What is a discretionary obligation?!

Clarity of wording is essential in a contract for insurance or financial services. It’s a cornerstone to what is being promised to the customer. The trust that results is an essential ingredient to what can be summed up as the ethical performance of the sector.

So it seems incredible that the Financial Skills Partnership, the organisation responsible for setting educational standards across the sector, should leave a particularly obvious oxymoron to fester away within one of its key documents.

Here’s the background. One of the Financial Services Authority’s key initiatives at the moment is the Retail Distribution Review (RDR), whose primary aim is to improve ‘consumer trust and confidence in the products and services supplied by the market’.

A vital ingredient to achieving this is the setting of higher minimum qualification requirements for retail investment advisers. One of the core standards covers ‘financial services, regulation and ethics’ and one of its requirements (bear with me for a moment longer!) requires candidates to demonstrate an understanding of the “Principles for Businesses and the discretionary obligations these place on firms”.

So just what is a ‘discretionary obligation’?!? I raised this with them some months ago and was told that it meant that the way in which the obligations of the Principles for Businesses were implemented was discretionary.

Well, that may be what they wanted to convey, but it’s not what they ended up writing into the standard. And as it remains so worded, they don’t seem to have changed their minds.

At it is currently worded, education providers would need to create coursework to show, for example, that the first Principle for Business places a discretionary obligation upon a firm to conduct its business with integrity. Now some sectors of the media may accuse the financial services sector of behaving with discretionary integrity at times, but for the body setting the sector’s educational standards to embed it into such a key document, it seems more than a little ironic.

How would the FSA react when a product offering a discretionary guarantee came to market? I think on the scale between laughing and crying, they would, like me, be tilting in the crying direction.