Memorandum by TRS Independent Financial Advisers
1. This Submission and the views expressed are provided by Gary James Stidolph the proprietor of TRS Independent Financial Advisers (TRS) and are based upon the practical experiences of dealing and working with the Financial Services Authority and its predecessors since their inception in 1988. TRS are currently authorised and regulated by the Financial Services Authority (FSA) and were first authorised in Spring of 1988 (by FIMBRA) when the Financial Services Act 1986 came into force. TRS have almost 19 years experience of working with the FSA and its predecessors within the regulated environment. I am prepared to provide oral evidence before the committee.
2. TRS are a small firm of Independent Financial Advisers that commenced trading in 1985. The firm is based in the economically deprived South Wales valleys where due to gradual expansion it now provides work for ten individuals. Remuneration for staff is considerably above the median for the area in which the firm is situated. Within the staff we have four graduates of which two have Masters degrees. Many of the staff have considerable experience of working outside of the financial services industry. They are all astounded and greatly concerned by their experience within the financial services industry, by the consistent failings of the regulatory authorities and the lack of reasonable accountability.
3. The firm provides financial planning and investment advice to 2000 clients. The average client has customarily been using the firm’s services for over 16 years and ninety percent of the firm’s income is generated from existing customers. Clients are mainly resident in the UK but some are resident overseas. We have interacted with several different jurisdictions when undertaking investment advice and research.
4. Given the substantial personal and financial investment made in TRS, we are keen to see the public have confidence in the UK Financial System. In order for this to be achieved and for the industry to flourish consumers must be afforded an appropriate level of protection; they must be protected from misrepresentation and the UK financial system and its regulators must be seen to exhibit integrity.
5. TRS are very concerned and will provide evidence that the FSA is failing consistently in its statutory obligations and objectives and that its activities are often counter productive in that:
(a)The FSA has failed to promoted public confidence in the UK Financial System among retail consumers.
(b)The FSA has failed to provide an appropriate level of consumer protection.
(c)The FSA has lost the confidence of the industry and especially the smaller players within the industry.
6. We are concerned and will provide evidence that the internal administration and decision making processes of the FSA are flawed and lack credibility.
7. The following paragraphs set out the experiences of TRS and its customers when communicating with the FSA on issues of investor protection. In addition to attempting to answer some of the questions asked in the “Call for Evidence,” they demonstrate the failings listed above and the consistency with which the FSA and its predecessors have failed to deal adequately with important matters which could and should have been dealt with comprehensively.
8. TRS first applied for authorisation to conduct investment business in 1988 in accordance with the requirements of the Financial Services Act 1986. The voluminous application forms and associated documents were mailed to FIMBRA (a fore runner of the FSA) in plenty of time using Royal Mail’s Datapost service. This service was used both because of the important nature of the application and because of the volume of documents involved. The application was acknowledged by FIMBRA and a receipt provided. No further correspondence was forthcoming from the then regulator to advise that we had been granted interim authorisation and as the deadline for authorisation approached, the staff at the regulator could not provide TRS with any advice or details. Finally we were advised that FIMBRA had no record of any application for authorisation by TRS and that we would have to stop trading once authorisation was required and that we would have make an application for authorisation. Evidence that an application had been received by FIMBRA was quickly provided and consequently TRS were asked to supply copies of the lost applications. TRS received tacit approval to continue trading without interim authorisation from FIMBRA. The nature of the communications from FIMBRA during this time were very haughty; no apology was ever offered for the inconvenience or associated loss.
9. The Financial Services Act 1986 required that appointed regulators such as FIMBRA monitored authorised firms to ensure their compliance with the standards set down by the act. One of the central tenets of this act was that advisers should provide consumers with “Best Advice.” This was taken to mean that any adviser should act in the client’s interest. TRS had its first compliance monitoring visit in 1990.
10. In addition to the 1986 Financial Services Act, 1988 also saw the provisions of the 1986 Social Security Act come into force. This act enabled consumers to opt-out of their employers Occupational Pension Plans should they wish and to opt-out of the State Earnings Related Pension Scheme (SERPS) using an Appropriate Personal Pension. It was widely understood within the industry that for the majority of consumers, Final Salary Occupational Pension Schemes such as the NHS scheme, provided benefits for consumers that could not be matched by Appropriate Personal Pensions.
