Freedom
to Care
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A Six-point
ETHICAL REFORM
PLAN
for the financial services
industry
Drafted 4th July 1997 by a Panel of financial
services specialists belonging to Freedom to Care's "Ethics in Financial
Services Network" and endorsed by Austin Mitchell MP.
Unfortunately, due to sluggishness of government reform, this plan is
still relevant today (2004).
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1 EMPOWER THE CLIENT
Regulation should be designed and implemented to give protection of the public
priority over protection of the industry. The financial industry is described
as a services industry, and to truly live up to that it must adopt a public
service ethic. To mark seriousness of intent in achieving this shift of emphasis
none of the senior people currently running the SROs and other such bodies
should automatically have a place in the new structure. A large proportion
of the public and financial advisers have no confidence in them. New senior
regulatory positions should include people with a large measure of independence
from corporate interests. Particular means by which a shift to the client
can be achieved include the following,
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A clear distinction between the sale of products and the provision of advice
should be developed.
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Periodic, random and independent spot checks on the products which clients
have been sold.
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The carefully crafted, equivocal and largely worthless ‘reason why’
letters currently provided to clients must be replaced with a new method
of unambiguous, factual and corroborated feedback to the client.
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Best advice requires much fuller information being generally available to
financial advisers than is currently the case. Many companies have deliberately
restricted product ranges and concentrate only on those products that maximise
profit.
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Disclosure of charges has to be full and understandable to the client to
allow comparisons to be made. Brief product comparisons should be given to
the client when the company first ‘sets out its stall’.
-
Product bias must be eliminated. (Because of commission bias Ladas cost the
public more than Rolls Royces!)
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In the current pensions compensation there should be full redress and no
costs against the complainant. An independent review panel should be made
available to complainants with a valid cause.
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The proposed Investment Savings Account should provide a model for all providers
to show how providers, individuals and the community can work together and
benefit from ethical financial planning.
2 REGULATE
COMPREHENSIVELY
The principle of client empowerment cannot be met when the financial services
industry is regulated in a piecemeal, almost haphazard fashion. Statutory
regulation must cover all of the industry in a coherent, consistent, simplified,
accountable and principled fashion. The boundaries of regulation should be
easily and readily identifiable by the public. In particular,
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The regulatory system should seek to remove conflicts of interest and to
establish compatibility between accountability, responsibility and remuneration.
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Regulation should be transparent and accountable to investors and not conducted
behind closed doors.
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The lending industry must be regulated by statute.
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The auditing industry must be regulated by statute.
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The insolvency industry must be regulated by statute.
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The mortgage, ‘long term care’ and banking sector must be regulated
by statute.
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There should be a single, properly resourced Ombudsman’s office to cover
all financial services. The Ombudsman should be wholly independent and be
answerable to Parliament.
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The compensation regime should be restructured in a more accountable way,
particularly in regard to the Investors’ Compensation Scheme.
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Personal pensions must be stringently regulated before companies are allowed
to encourage any more opt-outs from public sector and employer pensions.
Similarly, only worthy companies should be able to contract people out of
S.E.R.P.S.
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Members of the Treasury Select Committee must hold positions on the Board
of the new ‘super-SIB’.
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Regulation of the Internet must be regarded as urgent.
3 ENFORCE CORPORATE
RESPONSIBILITY
Irresponsible corporate policy and decision-making has imposed a tremendous
cost on the social fund. Bad advice on pensions, endowments and insurance
often brings clients into dependence upon state provision in various ways;
also there are many financial advisers who are on income support because
they have been debarred from practice by unfair debts, while as many again
are receiving legal aid to litigate over unfair treatment/contracts, contractual
breaches and poor training. There must be an immediate end to the scape-goating
and victimisation of financial advisers and first line managers for the failings
of the industry. While the workers ‘at the coalface’ must, of course,
face up to their ethical responsibilities they find it difficult or impossible
to do so satisfactorily when senior managers, executives and directors behave
without due care for staff and public. Those with corporate responsibilities
should not make policies and strategies which put unbearable pressure on
lower level staff, from salespersons to compliance officers. The demands
of performance must be balanced against ethical imperatives. In particular,
-
The new regulators must look more closely at the decision-making, accountability
and duties of directors and senior executives in the financial services industry
- including banking, building societies, auditing, insolvency, and lending.
-
The Boards of financial industry corporations must be encouraged to comply
with the good practice guidelines on corporate governance recommended by
the Cadbury Committee. It is time that the industry understood that pensions,
insurance and other financial products are as crucial to citizens’ lives
as decent health care - they must accept their social responsibility. For
every pound squandered there is a proportionate social cost.
