Retail Distribution Review

House of Commons Treasury Committee

Written Evidence

Volume two

Only those submissions written specifically for the Committee and accepted by the Committee as evidence are included.

Ordered to be published 2 February 2011

List of written evidence

120 Sean Glorioso 4 121 Simon Boyle, Independent Financial Adviser 9 122 Derek Gair, GDC Associates 12 123 Investment Management Association 16 124 Alan Lakey, Highclere Financial Services 19 125 Beverley Davison, Highclere Financial Services 24 126 Adviser Alliance 29 127 Glen McKeown, Financial and Tax Adviser 34 128 Financial Services Authority 39, 288 129 Investment and Life Assurance Group 56 130 AXA UK 59 131 Association of British Insurers 63 132 Garry Heath, Life Change Ltd 68 133 Seymour Pierce 73 134 St James’s Place Wealth Management 76 135 Justice in Financial Services 82, 268 136 Graham Franklin, First Financial IFA 88 137 Financial Services Consumer Panel 90 138 CFA UK 101 139 Association of Financial Mutuals 104 140 Standard Life 110 141 Association of Independent Financial Advisers 116 142 British Bankers’ Association 128 143 David Haxby, Independent Financial Adviser 134 144 Threesixty Services 136 145 Peter Hamilton 139 146 IFA Defence Union 143 147 Christopher Bolshaw 146 148 Zurich Financial Services 150 149 Sesame Bankhall Group 153 150 Lyn Cooke, Independent Financial Adviser 159 151 Warwick Butchart Associates Ltd 165 152 Stephen Henry, E M Gray & Co 170 153 Bharat Sisodia, Financial Planning Consultant 172 154 Principal Investment Management 174 155 Consumer Focus 175 156 Royal Bank of Scotland 178 157 APCIMS 183 158 Ian Brough, Independent Financial Adviser 188 159 Charles Stuart Financial Services Ltd 194 160 Patricia Hutchinson, Independent Financial Adviser 201 161 James Brearley & Sons Ltd 206 162 Phil Mines, Chartered Financial Planner 211 163 Ralph Whittaker 212 164 Jon Lowson, IFA Research and Reports Ltd 213 165 Mark Loydall, Cambourne Financial Planning Ltd 216 166 Which? 218 167 Building Societies Association 224 168 Arnott Guy & Co Ltd 227 169 Financial Services Practitioner Panel 228 170 Smaller Businesses Practitioner Panel 235 171 Mike Reynolds, Moneywise GB 243 172 Terence P O’Halloran, O’Halloran and Co 244 173 Care Asset Management Ltd 246 174 Simon Mansell, Temple Bar IFA 247 175 Martyn Young 249 176 Alastair Lyon 250 177 Fidelity International 252 178 D. W. Johnstone, Creative Benefit Solutions 258 179 Consumer Financial Education Body (CFEB) 260 180 Hargreaves Landsdown 265 181 Michael Forbes Bates 276 182 Paul Raseta 278 183 Concept Financial Planning 282 184 LifeafterX Ltd 283 185 Barclays 295 186 Aviva 299 187 Nikhil Chauhan 304 188 Owen Hoye, OPH Financial Consultants 305 189 Towry 310 190 Jonathan Blake, Independent Financial Adviser 314 191 Peter Falls, Financial Adviser 317 192 Mark Gosling, Castle Investments Consultants 328 193 Paul Naylor, A P Financial Services UK Ltd 331, 335 194 D Frost, Norwood Financial Services 337 195 Laurence Frazer 338 196 Mrs McCartney, Independent Financial Adviser 341 197 W H Ireland Ltd 342 198 Chris Dodd, Independent Financial Adviser 343, 347 199 Julian Ellis 344 200 A J Mathers, Mathers, Harrison & Co 348 201 J P Morgan 350 202 Angus Low 353 203 Richard Arnold Financial Management Ltd 354 4

Written evidence submitted by Sean Glorioso

Reshaping Retail Financial Services to Rebuild Consumer Trust

Themes Part 1. Consumer Financial Services Advice Choice Part 2. Financial Adviser Qualifications Part 3. Retail Financial Services Industry Structure

