the professionalisation of financial advice in britain

{Journals}sore/48-1/s199/s199.3d

The professionalisation of financial advice inBritain

Michael Clarke

Abstract

This paper reviews the impact of increasing state regulation of financial advice and

its effect in requiring much higher levels of competence and probity, so stimulatingprofessionalisation, though in doing so, pre-empting the traditional role ofestablished professional bodies in securing competence and probity. Is it still

possible at the end of the twentieth century for new professions to emerge? If so, is anew model of the professions in prospect?

Introduction

Is there space for new professions to emerge at the end of the twentiethcentury? This is a question not only of empirical interest but also pertinent tothe understanding of what a profession is. As we shall see the options availableat the end of the twentieth century are markedly different to those available atthe end of the nineteenth. Indeed a initial point of contrast is that the verysuccess of the professions which established themselves on the classical modelof the liberal or free profession by the end of the nineteenth century, epitomisedby law and medicine, alter the conditions for least some of their aspiringsuccessors. Medicine for example, has been so powerful that it has been able tomaintain ancillary occupations as continued technical support groups ± nurses,physiotherapists, laboratory pathologists for example ± in a subordinateposition as semi-professions. Law has done the same in an even more explicitfashion with its creation of legal executives who process the majority of routinesolicitors' work, but remain ineligible for partnership because qualified at alower level.

The substantial autonomy achieved by law and medicine laid down amarker for other occupations, not least because it was based on the claim thattheir remits concerned areas of life of vital importance, in which the expertisenecessary to deliver a service that could protect citizens now existed. In the caseof medicine this is health, to which citizens have become accustomed to thinkthat they have a right through the ministrations of doctors; in the case of law itis the assertion of legal rights, whether in the field of trade and commerce, in

# The Editorial Board of The Sociological Review 1999. Published by Blackwell Publishers,108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.


relation to fellow citizens, or in relation to the state, whose significance becamethe greater as its size and power expanded and as formal democratic rightswere extended in the latter nineteenth and earlier twentieth centuries.

The implicit challenge to other aspirant occupations was hence: if you wishto claim autonomy to the degree we have, what credible claim can you makefor the vital importance of your work? For there is no question that if thesignificance of such claims begins to shift in the public mind, the fate even ofthe most established professions can change dramatically. The cases of theestablished church and of universities are instructive. As established wellfunded and substantially autonomous occupations the clergy and academicsarguably predate law and medicine. The professional history of the church inthe twentieth century has been one of precipitous decline in numbers, status,authority and funding. Universities, after a period in which they maintainedtheir established position in the early part of the century, and improved it in themiddle period, which saw a great expansion funded by the state but withoutcompromising their autonomy, have been subject in the last third of thecentury to systematic state pressure, resulting, in the phrase of a leadingresearcher in `the decline, of donnish dominion' (Halsey, 1992).

At the same time the constant advance of knowledge, scientific andotherwise, and the concomitant ever changing division of labour have givenrise to a steady flow of aspirant professions. And, it should be said, the long-term growth of industrial economies, accompanied by social democraticpolitics and welfarism, has resulted in substantial portions of populationshaving the incomes and expectations of security (in all the diverse meanings ofthat term) which might form the basis for the patronage of additionalprofessions. Further, there is little doubt of the attraction of professionalismfrom the point of view of the individual worker, not just in the sense of status,security, income and autonomy for which they are now often regarded assuspect, as in the words of G.B. Shaw `a conspiracy against the laity', or asKrause (1996) has it, the direct successors of the medieval guild. In addition,professional work offers the satisfactions derived from work well done, inproviding a service to fellow human beings, a service which requires, besidestraining, experience, skill, judgement and dedication, adequate time andresources to deliver. It may be then that `the professionalisation of everyone' asWilensky (1964) once called it, is a manifestly unachievable aspiration, but thathas not deterred a continuing succession of occupations from pursuing theprofessional goal on a rather whiggish model of success. Professionalisation isseen as the gradual accumulation of the relevant knowledge and expertiseleading at a critical point to the formation of associations, frequently led byheroic figures, who then struggle valiantly to establish standards of competenceand ethical practice and to drive out charaltans. This is ultimately rewarded bystate recognition and licensing.

As Perkin (1989) has cogently argued, such aspirations crystallised out ofspecific historical, political and economic circumstances, namely the rise ofindustrial capitalism with its remorseless emphasis on competition, profits,

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The professionalisation of financial advice in Britain


costs and efficiency. Not only was this an affront to the manners, style,morality and sensibility of the gentleman, besides of course his status, it alsoran counter to a feature of humanity which Marx (1964) in his early writingsargued was fundamental: self-realisation through work where work isfundamentally co-operative and the basis of society as well as economy.Perkin went on to show that the success of professions from the end of thenineteenth century to the middle of the twentieth derived from the rise of themiddle classes as industrial society developed, and the increasing respect forexpertise as knowledge proliferated. The extraordinary success of the industrialrevolution in translating knowledge into material success also brought aboutthe rise of democracy and with it the notion of social progress and socialengineering, the most extreme aspiration of which was evident in the Russianrevolution. In a world where the working class was still numericallypreponderant, and which was plainly subject to severe class tensions at times,it was expertise, a professional and intellectual elite that was seen as the sourceof salvation, a view epitomised in the Fabian movement and its founders theWebbs.

We may then conceptualize a profession as an occupational group whichachieves market closure and autonomy on the basis of a successful claim toexpertise and the delivery of a service based upon it in a area of vital socialimportance. This implies the striving of a profession for autonomy on the onehand, usually perceived rather whiggishly by the aspirants, and a demand for iton the other hand, or the creation of social space for it, which may change overtime, both accommodating new professions and occasionally marginalisingexisting ones.

