This talk was given on 28 February 2006 at the Meeting of Minds conference for senior people in the financial services industry organised by OwenJames at the Lanesborough Hotel .
The text here may not be identical to the spoken text

What, Why, Who?

Three things for the financial services industry to get right.

Hi. I’m delighted to be here today. To talk to you. And especially here in this great hotel. I used to drive past here many years ago when it was St. George’s, an NHS hospital. Looking round at this splendour it’s hard to imagine it was once an NHS hospital. But I tried to book a room last night they did tell me it was full – and there was a waiting list. The room service menu does include a nurse to come and give you a bed bath. And in the bar you can have your drink straight into the vein.

I must make it clear that I am a freelance financial journalist. Among other things I present Money Box on Radio 4. But I do not speak on behalf of Money Box still less the BBC. What I say to you today is my analysis.

I was asked to talk to you today about what is wrong with the financial services industry. And I’ve got half an hour! And what I would do if I was in your shoes. Earn a lot more for a start!

Journalists like the simple questions – who, what, why, when, where. Easy to remember. Whose round is it? What you drinking? Why not? When’s closing time? Where’s the bog?

I’ve got time for three today

What? Why? and Who?

What are you selling me?

Why are you selling it to me?

Who are you anyway?

Sort out those questions and a lot of the problems of the industry will disappear.

First, though, how did we get here?

‘The past is a foreign country. They do things differently there.’ So begins L P Hartley’s book The Go Between a story of illicit sex and the failure of trust. Now I won’t be talking to you about illicit sex – in a hotel like this you can probably get on with that yourselves – but the failure of trust, yes.

Twenty years ago – 1986 – it was a foreign country. I remember it as I might recall a distant dream – or nightmare. Carol Thatcher’s Mum was Prime Minister. Nigella Lawson’s Dad was Chancellor of the Exchequer and Norman Fowler – sorry I don’t know what his children do now but he did resign in 1987 to spend more time with them – Norman Fowler was in charge of pensions as Secretary of State for Social Services.

In this foreign land of 1986 there were no personal pensions. There was no financial services industry – there was the man from the Pru and there were stockbrokers, and that was about it.

Most people relied on the state for their pension. And that included the State Earnings Related Pension Scheme (SERPS) created by the woman I always call the Blessed Barbara. Barbara Castle wanted everyone to have a state pension as good as the best in the private sector.

A year after SERPS began the Thatcher Government came to power. It wanted the state to get out of pensions. And came up with the idea that we should all cast off our chains. Government adverts showed a chained man setting himself free. And the first thing he did, as you would after a long time in chains, he bought himself a pension. One of the new personal pensions.

Now to make sure your own personal pension pot wouldn’t start empty you could take some of the contributions you and your employer would have paid into the state scheme and pop them in. Together with tax relief – which wasn’t normally paid on state scheme contributions – and a nice bonus from the bulging National Insurance Fund. All courtesy of taxpayers in general. Around 8% of your pay.

The new financial services industry thought it had been born in the land of the All Year Christmas. Teams of poorly trained commission driven sales staff descended on a hapless population who, believing the adverts and newspaper stories which said that for a few pounds a month everyone could buy political and financial independence, were gladly mis-sold £11.5 billion worth of personal pensions. Eventually the industry had to spend £2 billion finding the nearly two million people affected and repaying them the £11.5 billion they should never have put into their own pension in the first place. And that was just the start.

Personal pensions were followed by

Mortgage endowments sold from the 1980s right up to the late 1990s will leave three million people up to £40 billion short of the money they need to repay their mortgage. Only £1 billion of compensation has been paid.

Additional Voluntary Contributions – between 1988 and 1994 at least 100,000 customers were sold the wrong sort of AVCs to top up their company pension. More than £250 million in compensation has been paid.

Split capital investment trusts were sold as safe investments mainly from 1998 to 2002. Up to 50,000 individuals have lost at least £600 million. Compensation of £350 million was sought by the regulator. The industry finally coughed up £144 million – on condition it admitted nothing and got indemnity from further action.

Precipice bonds were sold between 1997 and 2004 to 450,000 mainly older customers who wanted safety and a good return. They put in £7.4 billion and may have lost more than £2 billion.

No lawful industry has been rocked by such a succession of scandals as financial services. And those are just the big five. There were many others as pensions were unlocked but the door led to poverty, people were encouraged to contract out of SERPS only to find that it was their pension which had contracted. And that’s without mentioning the future – Venture Capital Trusts where the tax cart pulls the investment horse, or the layers of charges being added as we all start SIPPing.

The mystery is not that the industry isn’t trusted by its customers; the mystery is why anyone buys anything from it, at all, ever.

