The chairman’s surveillance cameras have eavesdropped on a revealing conversation between a pair of regulators. Is the day approaching when consultants will charge advisers for advice?

“Do you know the one about the scorpion and the frog?” asked the chairman of the implausibly-sized investment company Second Coming Asset Management as we met in his office for a viewing of his Chairmovision network of hidden surveillance cameras that have been installed in assorted meeting rooms around London.

“Is that the really naughty one where John …?” I began. “No,” said the chairman. “It is the really clean one where a scorpion asks a frog for a lift across a river. Understandably enough, the frog is reluctant but, after the scorpion points out if he stings the frog they will both drown, the frog agrees.

“Halfway across the river, however, the scorpion stings the frog and, when the frog asks why he has doomed them both, the scorpion explains ’It’s my nature’.”

“Poignant stuff,” I said. “But what’s its relevance to today?” “Watch,” said the chairman, clicking a remote control at a large screen to reveal two besuited men sitting under a table in a small, windowless meeting room. (Scam continues below)

“Who would have dreamt there were so many risks in the world?” sighed Suit One. “I know,” agreed Suit Two. “But that’s the trouble with brainstorming these things – once you get on a roll there’s no end to the potential dangers out there.” “So true,” nodded Suit One. “So where have we got to with our 2012 Retail Conduct Risk Outlook?”

“Er … section 3.3.2,” replied Suit Two. “’Firms’ responses to regulatory and/or legislative change – the RDR.” “Hang on,” said Suit One. “Wasn’t the RDR our idea?” “Yup,” nodded Suit Two. “And yet it brings risks?” checked Suit One. “Like you would not believe,” said Suit Two. “By our count there is even an emerging risk not to mention a potential concern.”

“Crikey,” said Suit One. “What’s the emerging risk?” “That firms may seek to maximise recurring revenue streams ahead of the RDR and, in some cases, may do so in ways that produce poor outcomes for consumers,” Suit Two replied. “But why – after all we have done for them at the FSA – would these people do such a thing?” asked Suit One. “It isn’t our job to know why people do things,” said Suit Two sternly. “Only to come up with things they might possibly do and then legislate for them. Still, the good news is that risk will only remain valid for the next nine months or so – it is our concerns about business model change following RDR that could run and run.”

”It isn’t our job to know why people do things. Only to come up with things they might possibly do and then legislate for them”

“This would be the same business model change we demanded to make the world a better place for consumers?” asked Suit One. “And your point is?” asked Suit Two. “Anyway, we have identified four possible reactions to the RDR that may, if realised, increase the risk of poor outcomes for consumers. They include the risk of a strain on advisers’ compliance functions and the risk that some providers may seek to avoid the ban on commission by offering advisers incentives such as business or consultancy services.” “Consultancy services for advisers?” said Suit One, struggling to keep a straight face. “Seriously?” “We had to brainstorm pretty hard to come up with that one,” admitted Suit Two.

“But it is still a risk – as is the possibility that advisers charge fees contingent on a product sale or where charges are paid for ongoing advice regardless of whether products are sold.

Finally, the requirement to provide an ongoing service to justify ongoing fees may incentivise firms to move to portfolio advice and inappropriately make more transactions than necessary.”

“Good grief,” sighed Suit One. “With all the potential sales bias still out there, it’s like there was no point to RDR at all.” “Don’t be ridiculous,” said Suit Two. “It’s kept advisers in hand – and us amused – for years. But we have to keep looking ahead and moving forward. We are regulators. We regulate. It’s our nature.”

“See?” said the chairman, killing the screen. “So what do you think?” “I think your little parable is extraordinarily apposite and potentially quite depressingly prophetic,” I said. “I also think a lot of people will feel it is unfair on scorpions to compare them to regulators.”