The success of aspirant occupations is hence dependent on a limited numberof general factors besides less central ones,1 and what might be called avagaries of history ± the peculiar conjunctions of people and circumstances.The first of these is the existence of successful and established professions,which to some extent can set the conditions for others. The second is thecapacity of the aspirant profession to mobilize its expertise effectively in a waythat achieves practical results. Thus, for example, although medicine hascolonized mental and emotional as well as physical health through psychiatry,it has not remotely been able to cope with demand or operationalize effectivecare or cure, and is largely confined to securing those who are `a danger tothemselves or others'. This has left open a large area of demand, previouslyministered to by the churches, which now goes under the name of therapy.Here a thousand flowers bloom and the number of therapists, necessarilylargely in private practice, has grown. Even in the more delimited area ofpsychotherapy the schools founded by Freud and Jung have now proliferatedin a variety of directions. As long ago as 1971 a government enquiryrecommended legislation to control psychotherapy, in recognition not onlythat incompetents might fleece clients, but more importantly that a significantdegree of expertise existed that could, if abused, damage vulnerable clients. Yetthe consolidation of that expertise into a common body of professional

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knowledge is proving slow and difficult. In 1998 the UK Council forPsychotherapy acted as a register for a postgraduate level profession andwas anticipating the development of a European Certificate of Psychotherapy,yet it had 78 member organizations, reflecting the diversity of approaches.2

The third factor conditioning the emergence of a profession is hence thedemand for it, whether from the public at large, or from the state, or both.Accounting is a leading example of a demand led profession and incidentallytestimony to the limits of the capacity of established professions, in this casesolicitors, to prevent the emergence of new ones from their midst. Despite thedisparagement by the Law Society of accounting in the nineteenth century, theestablishment of joint stock companies with limited liability in the middle ofthe century created a demand for competent, independent audit as a means tosecuring shareholders interests. As corporations grew in size in the twentiethcentury accounting became increasingly important in keeping a grip on internalfinancial security, and was given a further boost by the First World War whengovernment contracting encouraged the development of cost accounting as abasis for ensuring that the state would not be overcharged for military contracts.3

The professions of the land also provide examples of demand leading to theemergence of separate professions, with surveying, with its military origins,coming first with the rise of the real property market in the nineteenth centuryas a consequence of urbanisation and the spread of wealth, followed by landagency, and then by property valuation and auctioneering, leaving estateagency to struggle, despite the sustained growth of the private housing marketfrom the end of the nineteenth century and throughout (with ups and downs)the twentieth.4

The reasons for the failure of estate agency to professionalise are instructiveand identify a fourth conditioning factor: distance from business, construed asstraight forward profit seeking.5 For the estate agent has two sides to his or herwork: that of the agent acting for the seller, and as such the provider of adviceand mediation with other parties ± solicitors, insurers, builders besidespurchasers ± and that of the deal maker and commission taker, in which he is ainterested party since, if there is no sale, there is no commission. Attempts atthe formation of professional bodies and at getting state registration werecontinually frustrated by the emergence with every property market boom of anew generation of novice estate agents offering to act at cheaper rates ofcommission. And since the primary concern of the seller is to achieve a sale,and the interests of all parties are for a sale to go through without unduecomplication and delay, such novices might well survive in the boom, even ifheavily culled when a quieter market returned. Whilst there has been no doubtof the public demand for estate agency, since the option of advertising andmanaging the sale by the seller is one adopted by a small minority, theaspiration to provide a protected service is constantly compromised by offersfrom newcomers to sell quickly and for a lower commission.

The final conditioning factor is the most complex and takes us back toPerkin's account of the social conditions which favoured the rise of




professions. While some of these conditions continued to obtain in the lattertwentieth century, the end of the golden age of the professions has meant thatincreasing limits have been imposed on both existing professional autonomyand on the potential for new ones to achieve anything resembling the classicmodel. Krause's (1996) magisterial review of the history of law, medicine,engineering and universities in America, Britain, France, Italy and Germany,whilst necessarily limited in detail at times, gives the clearest overview. Heconceptualizes matters in terms of the competing powers of the state,capitalism and the professions and shows how professional organisation andautonomy varies with the nature and strength of the state and its relations withcapital. It is difficult to escape his overall conclusion that capital has shown anincreasing tendency to intrude on professional autonomy in the latter half ofthe twentieth century. The state has for the most part also significantlyincreased pressure on the professions, whilst at the same time being very muchalive to the need for reliable standards of expertise. Indeed, paradoxically thestate has come to demand such standards in an increasing variety of fields,whilst at the same time maintaining a strong scepticism as to the benefits ofprofessional autonomy. Professionalisation of a sort may hence be possible,but the end point of the professionalisation project is not what it was.

What this amounts to can best be understood by a brief periodisation ofdevelopments. The twenty years following World War Two saw the establish-ment and consolidation of the welfare state in industrialised societies, sustainedby the post-war boom. This included an increasing provision of professionalservices to the public ± notably medicine and to a lesser extent law anduniversities ± on the basis of state funding. The state hence acquired a stake inthe professions, but was content initially to leave their autonomy substantiallyuncompromised. As increasing prosperity turned to affluence and the economybecame increasingly consumer driven, an ever larger mass of citizens becamemajor consumers and began to assert rights as such in the consumer movement.Although initially directed at material products, this spread to services andthen to the professions. Increasing sections of the public had their confidenceraised in challenging professional expertise and service delivery by the spreadof knowledge through the media, and by the expansion of education, andespecially of higher education. The age of deference to experts was over andthe evident unwillingness of the leading professions of law and medicine todeal with complaints from clients adequately, extending to a willingness toallow incompetence and even malpractice to go unsanctioned, contributed to arising cynicism about professionals and greatly increased awareness of theiradvantages, privileges and income.6

The significance of consumerism is that consumers increasingly constituteda large majority of the electorate and were hence a source of influence ongovernments, and therefore on the state. This was manifested in more stringentlegislation on consumer rights7 to quality of products and services and toreplacement, redress and compensation in cases of failure to perform, ordamage to the purchaser. When translated into the professional field this


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entailed more effective and accessible redress systems ± for example the LawSociety in 1998 moved to create a wholy independent complaints procedure ±and an increasing emphasis upon competition and value for money, withprofessional fee scales being banned as against the public interest, andrestraints on advertising also relaxed.