Executive Summary The spirit of RDR is to recapture consumer trust in retail financial services. One of the themes is to offer consumers the choice of either accepting restricted or independent advice. The adviser will be suitably qualified to QCF level 4. The structure represented of the financial services industry distribution of retail financial services taking account of the major distributors for example Retail Banks (Bancassurance), Wealth Management Firms, Network Platforms (i.e. panel of funds), Insurance Firms, Stockbrokers and other participants will result in a restricted advice monopoly when considering the application of EU Competition Law principles to the supply of a particular product and/or service. The forgoing therefore means that RDR in principle offers no real benefit of choice given that the consumer won’t be in a position to access readily on national basis independent advice. This also therefore disenfranchises localised community Solicitors, Accountants and other Professionals including Trustees given the Trustee Act 2000. Moreover the QCF Level 4 qualification therefore under a restricted advice label won’t have much practical application given that some restricted providers won’t facilitate a full product solution thereby rendering the qualification inappropriate for a particular adviser. Changing the industry imbalance to the advantage of the consumer will only come about if serious consideration to the FSA enforcement powers to tackle poor advice is strengthened. The RDR position therefore means that the restricted advice label will become the advice monopoly that will destroy the long term prosperity of the mass affluent consumer in that the consumer will continue to suffer from poor advice given that no real choice will be available on a national basis.

Part 1 . FSA RDR Stance on Consumer Advice Choice – Restricted or

Rebuilding Consumer Trust through a deeper understanding of Independent and Restricted Advice. Reshaping the industry in order to deliver financial solutions to meet consumer needs. 5

Independent

Part 1. A. FSA - RDR Definition: The Restricted Advice Choice Label 1.1 Restricted advice by far is the most predominate in market share.

1.2 Restricted advice equals a selected panel of products to provide solutions to consumer needs.

1.3 Restricted advice totals poor consumer outcomes given that it effectively sets up advantage for the distribution channel and adviser rather than to the advantage of the consumer.

1.4 Restricted advice does not provide financial needs solutions it pushes products on the consumer.

1.5 By way of example in answer to 1.4, Bancassurance sets out a single product that moulds to needs rather than tailor to specific consumer need. In some instances this is beneficial given that a particular product may benefit that particular consumer need but by in large each consumer need given their unique circumstance requires a combination or single product that predominantly falls outside the scope of the restricted panel of products.

Part 1. B . FSA - RDR Definition: The Independent Advice Choice Label

1.1 Independent adviser choice provides a wider scope to meet consumer needs given that it’s a whole of market choice.

1.2 The FSA register of dual qualified advisers i.e. those that are classified as stockbrokers as well as financial advisers and/or any research evidence available to the Committee will show that the Independent Adviser market share is a tiny fraction of the restricted adviser market share.

1.3 Independent advice acts as a far more positive consumer outcome given that it has the ability to serve each individual consumer need. The spectrum of whole of market products offers a wider and deeper product suit to meet the unique consumer needs.

1.4 The Independent advice label is the only single vehicle that can support Trustee responsibilities under the Trustee Act 2000.

1.5 Independent advice captures a larger consumer audience of needs than the restricted advice label.

1.6 Likewise the independent advice provided is a far more robust method of delivering financial advice given that it provides solutions to needs to a greater audience and it does not push product on a need that does not require the same.

1.7 The difficulty however in seeing growth in the Independent advice label to cater for a wider consumer audience lays in the industry structures particularly given the 6

market share that Retail Banks (Bancassurance), Wealth Management, Insurance firms , Networks (panel of funds) control. Facts that the FSA can readily provide the committee. 1.8 The North American retail financial services sector is far more robust in delivering independent financial advice solutions to consumer needs examples may include some of Americas best known and largest financial services firms Wells Fargo, Edward Jones, and Merrill Lynch and in Europe AWD Holdings AG.

1.9 The Independent advice label will provide greater Long term Financial Stability to the Consumer and British Savings Market.

1.10 Further the interdependence of fairness and trust with the consumer will increase in ratio as the advice provided will serve the consumer need thereby forging stronger relationships of trust between adviser and consumer over the long term.

1.11 Further the mass affluent consumer will have greater scope to access financial solutions that meets their needs rather than product solutions that do not meet the consumer need.

Part 2. Financial Adviser Qualifications 2.1 FSA QCF Level 4 main outcome objectives; 2.1.1 Increase Professional Financial Adviser Standards 2.1.2 To achieve a more positive consumer perception outcome for Financial Advisers

2.2 An adviser qualification plays only a small part in the relationship wheel of trust between adviser and consumer.

2.3 The QFC Level 4 will achieve greater financial adviser literacy will it though create a better landscape of financial services delivery in that more consumers benefit from solutions that meet their needs rather than match the restricted provider’s sales volume targets.

2.4 The adoption of QFC level 4 will not deliver better financial services delivery to the mass affluent given that a great proportion of the retail financial services distribution platforms i.e. the Bancassurance models, other restricted providers will only seek to reduce the product options available to consumers thereby rendering a QFC level 4 qualification nonsensical for those advisers and therefore disenfranchising the mass affluent.

