By Alan Steel

An edited version of this article appeared in The Scotsman
Saturday 13 October 2012

Much as I admire Warren Buffett's thoughts and actions, his comment "It's when the tide goes out you discover whose been swimming naked all along" should not be how our Financial Regulators conduct their business.

Surely it's their job to spot who could be heading for a financial deep end and hooking them before they indecently expose savers to serious financial loss. They shouldn't let them in the water in the first place.

But for over 26 years now successive Regulators wait for the tide to wane, when it's too late and, as a result, we've had one financial scandal after another. It's hardly surprising we read headlines and reports about people not saving enough for their retirement. After 26 years of being stitched up, who can blame them?

Since the Financial Services Act in 1986, there have been at least 4 major changes of Regulator. And they've all failed miserably to protect retail investors. You will no doubt be well aware of the various scandals.

So now the latest expensive so-called lifeguard, the FSA, is being dumped to be replaced by yet another massively expensive body who claim they've got the answer of ridding us of the industry's conmen.

There's a new buzz word - transparency. Apparently that's to be introduced by something called RDR (Retail Distribution Review). It's funny that because I thought we'd had transparency of charges for the last 15 years or more. But sadly two areas where we've seen most scandals and mis-selling, Single Premium Investment Bonds and Pension Plans are exempt from much of the new rules being imposed at the end of the year. Why? Somebody should ask the Regulators that question because allowing these two areas to be exempt for much of the new law its latest attempt at transparency will not work.

It strikes me having been an IFA since 1973, the UK savings industry must be the only one where a product manufacturer can increase market share by increasing their charges to the customer. In the last decade new savings institutions have entered the market, grabbing more than their share by doubling commissions paid to advisers. Regulators meanwhile sat on their beach and sunbathed.

Most advisers and customers think that because a product is badged "Regulated by the FSA" it must have been subjected to proper due diligence. Nothing could be further from the truth. New products are simply rubber stamped and when they go wrong the rest of us and taxpayers pick up the tab.

Today, unless Regulators don't read newspapers or watch television, they must be aware interest rates are at all time lows and, as a consequence, so are annuity rates. It's at times like this savers are particularly vulnerable to smart ideas generated to give higher returns.

So a new wave of products has hit the market for annuitants or those reaching retirement and seeking income. They are known collectively as The Third Way. We had a presentation only the other day from one of the leading exponents of this new income retirement scheme. We were told their product was selling like hot cakes. I'm not surprised.

For as long as I can remember, commission to intermediaries in respect of an annuity purchase has been 1% with a maximum of 1.5%. This Third Way income panacea pays intermediaries up to 5 times that, and pays an annual commission for the lifetime of the annuity. Now who do you think's going to pay for that? Sadly I see another mis-selling scandal a few years from now.

What I can't understand is that enshrined in the Rule Books of all Regulators since 1986 there have been 11 Principles of Business, which are the perfect guide for Regulators to spot future financial storms well in advance. And yet they have been ignored.

We have the 11 principles on our website (alansteel.com) if anyone is interested. But surely 1 principle is sufficient - "A firm must conduct its business with integrity." Now what could be clearer than that?

For publication in The Scotsman
Saturday 13 October 2012