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There must be stringent authorization requirements.
-
Where there is prima facie evidence of offences under the Financial Services
Act they should be investigated with a view to prosecutions being mounted.
In particular, directors who have knowingly flouted the true intention of
the FSA 1986 and associated rule-books should be held accountable for their
actions in a court of law.
4 MAKE SANCTIONS
EFFECTIVE
A new regulator must be pro-active, rather than merely reactive. It must
encourage good practice as well as deter bad practice. However, given the
current state of the industry some hard lessons have to be learned and learned
quickly. The current regime of sanctions against errant companies is not
only ineffective, it is derisory. In particular,
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While corporate fines have important symbolic value to the public, the real
weight of sanctions must fall on the responsible individuals (directors,
managers and others) in proportion to their individual part in the offences
and negligence. Legal reforms may be necessary to facilitate this.
-
There should be more and larger fines on errant companies. Fines for
non-compliance should hurt, and cannot hurt unless they are counted in millions
rather than hundreds of thousands. Firms should not be permitted, as far
as is possible, to recoup the cost of non-compliance from investors.
-
The emphasis should be put on a range of other sanctions, with a real
preparedness to apply the ultimate sanction of withdrawal of registration
to do business.
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When sanctions are applied official notification, and a full report, should
be sent to the regulatory bodies in the other countries in which the company
operates.
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Penalties should always be public, and press releases should always accompany
sanctions.
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It must be recognised that some of the acts and omissions of directors and
top managers which are currently tolerated may be of a criminal nature, and
appropriate investigations should always be instigated.
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All working papers in relation to penalties should be openly available to
the public, excepting matters of strict commercial confidentiality. Disciplinary
hearings should be a matter of public record.
5 MAKE COMPLIANCE
EFFECTIVE
Compliance is currently not effective, and has almost become a self-serving
industry in its own right. In particular,
-
The regulatory system should be designed with a view to compliance being
the natural ethos.
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Compliance staff should be licensed and trained by the regulators and should
also be directly accountable and responsible to them.
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Inhouse compliance officers should be independently financed. Their work
stands in danger of being compromised when they are paid by the very company
for which they are ensuring compliance. Companies should pay a fee, relative
to their size, into a compliance pool to maintain independent compliance
officers. This pool could be held by HM Treasury.
-
An effective system needs to be developed to identify negligent advice. Investors
should be able to rely on the content and completeness of advice. Any checking
system should include validation as part of the process.
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Monitoring should be real. That is, it should be based on corroborated evidence
obtained directly from clients and financial advisers. At present it largely
consists in the ‘examination’ of paper, without any attempt to
make the paper fit witness experience. For example, it is not enough to check
a policy with a Factfind - the Factfind must be checked with the client.
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The ‘super-SIB’ should be financed by HM Treasury by making an
equitable levy upon customers and companies alike.
6 PROFESSIONALISE FINANCIAL
ADVISERS
Training requirements have been improving lately, but there is a great deal
of scope in order to turn financial advising into the highly valued and vitally
important profession it ought to be - with recognised standards of competence
and conduct. In particular,
-
The new regulator should find ways of promoting initiatives with other bodies
- in the training and education sector - to put the training of advisers
on a professional footing.
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Where relevant, training should be independent of the financial services
industry itself and should not be viewed as a valuable ‘profit
centre’.
-
A great deal of confusion and fudging currently surrounds the role of independent
financial advisors. The public takes the word ‘independent’ seriously.
Therefore IFAs should not be receive ‘product-biassed’ commissions
from companies, but work on a fees-only basis. The fee would be determined
by supply and demand. You cannot serve two masters.
-
All financial advisers who work for financial services providers should have
the status of employees and thus gain the protection and rights of employment
law. (After all, they cannot be considered self-employed when they only have
one source of income.)
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Companies must stop using the debt of financial advisers (whether incurred
as allowances or commission advances) as an instrument to meet unrealistic
sales targets and bully the advisers. There are currently thousands of cases
in which companies are pursuing advisers through the courts, in many cases
quite unfairly or even illegally.
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Life offices and other companies often provide secret and inaccurate references
for advisers on matters of debt, financing and ‘churning’ which
ruin careers. Companies should be warned against this practice and advised
that unfair references are illegal. Advisers who feel they are the subject
of an unfair reference should be able to appeal for arbitration to a defined,
jointly agreed, independent official.
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