The Financial Conduct Authority (FCA) is to investigate whether the advice provided by Independent Financial Advisors (IFAs) really is truly independent and in the customer’s best interest. There has been growing concern at the regulator that the requirement to ‘treat customers fairly’- known by the acronym TCF – is compromised by a need to deliver commission or fees to the advisory firm. Incentives designed for a sales-driven culture can distort the impartiality of any financial advice.
One former advisor has said: ‘Being a financial advisor should be all about putting the customer at the heart of everything you do. It is the outcome for them that is important, not how much money you make as an advisor’. Nevertheless a regulator tasked with enforcing ‘conduct’ will inevitably explore the conflict of interest inherent in serving the different needs of customer and employer.
Following the financial crash of 2007-9 major banks embarked on culture-change programmes to embrace TCF, and for the past decade there has been much focus on conduct, culture and compliance within the Financial Services industry. Changes to the UK pension industry in 2015 created a surge in business for IFAs keen to offer customers advice on investing their released funds. There are now in the region of 6,000 IFA firms and a total of 25,000 registered individual advisors.
Advisors are obliged make clients aware of their fees, and investment decisions on behalf of a client should be made to benefit the client. Nevertheless advisory firms are commercial concerns that thrive on selling product, so tend to adopt an incentives culture of bonuses and rewards. Therein lies the inherent conflict of interest: How can you best serve your customer if you have sales based targets, is it perhaps a bonus culture that is a latent behavioural or conduct problem?
The FCA says: ‘Firms need to look after the interests of their customers and treat them fairly. This includes ensuring that they do not remunerate staff in a way that conflicts with their responsibilities to act in the best interests of their clients’.
Regulators have a difficult job to protect consumers, customers and the wider public from exploitation by commercial interests driven purely by profit and gain. Lord Heseltine was recently asked for his views on government intervention in markets and he said: ‘The market knows no morality, so the government must inject it’. Regulators therefore protect the public from exploitation by powerful players within the market who see customers only as a revenue source.
The Financial Reporting Council (FRC) regulates the way companies report performance and recently published a Stewardship Code in which it claims: “Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, which leads to sustainable benefits for the economy, the environment and society”. However a recent study found that many corporations only pay lip-service to this, presumably because they view their primary purpose as serving shareholders not the wider economy, environment or society.
This new code raises a question of purpose and performance criteria, not unlike the dilemma faced by IFA advisors – who do I serve and what is the purpose of my business? This is a philosophical question that should be addressed by any responsible board. For the past fifty years ‘competitive advantage’ has been the goal of any business, yet in truth this can only be attained through resource exploitation – human, natural or technological. This exploitation, now deeply unfashionable, has been a pre-requisite for investment return and shareholder gain. If the market is truly devoid of morality, how can any regulator effectively change behaviours and corporate conduct within it?