2.5 Smaller firms operating as pre RDR label classification of independent i.e. the Independent Financial Advisers are already well qualified and provide good advice evidence of this is prevalent in the numbers of complaints that the Financial Ombudsman Service (FOS) receives when compared with smaller firms and larger firms. Granted larger firms cater for a greater proportion of financial services delivery however an assumption if complaints are reviewed on an individual case by case basis against each adviser then surely complaint evidence on an adviser by 7

adviser basis will show that larger distributors account for more complaints on an adviser per adviser basis than smaller firms.

2.6 The above 2.5 holds true when considering the type of advice being afforded through restricted compared to independent advice.

2.7 The prevalence of the restricted adviser advice model when reviewed in light of EU Competition law principles means that to large extent real financial solutions that meets consumer needs will in all probability not lead to the RDR vision of rebuilding community trust but create further imbalance and less choice for the consumer.

2.8 Further in support of all the above in Para 2. advisers will be qualified to QCF level 4 but few will fully utilize the qualification due to restriction of products when undertaking financial services delivery to the consumer.

2.9 If for example the Bancassurance model is used as a method to calculate as a proportion relative its overall market share and not considering complaints but delivery of financial solutions to meet consumer needs then it is evident that RDR will fail to reach its stated objective but rather it will disenfranchise smaller financial services firms that are already providing solutions that meet the needs of consumers. In other words the QFC Level 4 great in principle but poor in delivering financial solutions to the mass affluent market.

Part 3. Retail Financial Services Industry Structure 3.1 RDR classification of the Restricted and Independent advice label classification are two separate advice chambers.

3.2 The two advice labels are very different in providing a financial solution to meet the consumer need. Restricted provides almost a solvable solution to consumer needs but quite often is product focused whereas independent advice is geared towards financial solutions to meet the need rather than product driven.

3.3 The Financial Services Industry structure means that the FSA RDR definition of advice labels will follow that restricted advice will be far more prevalent in market share than independent advice.

3.4 If RDR objectives for fairer consumer outcomes are to be achieved then a thorough investigation of the impact of the two advice label choices should be considered in light of the principles that apply to EU Competition Law in that a single product and/or service monopolises the market to the determinant of the consumer.

3.5 The consumer choice between restricted and independent is a good choice however such choice should be available to the consumer on a national footprint otherwise the consumer will in effect have no choice but a restricted adviser label choice thereby rendering the RDR advice choice distinction futile.

3.6 RDR sights should be aligned to job creation to strengthen the Independent adviser label opportunity to service consumers nationally. 8

3.7 FSA financial oversight should have real teeth in application much to the same degree as EU Competition Law has on large organisations in such a way that the EU Competitions Law principles promote consumer confidence and organisational management engagement.

3.8 The FSA it seems is toothless in restructuring the industry for the betterment of the consumer given that the failure of poor restricted advice is not set off sufficiently by the risk reward ratio that firms apply to their financial advice risk policy setting.

3.9 Contrast EU Competition Law penalties for failing consumers with that which the FSA sets out in penalties for the systematic failures to firms that continually deliver poor advice on a wholesale basis.

3.10 Case in point in support of 3.8 above the recent (11/01/20011) FSA fine of under £3 million relating to RBS and Natwest failings in complaint handling methodology equated to less than the Chief Executives annual salary and incentives. Whereas EU Competition Law sets much large penalties on turnover which forces better internal firm management and risk return policy setting outcome for consumer fairness.

January 2011 9

Written evidence submitted by Simon Boyle, Independent Financial Adviser

Please accept this as my formal submission to the Treasury Select committee's enquiry into the potential consequences of the Financial Services Authority's impending Retail Distribution Review, following the House of Commons debate into these proposals on the 28th November 2010.

I have previously raised my concerns in a meeting with Mr Nicholas Soames MP, who requested that I formally confirm the key issues from my perspective in writing.

The attached letter in this respect was relayed by Mr Soames office to Mr Hoban, the Financial Security to the Treasury, but to date we have not received a reply of any description.

Therefore the letter outlines my opinions and poses a range of questions, which I would like included into the equation for the Committee's consideration, especially if the answers to them can be ascertained. As I fear and suspect the practicalities of the new intended regime have not been given any due consideration by the policy makers considered, hence the level of adviser disquiet in relation to them because we can envisage the catastrophe that it is going to cause in it’s current format.

Nevertheless in the meantime prior to a response being forthcoming from Mr Hoban or his office, I have outlined below the range of measures I feel would be more beneficial and prudent to change the present regime in order to achieve the original objectives of the FSA's “desired outcomes in this respect.