Pressure was further increased with the advent of the new right (Reagan,Thatcher and their imitators) in the 1980s with their militant insistence on freemarket values and deep scepticism of any restraint on them. Professionalsmight well complain that such governments knew the price of everything andthe value of nothing, but it did them little good, as measure after measure wasintroduced eroding professional privileges: to cite but two examples,conveyancing, on which solicitors in small and medium practices had reliedfor many years, was subject to a sharp increase in competition by theintroduction of licenced conveyancers; and the Thatcher government policy onhigher education was to greatly increase student numbers, so currying electoralfavour, but to refuse to increase funding, so progressively degradinguniversities as resources were spread more thinly. The constant message toall in the economy was to be more efficient and make more effort. Industryresponded by `downsizing' and `outsourcing', cutting swathes through middlemanagement. Both the state and private industry engaged in a concerted effortat the greater exploitation of labour, including white collar labour, an effortwhich continues beyond the end of new right governments. The effect of thisupon the professions was a significant loss of control over quality of servicedelivery and a move in the direction of business, with a constant emphasis uponcost control and efficiency. Accountancy and accounting techniques prospered(Broadbent and Laughlin, 1997), but they were one of the few professions to doso. In most professions office machinery and specialist administrators wereengaged to increase output, performance evaluation became constant andsmall scale practices declined in favour of larger ones with internalspecialisation. This attack by governments in alliance with capital achieved agreat symbolic impact in `cutting the professions down to size' and reducingtheir status as experts to be deferred to, coming as it did after the establishmentof the state as a stake holder, and of consumerism.

What space was then left for future professionalisation? The developmentand proliferation of knowledge continued and the aspiration to professionalstatus became if anything more widespread with the growth of the graduatewhite collar sector of the workforce. Prosperity for many secured a financialbasis for the possible patronage of new professions. More importantly, a moreaffluent and educated population of consumers increasingly looked for reliableminimum standards in all areas of the economy. It remains sceptical however,of the capacity or willingness of autonomous professionals to provide suchservices, and increasingly expects the state to act as guarantor and regulator.The nature of the profession which can arise is hence paradoxical: its autonomyis limited by state interest, oversight or intervention, but at the same time thestate is concerned to foster the development of reliable standards of conduct,




competence, training and expertise, for which an effective professional bodycould well take responsibility. In addition the state and consumers areconcerned that clients should receive value for money, precisely because oftheir inevitable ignorance of the amount of time and effort a particularprofessional service requires. One might call this model the state regulatedprofession. Financial services provides a example of just such a possibility, towhich we now turn. It will left to the end of this article to discuss whether thepotential for professionalisation involves, in this case, the possibility of success,and if so just what that might consist in.

The growth of financial services in Britain

Britain's financial services industry, which provides banking, insurance andinvestment services to the general population, is long established, with roots inthe last century and earlier, and has grown very substantially in recent decades.In part this has been the long term outcome of the progressive shift in theoccupational structure towards white collar work with its attendant shifts inattitudes, habits and financial capacities. White collar work is more likely toinvolve an occupational pension, the payment of salaries by cheque or credittransfer and to be associated with occupational development, a career, withsecurity and skills acquisition leading to rises in income in a hierarchy, ratherthan the more limited prospects of the manual job, underpinned by specifictechnical skills in many cases. The picture is complicated by the proliferation oflower white collar jobs as clerical workers and retail assistants, many of thempart-time and occupied by women, which have much more in common in termsof income, job security and additional benefits with manual work. At the sametime skilled manual workers in the more stable industries and those witheffective trade union representation have been able to acquire white collarbenefits, notably participation in occupational pensions to which employerscontribute as well as employees.

This sustained growth in income and in the middle classes ± and theevidence is that the most sustained and dramatic rises have been in the upperrather than the lower white collar occupations (Goldthorpe, 1980) ± have beenassociated with a broad under-pinning of middle class status with middle classfinancial security, perhaps most dramatically illustrated by the rise in homeownership, which reached a level approaching two-thirds of households by the1990s. In general the more that incomes rise above the necessities ofconsumption and the stronger future anticipations of income become, thegreater the tendency for income to be invested in the broadest sense of thatterm, which includes not merely financial instruments, but housing andconsumer durables. These investments and expectations then need protectingagainst adversity ± serious illness, job loss, burglary, fire and storm ± which isachieved through insurance.


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This process was given a significant and deliberate boost by theConservative administrations of 1979±97. Mrs Thatcher's aspiration was foreveryone to be financially self-sufficient, to own their own home and pension,and to take an active part through savings and investments in securing theirfinancial future. Thus council (state) housing, built on a bi-partisan basis at lowrents for the working classes, was offered to sitting tenants freehold atdiscounts which construed years of tenancy as a kind of mortgage, with longterm tenants being offered very large discounts off commercial market price.Local councils who had built and administered rented housing were required tooffer all their properties to tenants, and the take up was substantial. This wasfurther assisted by a powerful boom in house prices in the 1980s, which in itslatter stages contained a considerable speculative element. Nationalisedindustries, notably the utilities, were progressively privatised and the sharesoffered to the public at prices which almost invariably ensured the smallinvestor an instant profit, and in many cases also the experience of longer termgrowth if they retained the shares, resulting in a sharp increase in shareownership. Personal pensions were launched with a great fanfare by thegovernment in 1988 as a means of encouraging individuals to takeresponsibility for their financial security, and to avoid the problem posed byincreasing rates of job change which compromised the effectiveness of

Table 1 Adults1 holding selected forms of wealth: by age, 1994±95

Great Britain Percentages

16±342 35±54 55±74 75 and over All adults2

Current account 76 82 71 57 75Building Society Account3 43 52 52 45 49Premium Bonds 13 24 28 24 22

Stocks & Shares 8 17 23 15 16Other bank account3 12 14 15 18 14TESSA4 3 9 14 6 8

Post Office account 6 6 8 13 7Unit Trusts 2 6 9 4 6National Savings bonds 1 2 10 12 5

Other account5 2 2 2 1 2Gilts 1 2 3 1Save as you earn 1 2 1 1Any 87 90 88 85 88

1 Percentage in each age group holding each form of wealth.2 Excluding 16 to 19 year olds in non-advanced full-time education.3 Excluding current accounts and TESSAs.4 Tax exempt special savings account.5Any account yielding interest not included in another category.