11. During the first compliance monitoring visit the FIMBRA compliance monitor selected a large random sample of TRS files. These files were thoroughly reviewed by the monitor who made notes. Once this was finished there was a meeting with the monitor who asked questions about systems and procedures. The monitor reviewed files in which clients had entered into mortgage arrangements and associated life assurance policies. He also reviewed files in which clients had purchased pension policies. TRS practice and procedures were recorded as compliant in that the firm demonstrated that it undertook sufficient enquiries to get ‘to know the customer’ and establish customer needs and attitude to and understanding of risk in all cases.
12. Towards the end of the first compliance visit there was a debriefing session during which we were assured that the purpose of the visit was twofold; firstly to check our compliance with the rules and secondly to provide feedback to the regulator upon what was happening in the market place. During the debriefing we alerted the monitor to the fact that we were beginning to encounter members of the public who were being advised to ‘opt-out’ of the membership of their employer’s superannuation scheme in favour of investing into an Appropriate Personal Pension. We advised the monitor that we had a policy of not advising customers to ‘opt out’ of Supperannuation Schemes. We advised that this was one of two serious investor protection concerns we wanted to raise.
13. The monitor agreed that such advice was not ‘best advice’ and indeed was detrimental to the investors’ financial well-being. We specifically bought to his attention a case in which TRS together with a local firm of solicitors had begun action against Sun Alliance in respect of the disadvantage and loss caused to a Nurse who had been advised to opt-out of the NHS Superannuation fund in favour of investing into a Sun Alliance Appropriate Personal Pension. TRS were encouraged by the monitor to make contact with both FIMBRA and LAUTRO to raise this issue. TRS raised both the specific case and the issue in general (as we came across it regularly) with both FIMBRA and LAUTRO. Nothing was done although the impression given to TRS was that there was an awareness about the issue and the damage being caused. It appeared that nobody wanted to take responsibility for examining or pursuing the issue. The lack of timely and substantive action on this matter led to the Pension Mis-selling debacle.
14. During the debriefing TRS also raised the fact that investors were being provided with misleading information when they were provided with authorised quotations and illustrations for life assurance and pension policies. When issuing quotations and illustrations of policy benefits the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO) required all life assurance and pension providers to issue standard illustrations that complied with their rules for illustration. These rules set standard rates of investment return and included enforcing a standard assumption for charges. Not only did this mean that it was impossible to differentiate one company’s quote from another, (even when the charges were substantially different) it also provided investors with an unrealistic expectation of investment returns as the LAUTRO assumed charges were considerably lower than the actual charges being levied by the insurers and pension providers.
15. TRS advised the monitor that policies were being sold by salespeople to the public in their homes where extortionate charges were being hidden behind illustrations that greatly exaggerated the likely investment returns. Many policies sold by salespeople during this time included charges many times greater than those illustrated in the authorised quote. We challenged this and questioned how this might be impacting upon such importantmatters as setting premiums for mortgage endowments and the decision that some investors needed to make about whether or not they should contract out of SERPS. Again the monitor implied that this issue was being reviewed. TRS were dissatisfied with this and subsequently made representation to both FIMBRA and LAUTRO. The disastrous LAUTRO illustrations regime was not changed until 1995 after intervention by the OFT. It is our experience that this issue did a lot to damage the public perception of financial services and financial services regulation in the UK. Policies that were subsequently cashed or matured, repaid far less than indicated. This was a direct result of the regulators action. The issue continues to have ramifications today which will be mentioned later. The FSA even now has failed to fully investigate the issue and take appropriate action.
16. The Pension Mis-selling debacle eventually led to a public outcry that in turn led the regulatory authorities to set up the Pensions Review. The Pensions Review required all regulated firms to review past pension business to assess whether clients had been badly advised. The methodology for the review of past business was set down by the regulators and impacted heavily upon TRS even though the regulators were aware of our company policy of not transacting what was known as ‘Opt-Out’ business. TRS had to review almost 700 files in detail and were one of the first firms to undergo a monitoring visit to establish whether we had complied with the regulators requirements. This was despite the undoubted knowledge that the regulator had about our policy and actions in this area. TRS had pursued several cases on behalf of clients who had been encourage to ‘opt-out’, such as the one mentioned earlier, and considerable correspondence had been exchanged with the regulator about such matters as ‘time barring’. We were given the impression that they considered TRS to be a nuisance.
