Can we still trust financial services?

The Barclay’s LIBOR-fixing scandal is the latest in a long line of negative stories which have caused most people to question whether banks and financial services can be trusted any more.

First of all, full disclosure: I worked for over 20 years in the City and so none of the recent news was much of a surprise to me. In fact, many similar issues were raised back in 2006 by the then Chairman of the FSA, Callum McCarthy.  In his speech ‘Is the present business model bust?’ he challenged the commission-based, sales-driven world of financial services and its lack of transparency.  His key messages were that incentives affect behaviour and the customer is losing out. Heard it before?!

The good news is McCarthy’s speech started a review of retail financial services which will lead to new regulations from 1^st January 2013. After this point, financial advisers will no longer be allowed to receive commissions from new pension and investment products and will need to agree to a separate fee with their clients. They will also need a higher level ‘Diploma’ qualification (roughly equivalent to an A-Level) and will either be classified as independent or restricted advisers.

The higher minimum qualifications are still not comparable with the legal or accountancy professions, but some advisers have already voluntarily gone for Chartered or Certified Financial Planner status (roughly equivalent to a university degree) and more will follow.

The Retail Distribution Review (RDR) is a positive step. It’s worth bearing in mind, however, that not all product-types are affected. It will still be possible for financial advisers to receive a commission for annuities, life insurance and mortgages. Additionally, if you took out an investment or pension product before 2013, you will probably pay on-going commissions to advisers for many years to come. It’s important to check whether any products you already have, or are thinking of buying, still offer value for money relative to the newly available commission-free options.

Although these changes will certainly help improve trust in our industry, it may not entirely remove some of the more long-standing conflicts of interest. In my view, there will ultimately be two possible business models for financial advisers, post-2012.

Firstly there is a sales model, where financial products are sold in return for payment of a fee. While the commission has been removed, there is still a strong incentive for the adviser to sell a particular financial product, or he/she does not get paid.

The second model is fiduciary (from the Latin fiducia, meaning ‘trust’), where the adviser is obliged to put the client’s interests first. This may sound unlikely, but there is already a small but growing number of professional financial planners across the UK working in this way.

As Robert Louis Stevenson said: ‘everyone lives by selling something’, but under a fiduciary business model the ‘product’ being sold is trusted, expert advice. A product sale may, or may not, follow.

Aside from the positive regulatory changes, there are other promising signs that certain pockets of the industry are working hard to reclaim the public’s trust. If you would like to know more you could take a look at the Question of Trust Campaign, which is supported by the Institute of Financial Planning.

Perhaps it won’t be too long until people can expect the best from the financial services industry, until proved otherwise, rather than vice versa.

Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.

Article is accurate at date of writing.