Source: Family Resources Survey, Department of Social Security




occupational pensions. Personal pensions take up was promoted by tax breaksand subsidies amounting to as much as 8.7% of income for a limited period,and take up was eight times the government's expectation of half a million(Nesbitt, 1995).

For a combination of reasons then, participation in financial services, whichhad been subject to long term growth in any case, accelerated in the 1980s tothe position summarised in the table on the previous page.8

Regulatory intervention

The entire financial sector, wholesale and retail, was seen as of leadingsignificance by the Thatcher administration. It represented a success story forBritain, a major foreign currency earner with sustained expansion and apowerful position internationally. It constituted a leading example of the shiftfrom manufacturing to service industry and an important counterweight to thetraditional heavy industries, from which state subsidies were withdrawn andwhich declined precipitately. Ideologically financial services were the embodi-ment of the market, offering the prospect of rapid gains for the astute and theadventurous and, according to government wisdom, incapable of beingfundamentally restrained by state intervention.9 It was of vital importanceeconomically that Britain should continue to be a leading player ininternational financial markets, and for this reason the modernisation of theregulation of wholesale markets was essential. These reflected Britain'sinsularity and imperial past in their governance and reliance on a commonculture and common upper social level origins to sustain an informalgentlemanly regime of regulation. This formally excluded foreigners frommany positions, for example membership of the stock exchange, and theinformal system of regulation was opaque and confusing to outsiders. Accesshad to be granted if international status was to be maintained and hence a newpublic and formal system had to be instituted. This was achieved through theFinancial Services Act 1986, which established a supervisory regulator, theSecurities and Investments Board appointed by the state, and a second tier ofsectoral self-regulatory organisations representing practitioners. 10

Although regulatory reform was primarily driven by the wholesale side andinternational considerations in creating foreign access and a `level playingfield', regulation of the retail side was also implemented by the Act. Itwas important domestically in promoting the further participation of thepopulation in financial services and achieving a shift in the national cultureaway from the expectation of support from the state which had characterisedthe post-war settlement, with its commitment to full employment, and towardsa sturdy independence. Regulation was explicitly designed to ensure thatinvestors were not cheated or misled, with the object of creating an informed,competitive market?11 Regulation was hence directed at identifying andeliminating rogues and compensating their victims where necessary, and with


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ensuring that the sellers of financial products disclose clear and adequateinformation to enable the public to make informed purchases. The clearunderstanding was however, that when they did so they would be liable for theconsequences, unless they had been actively misled by the seller: caveat emptor.

The problem of advice

This created a difficulty given the relative inexperience of much of the publicand the character of financial services products as what economists call`credence goods', that is those which are impossible for the customer toappraise as to quality and value for money (OFT, 1997). Regulation under theAct concentrated on investments, notably pensions, endowment life assurance(because of the investment element), unit trusts (mutual funds), bonds andequities. Portfolio management was naturally also included. Risk assurance,including all forms of healthcare cover, and mortgages, were excluded. Themarket was dominated by large, well established, British firms, many of themmutuals formally existing for the benefit of their members, but in practice solarge as to be as much beyond the reach of individuals as equity basedcompanies are beyond the reach of their shareholders. Nonetheless, apaternalistic ideology of service to the public with its origins in mutualitypervaded these august institutions, many of them dating from the nineteenthcentury or earlier.

It was this establishment and paternalism, together with the strong self-regulatory element in the new regime that served to bridge the gap over theproblem of advice. Regulation concentrated on the most important financialdecisions, those with medium and long term consequences and with substantialopportunity as well as direct costs: make a mistake over your pensionarrangement and it may well be too late to make adequate provision by thetime you realise it. Most of the products in question do not perform in theshort term, and they may require a long term regular commitment of income.They are abstract and hard to figure out, unlike the consumer goods the publichad become used to. The customer may not understand how a television works,but at least she can appraise the quality of the sound and the picture. Buying apension is rather like paying for a television on the basis of the manufacturer'sspecification, with delivery in thirty years time. Even worse, the volatility ofmarkets means that no guarantees can be given about the performance offinancial products. A new model television will generally get better inperformance the longer it remains in production, as minor failings in designand manufacture are eliminated in the light of experience. Financial servicesinvestment products however, carry the obligatory warning that the value of aninvestment can go down as well as up, and that past performance cannot betaken as a guide to future.

Yet if this is so how can the customer, even if she has acquired the necessaryexpertise in appraising what are often complex products, make an informed




purchase? The solution to this was two fold, regulatory and practical. Theregulatory solution was to focus on the sales process and to try to ensure thatthe advice and information given to the customer was effective to achievethe desired outcome. First the customer's circumstances are required to beinvestigated in a fact find and detailed rules specify what kinds of productsshould be offered to customers in differing circumstances, with the object ofpreventing customers being sold whatever pays the most commission. Inaddition, information about the product must be disclosed in a standardisedform which illustrates its potential performance and the impact of commissionand charges. This should result first, in the customer being offered a productappropriate to their circumstances and needs, and secondly being given enoughinformation to evaluate it. If the sales adviser represents a single companyrather then being independent however, as is often the case, it is then up to thecustomer to engage in a wider market search to compare the merits of thisproduct with the parallel products of other companies.

Two questions arise at this point therefore, first that of the difference betweenthe tied seller and the independent one who can give advice on the comparativemerits of parallel products, and secondly whether the customer is in fact likely tobe inclined or able to engage in a wider search, or to be able to appraise theinformation disclosed properly. This became more problematic in the light ofthe actual sales relationship. Regulation enshrines the notion of the informedcustomer, that is a critical, cautious, arm's length decision maker, yet the salesprocess was founded on the quasi-professional notion of advice giving, with salesstaff referred to as `consultants' or `advisers' and never as salesmen. The objectof the sales process, which the regulatory requirements of the fact find anddisclosure made considerably more lengthy, was the establishment of trust andconfidence in the seller, a process naturally made easier given the detailedrevelation of the customer's circumstances. The adviser was there to help ratherthan to sell. Identifying a potential customer or `prospect' is a time consumingand expensive process however, and it is hence vital that half interested prospectsare `closed' into a sale. The nature of the sales process, with its emphasis upondetailed questioning of the customer, the giving of advice and the establishmentof trust is hence in practice a version of the professional client relationship. Thebenefit of this to the seller is that the trusting client does not ask too manyquestions, that is behaves in precisely the opposite way to the critical, informed,market based decision maker. They are glad to do this because of the importanceof the decision, because of their substantial ignorance of financial servicesproducts, and because of the credence character of these products. The sellerneeds the customer to behave as the client, because he=she is only trained in themerits of his company's products, and his general training in the industry and itsproduct varieties is limited. Regulation did eventually introduce minimumstandards of competence tested by examination for all sellers, tied or independentin 1997, but the standards in question are not claimed to be very high.12