I am sure many of you think journalists are very unfair critics of your industry. But in fact journalists spend a lot of time promoting independent financial advice. Whenever we write or broadcast about a financial product – from a pension to an ISA – we always say get advice from an independent financial adviser. For twenty years financial journalism has promoted the importance of independent financial advice.

Because funnily enough, people believe us. I say ‘funnily enough’ because generally people put journalists at the bottom of the list when it comes to trusting them to tell the truth. Doctors are top, nine out of ten of us trust doctors to tell the truth (91%). With the police it’s about two out of three of us trust them (64%). Civil servants nearly one in two (46%), trade union officials one out of three (33%). Then we come to the bottom feeders. With politicians fewer than one in five of us trust them to be honest (18%). And down there with politicians, in bottom place, at 18%, yes, journalists. [Source: MORI 2003]

When the pollsters MORI asked people where they got information and advice about investing in a range of products – from ISAs to unit trusts – typically they answered – internet 5%, friends and family 7%, tied agents 12%, building society 13%, bank 17%, – mmmm so that’s 42% tied agents! – and then IFAs 19%. But out in front of all of them at 31% was Newspapers. So nearly a third of people turned first to newspapers, to journalists, for their financial information and advice.

So although 4 out of 5 people don’t trust journalists to tell the truth – they obviously trust us more than you lot!

Question 1
What are you selling us?

I mentioned SERPS or State Second Pension as it now is. This earnings-related top up can boost the state pension by up to £146.16 a week. £7,600 a year, index-linked. To buy an annuity to do that would cost a man aged 65 £161,297 and a woman £181,609. And if we take account of the fact that a spouse can inherit half the pension when her husband dies then the cost for a man rises to £186,924 and if we take account of the fact that a woman can, at the moment, retire at 60 her cost rises to £214,857.

How many of your clients have a personal pension pot approaching that figure? And to get that much SERPS you needed only about 1.5 times median earnings - £33,540 a year in today’s terms.

And yet the financial services industry got people to leave SERPS en masse. Latest estimates suggest that by 1994 five million had opted out of SERPS and paid £35 billion into personal pensions – a lot of that a subsidy from other taxpayers. From that the financial services industry took £3 billion to advise people to give up a guaranteed, index-linked pension. And the personal pension they will get will be about a fifth – some say two fifths – lower than if they had stayed in SERPS.

Would any of them have done that if they had honestly been told clearly what they were being sold? So I make SERPS the sixth big misselling scandal.

Let’s take another example from that list, no.2 – mortgage endowments.

A certain debt due at a fixed time. And to pay it off we were sold a volatile investment that may or may not produce enough money to repay the debt. And if it does it may not produce it at the right time. Oh and by the way this will all happen when you are approaching retirement and have no way to earn extra money to repair the damage. And if you don’t pay the debt it could leave you homeless.

Explain it like that and no-one would have bought it. Around 12 million people would have had straight repayment mortgages. It would have cost them no more. And today more than two million people would not be around £16 billion short of the money they need to repay their mortgage.

These products, like so many in that list, were created to generate sales not to provide a service to customers. Not by advisers of course. Who often sold them honestly. But by people who should have known better – the actuaries and directors of insurance companies who dreamt them up. To boost sales.

Let me give a different example of getting ‘What’ you are selling right. Saving or investing. How often do you use them to mean the same thing?

They’re frequently confused. And not just by financial advisers.

Ask Her Majesty’s Treasury the difference and it will call a shares based ISA a ‘savings account’. And the Financial Services Authority told IFAs just this week that they should sell ISAs clearly and ask themselves

"Does the promotion make clear what the customer’s money will be invested in? (cash, corporate bonds, equities, commercial property etc)"

Two mistakes there. First, ‘Equities’ is not a word you should use with a client. Or even at home. And second this phrase ‘invest in cash’.

Because you don’t invest in cash. You save it. Because there is one very simple difference between saving and investing.

If you save, your money remains yours.

If you invest, your money belongs to someone else.

It is that simple. If you invest the money is someone else’s. What you own is the investment. And to get your money back someone has to buy the investment from you, at the right price, when you want to sell it.

So if you invest you may not get your money back. Either when you want it. Or ever. It is that simple.

And that brings us of course to risk. Risk simply means that there can be a happy ending and a sad ending.

But risk is not well explained. A well-known IFA told me on Radio 4 recently "Well normally risk provides reward, so over the longer period of time you would expect the stock market, which obviously is the highest risk, to provide you the highest returns."

‘Risk provides reward’? No it doesn’t. Risk means you can lose money. If risk provided reward where would the risk be? The risk is you might not get a reward, you might get punished.

