I was lucky enough to be in Exeter recently and saw the impressive and moving mural commissioned by the Exeter Kindness project. You can view it here:  

https://exeterkindness.co.uk/

On the mural a boy is asked: “What do you want to be when you grow up?” 

“Kind” replies the boy.

And that made me think about the evolution of Financial Services regulation. I believe we can trace financial services regulation through 5 stages.

Stage One was ‘Prudential Regulation’. Do providers have enough capital, and are they well run? That did little for consumers - they were basically on their own.

Stage Two came along in 1988 and was an attempt to make ‘Buyer Beware’ work, loading consumers with increasing amounts of ‘Disclosure’, which they barely read, let alone understood.

Stage Three was a sort of halfway house, where better advisers – mainly IFAs and Financial Planners, but including others, put themselves in between clients and the regulator, and took greater responsibility for their advice and actions – essentially saying: ‘Trust me, I’m on your side’. Ethical, but really did very little to help consumers give proper informed consent.

Nor did it provide any feedback or incentive for providers to simplify their products and explain things in a way that your mother could understand. 

Carl Richards illustrated this stage as the ‘Complexity Gap’, highlighting the gap between what we as advisers know, and what consumers can possibly be expected to understand. And the regulators increasingly desperate attempts to make ‘Buyer Beware’ work, with increasing amounts of disclosure, inadvertently made things worse.

Along came Stage Four. Or at least it tried to. This is the natural evolution to the adviser – of whatever status – having a ‘Fiduciary Duty’ to the client. Stage Three, but with legal meaning, if you like. Comparisons were made to Doctors with the Hippocratic Oath – simplified to “First, do no harm” or the duty of care owed to a client by lawyers.

And there is the rub. For a Fiduciary Duty structure to work, there must be no conflict of interest. Where there is any incentive or benefit to the adviser for the client to buy a product or invest money, that undermines the whole concept.

And it's not just about commission. I could argue retainers and asset fees would be in the same space – they create an incentive for advice to favour action to the adviser's future or current benefit.

There is always a but. And I agree that a properly applied ‘Fiduciary Duty’ is a better model of regulation than endless disclosure and some form of ‘Buyer Beware.'

But the mural made me imagine a ‘Stage Five’.

(Channelling my inner John Lennon…)

• Imagine if we were just kind to clients. 

• Imagine if we gave clients the sort of regulation and protection they needed, not just what the FCA says they should have.  

• Imagine if all clients were actually vulnerable, and all needed our care and kindness. 

Would that be easy? Perhaps not. Would that be desirable? I think it’s maybe worth a try.

Phil Billingham FPFS CFP Chartered Financial Planner, Chartered Fellow (Financial Planning) is a Financial Planner and a director of Perceptive Planning, a Chartered Financial Planning firm based in London and Essex. https://www.perceptiveplanning.co.uk/

Biography: Phil joined the profession in 1982 and is a past director of the Institute of Financial Planning (IFP) which merged with the CISI in 2015. He is a past member of the Financial Planning Standards Board (FPSB) Regulatory Advisory Panel. He is a specialist in helping advisers cope with regulatory change and has worked with advisers, planners and regulators in the UK, Europe, USA, Canada, South Africa and Australia. He writes this column most months for Financial Planning Today.