In practice then the customer is induced to feel that they are receivingprofessional advice when in fact they are being sold a product. The regulatory


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solution does not really work and indeed in practice there is a deliberateinducement of the compliance and passivity of the client rather than the alertinquisitiveness of the informed customer. The practical solution to this takesus back to the companies which dominate the industry and their sense ofbenevolent service provision to the public. Their culture is sustained by the factthat their prudential management is long established and that they had, at leastuntil recently, long records of provision of their products to an ever largersection of the public with steady product performance. Further and crucially,the industry view has been that the public is greatly under provided for in termsof savings, investments and insurance protection and, since prudentialregulation is established and effective, the customer is invariably better offwith a purchase than without one, albeit at times the product purchased is notthe best of its kind. Hence regulation devoted to ensuring that the right kind ofproduct is sold is adequate also to ensure that the customer always benefits.

This in turn legitimises the structure of the industry, which is dominatedby the direct sales forces of the large product providers, be they insurancecompanies sending their staff out on the road in search of customers, or banksattempting to attract existing customers into their branches for advice on theirinvestment products. There is a network of independent financial advisers, butit is not large enough to service the whole nation, is very heterogeneous in thesize and scope of competence of firms and, at the time regulation wasintroduced, very diverse in basic competence and probity, because precedingregulation was limited and almost anyone could set up as an adviser. Inpractice most independent advisers are former sales staff for the largecompanies. The proto-professional constituency was hence very poorlydeveloped and in no condition to shoulder the burden of providing advice.

Scandals and abuse

To summarise the situation so far, we have a substantially expanded market forpersonal financial investment which is expected to grow further and which thegovernment wishes to promote. The need for investor protection is recognised,but the model for achieving this is primarily through the creation of aninformed, competitive market, with sanctions and compensation for fraud. Thedifficulty arises over the public's capacity and willingness to make informedpurchases in financial markets, because of their complexity and the abstractand credence character of many of the products. The public would clearly bebetter protected by being able to rely on advice from a professional who hasappraised their needs. Paradoxically, the industry actually operates its salesprocess in just this way, and regulation reinforced the liability of the seller byinsisting on a fact find, on clear product literature, and on appropriate selling.The professional client model is hence effectively being supported in the midstof regulatory change directed at creating an informed market throughdisclosure.




The question then was whether the industry could hold the line on sellingachieve reasonably clear and adequate disclosure, and restrain itself frominappropriate selling. It could not. There are always minor scandals and abusesin financial markets, and regulators can expect to have to modify rules, topursue abusers, and to compensate victims. The best of these, from aregulatory point of view, are those that can be attributed to individuals actingalone. More problematic are those which are more widespread and involveexploitation of the rules rather than simple theft. Such were home incomeplans, sold to the elderly in the 1980s and early 1990s as a means of raisingincome from homes which were owned by taking a new mortgage and investingin a bond, the yield from which was promised to pay off the mortgage andprovide additional income. When markets changed the bonds failed to performand many elderly people found themselves facing repossession. Compensatingvictims was a substantial pre-occupation of the newly established InvestorsCompensation Scheme, since thousands of investors were involved. The planswere sold by independent financial advisers, with only a few accounting fornearly all the cases, but they obtained the mortgages from large and establishedlenders, often building societies. The lenders promptly disclaimed responsibilityand said that the loans were packaged by the independent advisers.

This level of abuse is embarrassing but still manageable, and could havebeen accommodated along with other abuses as part of the teething troublesof the new regulatory regime. It does however alert us to the problem ofestablishing adequate standards of conduct among independent financialadvisers, those best placed to offer professional advice. We shall return to theorganisation of independent advisers into professional bodies below. Muchmore significant were two other abuses which involved entire sectors of theindustry. The housing boom of the 1980s was fuelled by increasinglyundisciplined lending as existing lenders fought for market share and new,often foreign based institutions came into the market. Overlending became rife,with loans to value rising to over 100% and income multiples constantlyincreasing at the same time as dramatic increases in the speed of decisionmaking on offers. The result was that house prices rose even faster and manypeople borrowed more than they could afford. When the bubble burst andhouse prices fell, hundreds of thousands had their homes repossessed andmillions were stuck in negative equity, with the value of their home less thantheir mortgage. The situation was exacerbated by the successful drive to sellendowment linked mortgages, which had come to account for about four fifthsof mortgages by the end of the boom. With a decline in the projected yields ofendowment policies, some home owners faced the prospect that the policywould fail to pay off the loan on maturity. Worse, the fact that the capital sumin the loan is not paid off progressively when endowment linked meant thatmore faced negative equity and repossession via this route than would have ifthey had begun to reduce their capital debt through a repayment mortgage.

The reason endowment mortgages were popular with lenders was clear: theycontributed extra business and were very profitable. The issue the scandal


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presented was most evidently the failure of the regulatory regime to includemortgage lending. Perhaps more importantly however, why were so manypeople sold endowment mortgages inappropriately including, as was evidentfrom press reporting, relatively unsophisticated customers? Clearly there wasno evidence of informed purchasing. The answer lies partly in the freneticmarket and the conditional selling of mortgages by lenders: loans wereavailable only if the borrower took up the endowment. The answer is also to befound in the nature of house purchase however, often a fraught and exhaustingprocess in which attention is focused on the property transaction and the move,and the mortgage is seen as incidental and instrumental. Here if anywhereis surely a case for well informed financial advice from an independentprofessional.