And the way the industry assesses what it calls a customer’s ‘attitude to risk’ is not done well. Because most people haven’t got a clue.

‘What’s your attitude to risk?’

‘Well, I do the Lottery, I like a flutter. I take a chance now and then.’

‘I’ll put you down at medium but erring on the adventurous side then?’

‘Yeah OK’.

Here is how I would assess attitude to risk. Ask them this

‘You’ve got £1000. You follow my advice and invest in this product. In a year’s time it’s worth £600. How will you feel?’ What do they say?

Terrible – I worked hard for that money and I didn’t want it lost to someone else.

That’s a savings account person.

Quite happy – I knew I could lose it but I also knew there was a chance I could make more than I could in a savings account. It was a bet. I lost. Some you win, some you lose.

The perfect stock market investor.

A bit upset – I was told it was a risk but I did not really expect to lose money. You don’t do you?

…most people.

Risk means this. Put it in the bank and there’s no risk – you know you will make a small amount of money. Invest it and there is a chance you will make a lot more money than you would in the bank. But there is also the chance you will lose money. That is what risk means. You gamble the chance of making more money against the chance of losing some – or exceptionally most or even all – of the money you invested.

Now as I am saying this I am sure some of you will be thinking ‘That’s bollocks’ – as we say on Radio 4 – ‘There is a risk in putting the money in the bank. In ten years’ time it may not have kept up with inflation. You’ll have less than when you started.’

This is simply a mistake. I interviewed a man who runs one of the big Child Trust Fund providers. He said – I paraphrase – ‘the real risk is putting it in a cash savings account. And ten years later it is worth less than you put in because of inflation. That’s the really risky option.’

Of course it’s possible that inflation will have exceeded returns on deposit accounts. But over that period of time you have to discount the same amount for inflation whatever you do with your money. So there is no particular ‘risk’ that affects a deposit account. It is just inflation. And if you put it on the stock market or in gilts or bonds or National Savings it may not keep up with inflation either. To pretend there is any particular ‘risk’ with cash is at best sloppy thinking. At worst, it is a deliberate attempt to confuse people. To try to make them feel that deposit accounts carry some sort of ‘risk’ which is the same as the ‘risk’ which attaches to share based investments.

So be honest in ‘What’ you sell us. And yes that will mean that you will sell less. Selling honestly, a lot of the time, means not selling anything at all.

I mentioned earlier the mis-selling scandals. And you may say they’re exceptions. But there is evidence of systematic inappropriate behaviour in what you sell us.

Persistency figures – how many people keep their long-term product long-term. Figures published by the FSA last June show

Endowments – more than one in four sold by IFAs and more than one in three sold by company representatives given up after four years.

Whole of Life policies – one in five sold by IFAs and more than one in three sold by company reps given up after four years.

Personal pensions – almost half – 47% and 49% - sold by IFAs and company reps given up after four years.

Let’s look at that graphically for these three products combined.

Remember these are all long-term products. But after four years to the latest date available those sold by company representatives 37% more than one in three have been abandoned.

IFAs do little better 34% - still more than one in three - scrapped within four years. And oddly the ones bought off the page are the best, by far.

Only 20% one in five of these products bought direct are abandoned after four years.

And looking at the change over time, regular premium pensions only this time. It is getting worse. This is persistency after four years of regular premium personal pensions – down from almost 57% to 53% for company reps. And down from more than 70% to barely above half for IFAs. There is no longer term product than a pension. And nearly half are abandoned after four years.

So ‘What are you selling me?’ The right product, clearly and accurately described. That is what is needed. And persistency figures will be the measure of whether it is achieved.


So after ‘What?

Question 2.


‘Why - are you selling me this?’

Yep we’re talking commission. To me the cancer at the heart of the financial services industry. In all those mis-sales and inappropriate sales where is the commission paid? Up front. In some cases almost all the premiums actually paid will have gone to pay the commission.

I once visited a woman, in her 70s, who had been conned out of a lot of money by an IFA who visited her at home. I asked her about him. What was he like, did she have any suspicions about him? "No" she replied "he seemed such a nice man. He had a Rolls Royce and everything." That particular gentleman now lives abroad. The person I visited was lucky not to lose her home.

She was sold an old-style equity release product. Without commission, would they have been sold? Without commission, would pensions have been mis-sold? Without commission, would mortgage endowments have been sold at all. Without commission, would split capital investment trusts or precipice bonds have been sold? No.

And let’s start with the truth. Commission influences sales. Period. Or as people say now – end of.

You know that. But officially the industry denies it. A year ago the ABI published research into commission bias and said it showed there wasn’t any. Not true.