17. The Pension Review, its monitoring visit and subsequent correspondence tied up considerable resources and destroyed profits for two years. The exercise was bureaucratic in the extreme and would have been farcical if it were not for the consequences to the firm. There have been indications that the regulatory Pension Review monitoring team selected firms for visits that were known to have problems with Pension Mis-selling and the Pension Review. We have enquired about the selection process and earlier correspondence exchanged on the subject. The FSA have advised us they now have none of the relevant records.
18. In the last three years TRS have had reason to raise several investor protection issues with the FSA. The issues once again concern the provision of misleading information by investment suppliers. They include drawing the attention of the FSA to misleading figures provided by certain insurers when writing to policyholders about their mortgage endowments and the projection of benefits for these policies. TRS also wrote to the insurers. The FSA took little notice of our information but subsequently both Standard life and Friends Provident changed the basis of their policy statements. The FSA does not seem to effectively police their own rules and principles when it comes down to dealing with large players within the industry.
19. In September of 2005 we one again wrote to the FSA with an investor protection issue. The issue once again involved the LAUTRO quotes and illustrations problem referred to earlier. The issue was raised as a complaintas we believed this would generate the attention it needed and hopefully secure the appropriate protection that investors deserved. The letter was addressed to the Secretariat. It was in the first instance ignored. In December 2005 we followed up the complaintand after pressing the matter with the FSA eventually had the administration of the complaint itself, investigated as a complaint. The investigation confirmed that the FSA was guilty of maladministration. It set out clearly just how badly the FSA had performed administratively. However a response to the investor protection issue raised is still outstanding 16 months later.
20. There was an initial attempt to downplay the investor protection issue made by the Secretariat which further displayed poor administration within the FSA in that it failed to recognise it was in possession of evidence and that it claimed to have never before come across the problem before. This could not be true as one of our clients had themselves raised the problem with the FSA following a meeting with TRS and prior to our own complaint. To make matters far worse the reasoning used by the FSA to try and dismiss the issue was clearly flawed and displayed a complete lack of comprehension of the subject. We now believe the issue raised is continuing to be investigated followingfurther letters to the FSA.
21. The FSA requires that we deal openly and honestly with both themselves and our clients and that we exercise due diligence and skill when doing so. This is not unreasonable and is to be expected. We do not need a regulator toset out a duty of care. However, the FSA frequently behaves unreasonably. It requires that twice a year regulated firms such as ours provide it with a detailed return of the firm’s financial resources and business transactions. This must include amongst many other things details of complaints against the firm. The return known as the RMAR is now in electronic format.The correct and timely filing of the return is a serious matter and collating the information for a small firm is a major undertaking, but is not unreasonable.The fact that firms were required to complete the return electronically when the FSA system did not work and was known not to work was unreasonable and typical of the regulators haughty attitude.
22. In November of 2005 we incurred considerable difficulty in filing our electronic RMAR return. An experienced administrator with a masters degree in business administration found the system and the associated helpline ineffective. In the end we were told by the FSA to file the RMAR after inserting some false data into the report in order that the report could be “validated electronically” and filed. The result of supplying this misinformation requested by the regulator was that in December TRS received a letter from them stating we were likely to be in breach of the FSA rules and subject to enforcement action and demanding a detailed report into the finances of TRS. TRS pointed out that the problem was of the FSA making but duly provided the required information. We had a curt acknowledgement from the FSA, no apology was offered until much later when we made the matter subject to a formal complaint. As a result of the FSA investigation into this matter they have subsequently admitted responsibility and liability and following further representation have now offered a small sum as a contribution to our costs.
23. In recent years hardly a week goes by without the vexed issue of Mortgage Endowments featuring in the press. This is a matter that impacts upon some TRS customers. We believe some of our customers have been financially disadvantaged by life assurance companies failing both to discharge their duty of care to policyholders and comply with basic regulatory guidelines and rules. Consequently TRS have been investigating various issues relating to the matter for some time.The research has been directed into both financial and legal aspects of the matter. This has included meetings with a number of legal advisers and particularly an eminent QC who specialises in such matters. Among several important matters that have been uncovered one stands out. It is that the legal establishment are aware that the Financial Ombudsman Service (which is part of the system of financial services regulation bought in by the FSMA) are perpetuating both fraudulent, and frivolous and vexatious claims by members of the public against firms involved in Financial Services. Furthermore the FOS is widely acknowledged by the financial services industry and legal community to be inept and inconsistent both in its administration, its decision making process and its adherence to the law.