The other major scandal was worse. Government sponsored personalpensions were avidly sold in the latter 1980s and early 1990s on a very widebasis to many who should have never been approached. The government wasclear that the new pensions were not for those who were in or eligible to join anoccupational scheme because employers contribute as much and often morethan employees to such schemes. Yet an estimated 1.5m people were mis-soldpensions by an over eager industry, led by the banks and life insurers. Theregulators eventually decreed that a progressive review of the circumstances ofpurchases should take place and, if disadvantage could be demonstrated, thereshould be an offer of reinstatement in the occupational scheme, paid for by themis-seller. As the extent of the abuse became more established, so did the lackof scruple of the industry, which had rushed to expand its sales forces, giventhem only a few days training and put them on the road in the expectation thatmany would at best sell a few policies to friends and relatives before burningout. Once again the pensions mis-selling scandal illustrated the dependentnature of the great majority of the public as customers for financial services. Inthis case the costs were very serious: not only the direct disadvantage, but thecompromising of the very thing pensions are supposed to protect, long termfinancial security. The pensions case made it as clear as could be that the publicare at great risk and not likely to be candidates for informed purchases,disclosure or no disclosure, and that the industry's pose of acting as a advisersand consultants was no more than a ruse to take advantage of this weakness.

Regulatory review

The scandals greatly strengthened the arm of the regulators against a large,powerful, well established industry, assertively confident of the benefits of itsown products for the public. A new regulator, the Personal InvestmentAuthority was established to take over from the two separate ones for the largefirms of product providers and independent financial advisers. The salesprocess was targeted for improvement and a series of progressively heavy andwell publicised fines imposed on firms for failure to ensure their sales practices




came up to requirements. The regulator did not, however, propose a shift in thebalance of responsibilities decisively towards the seller. Distribution ofproducts remained divided between the independent route, which some ofthe big product providers were glad to support because their products weregood enough to succeed through it, and the direct selling route.

The impact of the regulatory review was to make the sales process muchmore extensive and expensive. More training was being required of staff, all ofwhom were required to pass the industry wide competence test by mid 1997.Detailed fact finds were linked to a `reasons why' letter, which spelled out whythe product being recommended was appropriate to the customer. The largesales forces of the big firms, with their high turn over requiring almostcomplete renewal within five years, were no longer sustainable. Sales forces hadto be better trained, more productive and develop longer term relationshipswith their customers. Payment began to shift from commission to salaries,though not decisively. Numbers fell by 65% in the four years to 1996 andcontinued to fall in 1997. Direct sales staff still only represented one companyhowever, and could only recommend the appropriate products of thatcompany. It was still up to customers to look more widely at other firms'offerings, even though relations with `sales consultants' were now moreextended and a long term relationship was being actively sought by most firms,that is a move in the direction of professional advice giving was taking place.

Independent financial advisers found the regulatory review difficult also,with its requirements for better practice and more disclosure, including the cashamount of commissions and uniform if limited standards of competence.Initially numbers dipped as the marginal fell by the wayside. Then the numberof firms fell, as achieving effectiveness and regulatory compliance becameeasier and cheaper in larger partnerships where specialisation was possible. Thenumber of individuals stabilised at about 20,000 however, of whom about3,000 in 1995 derived most or all of their income from fees rather thancommission. A limited shift from commission to fees hence took place, butmost customers were clearly unwilling to contemplate the hourly ratesnecessary to compensate for commission, even though commission is chargedto the product and reduces its performance. Independent advisers' share ofsales held steady and then began to grow in the latter 1990s, at the expense ofdirect sales forces.

Professional bodies and their organisation

It might be supposed that these events would stimulate the emergence ofprofessional bodies, especially amongst independent advisers, who wouldattempt to exercise pressure to drive the professionalisation of financial advicefurther. This was indeed the case, but the situation was complicated by themarket based assumption of both the regulation and the industry, and by therole of the regulators in the professionalisation process. Two professional


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bodies were established in 1991, the Institute of Financial Planners (IFP) andthe Society of Financial Advisers (SOFA). The IFP is the more assertivelyprofessional, with a commitment to high levels of competence, completeindependence, fee based advice and a strong antagonism to the sales culture ofthe industry. It was promoting its own qualification of Certified FinancialPlanner on an international basis in the latter 1990s. Its established AdvancedCertificate, which gives full membership of the Institute, was held by about1,400 in the UK. The SOFA was established by the Chartered InsuranceInstitute, the body that provides professional accreditation for insurancepractitioners and which was also given the task of administering the FinancialPlanning Certificate, the new industry qualification, by the PIA. Holders of theFPC are entitled to register with the SOFA, but full membership is restricted toholders of the Advanced FPC, also recognised by the PIA, which gives theSOFA a membership of 2,500. As the FPC became mandatory in 1997 theSOFA set out as its objective the achieving of chartered professional status forits members on the classic model by which accountants, surveyors and othershad succeeded. In doing so it was ready to negotiate with other bodies andallow access to as many practitioners as could achieve an acceptable level ofcompetence and qualification. Where the IFP set down a marker for standardsof professional excellence, the SOFA then took a more political line in pursuingthe professionalisation project.

The difficulty facing the SOFA however, was the wide variety of trade andprofessional bodies and the confusion between their functions, in particularbetween their functions of representation and promotion, and of accreditationand ethical discipline. The key organisation is the Independent FinancialAdvisers Association (IFAA), which emerged in 1993=4 from the NationalFederation of Independent Financial Advisers as a result of a merger withthe financial services arm of the British Insurance and Investment BrokersAssociation (BIIBA).

The IFAA however, maintained a curious relationship with a promotionalbody, IFA Promotions. This is turn was the child of the Campaign forIndependent Financial Advice, set up in 1989 under the chairmanship of aformer general sales manager of Standard Life, one of the largest life assurers.He persuaded twenty-two life offices, most of whom did much of theirbusiness through independent advisers, to sponsor IFAP with the hope thatindependent firms would become members in substantial numbers, and intime take over its operation and funding. Things did not quite work out asexpected. Life office membership increased to 52 in 1996 contributing 75% ofIFAP's funds and the organisation continued to engage in advertising,promotion and lobbying on behalf of independent financial advice. IFAmembership rose to 3,500 firms. A merger with the IFAA was mooted in1993, but talks failed, not the least of the problems being the financing of therepresentative body of the independent advisers by product providers. In1996 the implications of this issue reached the point where IFAP's chiefexecutive repeatedly refused to say that independent financial advice is best.