Last May I did a Money Box Investigates for Radio 4 called Sins of Commission – click to hear it or read a transcript

The ABI research and similar work three years earlier was done by Charles River Associates. I interviewed the researcher in charge Kyla Malcolm. She told me

"There was evidence of... a bias to recommend a particular type of product and also bias to recommend particular products...On the product side we found that roughly one-in-five people were not recommended an ISA where they should have been and were instead recommended some kind of bond product... bond products do get more commission. There wasn’t any other reason that they should have been recommended the bond and it was agreed by a panel of IFAs that the ISA recommendation would have been the right recommendation."

The detailed figures in her report show that by raising commission on single premium products by just half a percentage point, a company could increase its market share by 14 percentage points.

And you know don’t you that when a new financial product is launched it is sold with ‘enhanced commission’. Purpose? To get IFAs interested, to get them selling it.

In 2004 Norwich Union cut the commission on stakeholder pensions. Sales fell. Then last year it raised commission on some pension products. The FT reports yesterday that sales of those products were ‘a tick up’. Norwich Union Sales and Marketing Director Peter Hales told me last May

"The amount an adviser earns from the sale will affect the sale...we adjust our commission all the time to make sure that we are within the market.

Was it, I suggested, a fine tuning mechanism, you raise or lower it

just to keep yourself in the market?

"That’s the way we operate our commission, as a fine-tuning mechanism. To maintain our position in the market place."

Standard Life accepts it too. Here is a quote from its Full Year New Business Announcement 6 February 2006.

"UK Life and Pensions APE (Annual Premium Equivalent) sales for the fourth quarter were down 12% to £221m (2004: £251m). In both individual and group pensions, our decision to reduce commission levels resulted in sales falling compared with the final quarter of 2004."

So we all know that commission influences sales. End of.

I know the argument for commission – how do you motivate people without commission? Well it may come as a surprise but most people who work don’t get paid commission. What motivates teachers, plumbers, the people who work at the FSA – OK that is a mystery. Why do police officers, cooks, bricklayers do their job?

I’ll tell you. If they do it well, they are valued, promoted, and yes maybe given a bonus at the end of the year. A fair wage for a worthwhile job. That’s what motivates most of us. And if people don’t do their job well, then they are offered advice, perhaps some training, and if that doesn’t work they are disciplined, warned. And ultimately sacked. That’s what controls most of us at work.

It’s called management.

And I know some IFAs – at least one represented here today – who work exactly like that.

Are people who work in financial services are so different from the rest of us that they can only be motivated to get out of bed by the thought of earning £2000 for selling a product that isn’t wanted, isn’t needed and may not even achieve the limited objectives it actually has. I don’t think so. Treat them like people, not like greedy bastards, they might behave differently.

Commission is literally and precisely a conflict of interest between the financial adviser and the customer. When a customer asks themselves ‘Why am I being sold this?’ if even part of their brain says ‘commission’ the battle is lost.

Now some of you might be thinking that’s all right. We’re independent. We have the fee option. We charge a fee, offset it against the commission they earn, and get the best of both worlds. Charge a fee but the client doesn’t actually have to pay it.

This doesn’t work. I write a lot about debt. And I have a golden rule of borrowing which is this.

Never borrow over a longer time than the thing you buy will last. So it’s fine to borrow over 25 years for a house or four years for a car. But pay off your 2005 Christmas debt before you start taking on another one for 2006. If you borrow to pay for a holiday then make sure the debt is cleared before you go on your next one. And if you put that nice pair of shoes on your credit card – ladies – pay it off within what six weeks.

So under the golden rule a service has to be paid for when it arises. So If you advise me about my pension, I should pay for it when the advice is given. But that isn’t what happens if you then take that fee through commission. Look at the figures.


Your client pays £100 a month into a pension. Over 25 years let’s say it grows at 7% a year reduced by 1.5% for charges. That would build up to a fund of £174,000 at the end of that period. If you sell it without commission, ie you take a fee for your advice, those charges could be reduced to 0.6% a year. That means the fund will be £222,000. Which is £48,000 more for your client. Which could mean another £3000 a year for life on the annuity they you buy.

In effect your client is borrowing the fee and repaying it over 25 years. And it costs £48,000.

So if you charge a fee don’t pretend that it can be paid through commission. It can’t. It has to be paid upfront.

Now that’s all very well for people in this room who can write out a cheque for £1000 without too much difficulty. Or I hope you can if you’re staying here. But most people can’t. So what do they do?

Now those of you who have ever read anything I have written know that I also have a golden rule of investing. Don’t invest – or save come to that – if you have debt.

