Alan Steel: Will new review body turn out to be another brick in the wall?

By Jeff Salway
Published on 21/07/2012 14:38

Before 1986 there was no regulation protecting investors from the unscrupulous. The events leading to the Financial Services Act involved unlikely partners – Pink Floyd, inset, and the Bank of England.

Financial advisers Norton Warburg had eight years earlier managed to con the band out of £2 million. They also ripped off former employees of the bank that had promoted their services. Something had to be done.

So the government of the time appointed Professor Jim Gower to come up with proposals. He recommended that all sales of savings, investment, pension and mortgages should be included in the new law. To minimise the chances of future mis-selling, the production of products should be separated from their distribution.

In simple words, if you produced an investment plan, you couldn’t sell it – that would have to be done by unrelated advisers. You can imagine the fury of the banks, building societies and insurance companies, especially the likes of Equitable Life, with its own large sales force. They stood to lose millions in lost commissions.

Fortunately for them, they had clout with politicians.

Despite Gower’s argument that his plan would make it easier to control quality and reduce bias, the powerful lobby of the institutions won the day. Gower’s proposals were watered down, and institutions could carry on manufacturing products and control distribution. Mortgages were excluded.

If the Gower proposals had become law there would not have been the scandals and rip- offs that have plagued investors since. Equitable Life would not have been able to con customers and pension and endowment mis-selling at worst would have been minimal.

The act was passed in 1986. Bodies were set up at great expense. The Securities and Investment Board was formed, and underneath, other regulators were given roles to play. It didn’t work, so the various bits were put in one body eight years later to fix things – the Personal Investment Authority. It proved to be a disaster too, so in 1997 Gordon Brown dumped all of it into a bigger shambles – the Financial Services Authority (FSA).

While all this was going on and hundreds of millions spent on these toothless bodies, mis-selling of pensions, endowments, investments and savings schemes continued unabated. Equitable Life was named as a culprit by me in these very pages in April 1997, but regulators ignored warnings for over three years.

Recently they failed to spot the Northern Rock, RBS, HBOS or Barclays’ disasters brewing. Hundreds of millions of pounds of costs, if not more, down the pan, for what? At the last count the various regulators employ some 3,800 people, with the top dog on a basic of £850,000! And over the years, despite not spotting disasters in advance, a few knighthoods have been thrown around. You couldn’t make this up.

Now they tell us the new body will fix things. They tell us the retail distribution review – coming into force next year – will be the answer. Rogues will be sent packing. You will know what you are paying in costs and why. Commission will be no more. Natural wastage will get rid of advisers over age 50. And from January only those who have passed new exams will be left. Perfect!

Now why didn’t they get rid of the rogue salesmen by listening to the complaints of others in the industry? No, they wouldn’t listen to whistleblowing. Commission amounts should have been on page one of disclosure documents. Disclosure could have been explained in simple terms. Commission is not compulsory, why not explain that?

Exams do not guarantee good advice. The best advice comes from experienced, caring knowledgeable people with integrity and common sense. I am not aware of any exam that measures common sense and integrity. Do you?

When Pink Floyd lost their savings they were able to make another bestselling album – The Wall – to recover. Ordinary investors don’t have that option.

Given the record of failed regulation over the last 26 years, it wouldn’t surprise me to see the latest changes having to be rethought yet again. Give it five years maximum. Be very careful:

“We Don’t Need More Regulation

“We Don’t Need More Weak Controls

“All In All It’s Just Another Cost For Sod All.”

• Alan Steel is chairman of Alan Steel Asset Management