This provoked strong denunciation by leading life office sponsors and a climbdown by IFAP, leading in turn to renewed discussions, greater co-operationbetween the IFAP and the IFAA and an exchange of directors on each other'sboards. This then led in 1997 to a revamped IFAP, concentrating onmarketing and promotion and offering free membership to existing IFAmembers and a one off fee to new applicants. The new deal was againunderwritten by Standard Life and left the IFAA as the predominant tradebody for IFAs, with the clear understanding for the first time thatmembership of IFAP could not be seen as an alternative. Large brokers,which had formed their own trade body and had been reluctant to join theIFAA, and the larger independent financial adviser networks whose positionhad been similar, generally endorsed the move.

This however, only highlighted the confusion in respect of a professionalbody. In addition to the SOFA, which as we have seen above was theexpression of the long established CII, the life offices had also established aquasi-professional body, the Life Insurance Association, which becameenergetic in self promotion and in the provision of training for both the FPCand continuing professional development in the 1990s. In 1996 it began toprovide anglicised versions of courses provided by the Life UnderwritersTraining Council of the US as a means of enhancing professional standards,and of course promoting itself and the life insurance take on the issue offinancial advice.

There had been attempts at setting up a single body at least as far back as1991, when the Independent Intermediaries Forum was established as anumbrella body, but efforts at agreement were frustrated by the variety ofinterests in different aspects of financial services, and as between independentand tied advice. In 1992, the IFAA chairman proposed a council of British IFAs,but the initiative did not take root. Merger talks between the LIA and the CII in1994 were more successful, but collapsed in the end.

In 1996, there was a further and more intensive and extensive round ofnegotiations, led by the SOFA and the CII on the one hand and the LIA on theother. It emerged in the autumn that secret negotiations had been taking placebetween the SOFA, the LIA, the IFAA, the Large Networks Association andthe Large Intermediaries Group on an informal basis. The name of PROFCOwas given to the provisional joint body, with the object of developing a fullprofessional body. Once again the obstacles were the differences in backgroundand different views of independent and tied members. The objective as theIFAA chairman put it was painfully clear `We have to recognise that, rightly orwrongly, our industry does not enjoy a high level of public esteem. There isalmost constant criticism of some aspect of our activities, be it charges,commissions or mis-selling ...

If we can succeed in one professional body with common standards, acommon code of conduct, one set of examinations and one recognisedchartered qualification, then this must benefit everyone involved,' (MoneyMarketing, 7.11.96). The instrumentalism of this aspiration to professional


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status could not be more plain, and if that were not enough the headline of thearticle referred to a single trade association, not to a professional body.

There was soon trouble as the LIA was accused by the IFAA of hijackingthe talks by proposing a new umbrella group called the Financial ServicesCouncil. The LIA identified fourteen bodies to which it had written seekingsupport for a common approach by negotiation on representation, designationof qualified status, examinations, continuing professional development andcodes of conduct and discipline (Money Marketing, 28.11.96). It succeeded inattracting the IFP and the Chartered Institute of Bankers, the bankingcounterpart to the CII, and the Institute of Chartered Accountants, butpredictably the SOFA, the CII and the IFAA spurned it. Although effortscontinued to find common ground, it proved elusive.

The issue that remained unresolved was the same as that which regulationrefused to address: whether company representatives could give trulyprofessional advice or whether that could only be provided independently.Formally financial planning advice can be undertaken on the basis of thecustomer's circumstances to a professional standard, whether the adviser istied or independent, but sales advice on a particular product can only beprofessionally offered by an independent adviser. In practice there were fearsby independent advisers that appraisal of customers would reflect the range ofproducts the representative could offer and that tied sellers are in the endalways that and not professional advisers. There remained the prospecttherefore that two aspirant professional bodies would emerge rather than one.

Dilemmas and opportunities

The provision of financial advice in Britain has hence moved significantly in aprofessional direction, driven most immediately by the regulators and behindthem the investing public, now participating more extensively in financialservices and angry at widescale abuses in the early years of the regulatoryregime. Regulation still remains based on the informed purchaser modelhowever, even though its detail has coerced some professionalisation of thesales process.13 This reflects the character of the industry, which is stilldominated by direct selling, complicated recently by the advent of new playerssuch as Virgin and Marks & Spencer, seeking to use their reputation to sellsimple, reliable products by `phone. Although independent financial advice hasprospered and given rise to professional bodies with the usual aspirations,numbers are too small and standards still too diverse for there to be a realisticaspiration to take over financial advice in the short or medium term.

Nor is this the only problem. The widespread ignorance of the public aboutfinancial products and hence their dependence upon advice does not mean thatall sales of such products require extensive advice, and there is certainly aminority willing and reasonably capable of making their own judgements. Thishas been recognised in the regulatory regime in the acceptance of execution




only sales, where the customer approaches the seller, not vice versa, andspecifies his requirements. The telephone sales firms have attempted to developthis by maintaining that much of the source of public confusion about financialproducts derives from their complexity, which in turn reflects the desire offirms to create selling points and to make the sales process easier by ensuringthe products are obscure to customers. It is also the case that some products ±a few hundred pounds worth of unit trusts for example ± are not only simplerto understand but pose less risk to the customer than others ± a pension planfor example. Hence, it is quite unclear within regulation as it has developed sofar, which customers and which sales need extensive advice, and which may beallowed to take place with little if any advice. Until this confusion betweenselling and advice giving is resolved there is little chance of a professionalproject proceeding much further, since it is unclear where professional advice isessential and where it is not.