400 years ago Shakespeare wrote this line for Polonius in Hamlet

‘Neither a borrower nor a lender be’.

He really hated the financial services industry, Shakespeare.

Because nowadays we’re all both aren’t we? We borrow money at 15.9% and save it at 4.9% – before tax – if we’re lucky. Or less than 1% in Halifax Liquid Gold or Woolwich Premier Instant accounts.

But there are always exceptions, even to golden rules, and this is one. You’re investing. But if you can’t afford to pay the fee, borrow the money and pay it over a year, two years. Even over five years is better than paying it over 25 or 40 years through commission.

Some insurers agree. Scottish Life has what it calls Financial Adviser’s Fee. The fee for the advice is agreed between the client and the adviser, Scottish Life is notified and deducts the fee from the payments made by the investor over 12 months. The scheme was such a success it has now been extended to its group pensions business as well. Other insurers are taking the idea up.

And there is another reason why you should take fees not commission.

If you are paid commission you are not an advisor – you are a salesperson. Because you are being paid for the sale, not for the advice. What are you? Paid for the sale – salesperson. Paid for the advice – advisor. It’s that simple. And saying ‘well I’ll charge you for the advice but hey I’ll actually get paid for the sale’ doesn’t turn you from a salesperson into an advisor. It simply makes you a salesperson who lies about how you are paid.

Until commission goes there is what my friends in IT call a work around. Get sales staff to ask themselves this simple question. ‘If I wasn’t paid commission for selling it, would I recommend this product?’ And if the answer is ‘no’, don’t sell it.

Finally, we come to

Question 3


‘Who is that person trying to sell me stuff? Or advising me.’

It used to be easy didn’t it? Everyone who sold us financial products, or investment products anyway, was either independent. Or tied. An Independent Financial Adviser had the legal obligation to look at the whole range of financial products and find the best one for our needs. A tied agent could only sell the products of one bank or insurance company, tied to it.

So for journalists and the public it was quite easy. Two kinds of adviser. Independent or tied. Or as we often used to say good or bad.

But the FSA decided that this ‘polarisation’ was anti-competitive. It needed modernising. Or in fact, scrapping. Before depolarisation there were two kinds of financial adviser. After depolarisation, there are, how many? Any idea? Write down what you think it might be.

Let’s start with investment advisers

They can sell you products from the

Whole market – though that doesn’t mean of course the whole market it means a fair representation of the whole market, from

A limited number of companies, or from

A single company or group

And they can act towards you in three different ways. They can

Advise and recommend

Offer execution only – where you make the decisions and they just sell you what you choose

Or they can be limited to selling you just ‘stakeholder’ products as recommended by the Sandler review.

And you can pay in three different ways

By Fee

By Commission

or by a combination – commission masquerading as fees.

So that’s three ways to relate to providers, three ways to relate to you and three ways to charge you. 3x3x3 is 27. So 27 types of investment adviser.

You can do similar calculations for mortgage advisers and insurance people – the rules are sort of similar but different and there are probably 12 kinds of each, though it may be more. And if you multiply those up – because you can be in any one category for any kind of product – there could be a total of 4731 different possible types. And every one of them can call themselves a ‘financial adviser’ and some of them – I have absolutely no idea how many – can add the word independent. I suspect this is an underestimate

The language advisers have to use gets in the way of understanding in other ways. ‘Whole of market’ is a strange new phrase that doesn’t mean ‘the whole of the market’. It can mean as few as 15 mortgage companies out of about 100. It can mean a panel of investment providers. The insurance equivalent – a range – can mean as few as six insurance companies. With insurance there are two ways to be paid – by fee and ‘no fee’ – which means commission but they don’t want you to know that because insurance sales people are allowed to keep the commission they are paid secret. A mortgage adviser can be independent for mortgages and tied and execution only for insurance. Can even be tied for one sort of insurance and multi-tied or sell a range for another.

So who is sitting there selling us this product? It is, literally, impossible to know. A financial adviser may not give advice. A whole of market adviser may not cover the whole of the market. An independent adviser may not be allowed to call themselves that – or, as Coutts decided recently, may choose not to. And an adviser who charges fees may in fact be paid by commission.

The answer to ‘Who?’ is ‘I dunno’

So these three key questions – what why who.

What am I being sold?

Until people know clearly what they are being sold they will not trust the product.

Why am I being sold it?

Until customers know why the product is being sold to them, they will not trust the adviser.

(Who is selling it to me?)

Until they know clearly who the adviser is, they will not trust the system.

Sort out those three questions and you will go a long way towards sorting out the problems of the industry. And restoring – or creating – trust.


28 February 2006

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