It’s been a good few weeks for Co-operative Financial Services. The highlight has been winning the prestigious FT Sustainable Bank of the Year award, against stiff competition from 110 established banks.
But also very significant has been the just released figures on complaints, which show that The Co-operative Bank had the lowest number of complaints of any bank as a proportion of its customer base, at a mere 0.2%. It also upheld the highest proportion of the complaints it received – which sounds bad, but is actually probably a sign of a generous interpretation of grievances.
The half year results for financial services were once again very good. Its profits were up 50%, delivering £76m to the Group’s bottom line. Impairments (the likely bad debts) were down 41% – these are still going up with some banks. The Co-op has a capital ratio of 13.2% and a tier 1 ratio of 9.0% – which is reassuringly solid (anything over 6% is regarded as well capitalised).
Product sales are also going well. Customer lending increased, mortgage applications rose by nearly a third, while deposits increased by £1.4bn (up 4%). There was also a rise of a third in the sale of general insurance policies.
Personally, though, I regard the best news as being its negotiations to sell its IFA – independent financial advice – arm, CIFA, which employs 120 staff. CFS spokesman Andy Hammerton confirmed to the News: “We are in exclusive discussions with a third party.”
With the ongoing integration with the former Britannia Building Society (which did not have an IFA division), CFS has re-evaluated the IFA operation. Hammerton explained: “As part of a wider review as part of the integration with Britannia, we concluded that CIFA as a stand-alone IFA business no longer represents a suitable fit with the ongoing strategic direction of CFS. CFS has increased its capability to support the mainstream financial services market. Our branch network has trebled and we’re developing closer links with other parts of the Co-operative business.”
The reason for my pleasure is that I believe there is a fundamental incompatibility between the CFS positioning itself as a sustainable and ethical financial services provider and having an IFA operation. In 20 years as a financial journalist, I have had contact with many, many IFAs. Some are good – they are the ones who are thoroughly professional, whose advisors have studied for their chartered or certified financial planning exams, passed these and engage in continuous professional development.
Most IFAs, though, are not very good. Many give advice which I regard as poor. This has been true of even some of the largest and best known advisory brands. And while my own contact with the CFS IFA arm did not generate any advice I regarded as bad, it did not impress me with its efficiency.
One of the big problems with financial advice is that it has too often been led by commission payments from providers, rather than being driven by the interests of clients. The Financial Services Authority is addressing this by changing the nature of the IFA business. This involves advice being paid for by client fees, not commission. While this is more ethical, it is often unpopular with clients – who feel the pain of upfront fees and typically overlook the poor value of products that have been weighed down not only by one-off commission payments to advisors, but also with some products the annual repeat commission payments.
The IFA trade is now being reformed through the FSA’s Retail Distribution Review (RDR). The RDR was launched four years ago, says the FSA, “to address the many persistent problems we had observed in what is now over 21 years of regulation of the retail investment market.“ It explains: “Insufficient consumer trust and confidence in the products and services supplied by the market lie at the root of what we are seeking to address.”
The overall aim of the RDR is to produce fairer outcomes for consumers. It is recognised by the FSA that this is especially timely – not only because of financial crash, but also with the need to increase household savings and personal retirement planning. At its heart lie three reforms: financial services firms must describe their services to consumers more clearly; advice distortions caused by commission bias must be removed; and the professional standards of investment advisors must be raised.
All advisors – whether IFAs, banks, wealth managers or product providers – will have to comply with these new standards from 2012. Doing so will not be simple. I have no idea whether compliance would be a challenge for CIFA, but it will certainly be very difficult for most advisory firms to comply.
Some analysts have suggested that the majority of advice firms will be forced to cease trading. They will be either unable to conform with the tougher standards of product knowledge, or will be unable to persuade sufficient numbers of clients to pay fees for advice. I hope this prediction proves true, as I believe that many, perhaps most, advice firms do not deserve to trade. The lack of knowledge displayed by advisors (and, again, I stress I am not talking about CIFA) is a scandal that has never been properly publicised in the financial press.
As an example of the type of detailed knowledge that will be required in the tough new world awaiting IFAs, the financial analysis firm Defaqto has just published a list of alternative asset classes that advisors must properly understand if, in its opinion, they are to justify their status as independent advisors. Those asset classes include property, investment trusts, venture capital trusts, private equity, structured products, commodities and hedging. This is on top of understanding basic and simpler asset classes, such as savings accounts, gilts and corporate bonds.
Defaqto insists that it will not be enough for advisors to say that particular asset classes are unsuitable for their clients – they will have to demonstrate sufficient knowledge to explain why this is the case. This means in practice that financial advisors will need to have a thorough understanding of a very wide range of products. They must also be absolutely honest and trustworthy – traits that have not always been associated with some small advisory firms. The FSA has taken strong legal action against many advisory firms over the last two years and will continue to do so (as will, presumably, its successor body).
We are now entering a period in which financial advice will be more difficult to provide; require more resources to demonstrate regulatory compliance; and for many firms will become unprofitable. I fear – or rather I hope – that we are now also entering a time of greater transparency, in which those advisors who are not up to the mark will be found out in a very public fashion.
I would suggest that obtaining a good price for the sale of CIFA is not the most important issue for CFS and the Group. It is, quite simply, a good time to leave the market.