There is also the problem of the structure of the retail financial servicesindustry, which is overwhelmingly dominated by the big firms of banks,insurers and building societies. We have seen that tied selling has come underincreasing pressure as regulation has developed and independent advisers haveprospered, but even if this were to continue and eventually, with regulatoryinsistence upon it, tied selling were to fade away and then be outlawed andindependent advice became mandatory where advice was accepted asnecessary, the power of the product providers would not disappear. Theymight well adapt by developing products that could be sold without advice, andin any case would still be the product providers, managing vast funds andreceiving huge revenues from investors. Even though independent adviserscould thus in principle emerge as professional intermediaries, and even if feepaid advice became more common, it is unlikely that the product providerswould be content to relax and let the independent advisers reach judgements.There is already evidence that they are ready to manipulate products insophisticated ways designed to impress independent advisers, and there is nodoubt that lobbying and promotion would be substantial, as would the use ofcommission where this continued. Independent advice would hence still bevulnerable to the product providers for commercial reasons, much as doctorsare susceptible to the blandishments of the pharmaceutical companies and theirrepresentatives.

Even more important is the role of the regulator as a substitute for aprofessional body. As we have seen the introduction of universal standards ofcompetence was the work of the PIA, which is now contemplating raising thosestandards. Compensation is established through the ICS and complaints arehandled through the PIA ombudsman. Although the PIA has expressed itsdesire to see the emergence of a single professional body for independentadvisers to parallel the IFAA as the trade body, the question arises of whatsuch a body could do. The functions of accreditation and discipline areeffectively monopolised by the regulator, which leaves any professional bodywith the negotiation and representation role that constitutes the trade


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association feature of such bodies. Regulation has hence substantially usurpedthe standard mode of professionalisation through forming professional bodies.Paradoxically, it has required substantial moves to professionalisation whilstpreventing its likely achievement through full professional closure. The reasonfor this lies in the role of the regulator as the guardian of the public interest,and in public and state scepticism in recent years of the autonomy and closureof the professions. The state has hence both come to require professionalisationand to deny its full achievement in traditional form.

Conclusion

How does the provision of financial advice measure up in terms of the fiveconditions identified in the introductory analysis? Clearly, despite both effortsby some financial advisers and pressure from the state, professionalisation isfar from being achieved. The question is how far might it be achieved?Curiously, although the first condition, that the terrain has been cultivated byoccupations which professionalised earlier, could well have been problematic, itis not. Although in Scotland solicitors are widely still `men of business' andgive financial advice, including acting as estate agents, elsewhere in Britain theyabandoned this some time ago and are only now considering recovering it inthe case of some medium sized partnerships, which have established a solicitorsfinancial advice network. Accountants more frequently give financial advice,but even so they have only a modest presence in the market as a whole.Further, the third condition, the existence of a demand for a service from thepublic and from the state plainly exists, as we have seen, on a increasingly widescale: arguably there is, if not a new constituency, at least a very much greaterone.

The second condition, the mobilisation of proven expertise, is much moreproblematic. Whilst the ignorance and often apathy of the potential clienteleoffers a large opportunity, progress so far in achieving anything likeprofessional competence has been miserably slow and the general standardof IFAs is inadequate, even if a minority are good. The reason for this is not farto seek. IFAs establish themselves in order to make money and do so stilllargely through commission, so sustaining a business rather than a professionalorientation and creating a conflict of interest between their concern to earncommission and the client's interest in the most suitable product, which mightcarry less or, notoriously with national savings, a best buy for many smallinvestors, no commission. Further, the continued domination of the sector bycommission tied sales staff sustains a sales oriented culture from which IFAsfind it difficult to escape. Clearly the fourth condition, an emphasis onprofessional service rather than profit seeking is not met. The elimination ofcommission and a substantial increase in levels of expertise, includingspecialisation in what is rapidly becoming a complex field, is hence essential.Both of these could be achieved if public demand and state oversight were




sufficiently powerful and insistent. It remains to be seen in this respect whetherthe new regulator for the entire financial sector, which will include the PIA as adivision, the Financial Services Authority, will go down this route or, as before,emphasise market values.

This of course, leads to the conundrum of the final condition, managingconsumerism and state regulation. Even if standards of conduct andcompetence increased markedly and fee based advice took over fromcommission, it is now unlikely that the regulators would cede much in theway of formal authority, but current state (regulatory) responsibility forstandards of training and competence and compliance could in time beconsiderably modified in practice if a credible professional body were toemerge. As we have seen, that is only likely to happen once the aspiration for aunified body for independent and tied sellers has been abandoned. Theregulator could be the most potent promoter of this development if it moved toshift all selling to fee based independent advice and progressively outlawed tiedselling where advice is also involved, that is established a clear distinctionbetween sales and advice. Even then regulatory oversight would continue, aswell as consumer pressure. The scope for professional financial advice henceexists, not on the classic nineteenth century model, but rather on the latetwentieth century one of the state regulated profession.

Received 19 January 1998

Finally accepted 21 April 1999

University of Liverpool

Notes

1 For example the proportion of women has been argued to disadvantage nursing and teaching in

their pursuit of professional status, since women in general have had a lower occupational status

than men. There is of course a certain chicken and egg element in this argument.

2 The source of this information is the UK Council for Psychotherapy.

3 The literature on accounting and the accountancy profession is now large. Roslender (1992)

provides a good overview. On the UK profession see eg Wilmott (1986).

4 A fuller account of this process can be found in a Carr-Saunders and Wilson (1933).

5 For a more extensive account of estate agency and its attempts to professionalise see Clarke,

Smith and McConville (1994).

6 One of the most extreme manifestations of this consumerist anti-professionalism was Illich (1976).

7 Consumers were supported in Britain not only by the state co-ordinated National Consumer

Council and the voluntary Consumers Association, but also from 1973 by the Office of Fair

Trading, which worked to produce codes of conduct, redress schemes and improved service for

industry after industry, including the professions. See eg OFT (1986).

8 More extensive information on this and related matters is available in Clarke (1998).

9 Cf. Mrs Thatcher's remark that `You cannot buck the market'.

10 A full account of this period is available in Clarke (1986).

11 This principle was established in the review which laid the foundations for the Financial

Services Act 1986. See Gower (1984).

12 See Clarke (1998), chapters 3, 7 and 8.

13 In 1998 the PIA was absorbed into the new Financial Services Authority, which was created to

act as a unified regulator for the whole financial sector, replacing the SIB and eliminating the


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two-tier system of regulation. Whilst the new regime was widely touted as tougher by the

government, the Bill specifying the actual powers of the FSA when fully established was much

delayed, suggesting that implementing greater powers was not to be straightforward.

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