FSA – Desired outcomes

To begin with, for the sake of clarity, to confirm my understanding of the essence of these;

1. To improve the clarity with which firms describe their services to consumers. 2. To address the potential for adviser remuneration to distort consumer outcomes. 3. To increase the professional standards of investment advisers

Potential solutions

1) To improve the clarity with which firms describe their services to consumers.

• To re-introduce the previous simple distinction of independent advice versus tied advice, with the extent of any limits being imposed in relation to the choice of ultimate providers of products or services fully confirmed at the outset of any client discussion. This would surely be much easier for all consumers to understand, rather than produce a whole new range 10

of definitions which will only seek to baffle consumers (despite the perhaps good intentions of their introduction). • With a “menu” of services being explained to any prospective client before any advice process is undertaken and a documentary record being kept of any areas to be investigated further. • Evidence of the adequate explanation of both of these principles could be verified in a documentation that would be signed and dated by all concerned, i.e. the client and the adviser at the conclusion of any preliminary discussion.

2) To address the potential for adviser remuneration to distort consumer outcomes.

• To allow the current consumer choice of commission and fees to be retained, with the view that this enables clients to approach IFA's and not to fear any initial or subsequent discussion being chargeable, as this is only likely to prevent consumers from seeking suitable advice. • This would enable the concept of Customer Agreed Remuneration to be introduced but without the public perception being created that this means a fee would need to be paid by a client without any other alternatives or options. • However the decision in relation to whether to subsequently proceed on a commission or fee basis should be enshrined in a legally binding contract signed by both parties, namely the client and adviser, at the earliest possible opportunity. • In the case of all fee based advice, the contract would set out the design of the agreement (for example if it had been arranged on a fixed or time basis) and the exact cost of this, coupled with when it would be payable and a confirmation of the VAT situation. • While for all commission based cases, simply imposing a maximum percentage that would be payable on all relevant providers would remove any financial incentive for favouring one method of investing or organisation over another. To demonstrate the potential practicalities of this, using any kind of lump sum investment, a percentage of 3% of the amount in question could be used. • I believe that these four steps could completely remove any perceived suspicion of bias in relation to the remuneration accepted or indeed any recommendations made. • As in my professional experience, having offered clients the choice of both routes without favour from my perspective, the overwhelming majority continue to prefer the use of commission.

• The basis I have suggested would allow the FSA's preference for a fee only model to be tested in the real world, to avoid the decimation of the advice sector and the widening of the current “Savings Gap”. To demonstrate this and how far removed the RDR model is from reality, a recent survey conducted by ICM and instructed by Aviva produced a report that quoted less than 3% of the population would pay more than £100 per hour for bespoke advice while 17% would not be prepared to 11

spend in excess of £25 per hour and 50% would not be willing to pay anything at all.

3) To increase the professional standards of investment advisers;

• Undoubtedly advisers are in favour of increasing standards, although purely basing this solely on the need to pass exams as opposed to any forms of measurable and specific Continuous Professional Development seems unjust to say the least. So instead of an arbitrary date for advisers to pass the new set of exams and with it, the desire to make previous qualifications obsolete regardless of the age or experience of the individuals concerned, it would seem more equitable for a form of “grandfathering” to be introduced. In the hope that this could help prevent a mass exodus of experienced advisers at the end of 2012 and with it the cost of advice increasing significantly, caused simply by the laws of supply and demand.

Conclusion and summary

In conclusion to summarise the RDR proposals in their current unmodified format are unduly harsh, which will surely lead to an outcome of consumer detriment and is the exact opposite of the original intended aim. While at the same time they also deny adviser’s the ability to remain in economically viable businesses or alternatively to develop ordered exit strategies.

With regards to the present position it needs to be borne in mind that clients are already given the choice of paying by a fee but choose not to take this route for a whole range of reasons and all of the available evidence suggests that this is unlikely to change in the foreseeable future. Consequently a very large swathe of the population could be excluded from receiving good quality advice and this will lead to less financial provision in the years ahead at a time when it is increasing going to be needed.

Finally to qualify my personal position in relation to these changes, I am already diploma qualified but at an enormous personal cost in both financial and time terms. With additional qualification “Gap Filling” requirements, to remain in practice, due to be formally announced this month. Although all of this could be academic because based on an analysis of the last twelve months of my advising activity, I have ascertained only approximately 10% of my turnover is fee based (even though I have positively tried to move to a new RDR ready model) and so I will need to close my business early in 2013 if these proposals are implemented without any sensible revisions being made to them.

January 2011

Written evidence submitted by Derek Gair, GDC Associates

Past FSA Chairman McCarthy stated 'Retail Distribution Model is Broken' a statement flawed and without foundation - so started RDR

I do not detail every word of evidence that upholds my view, the detailed comprehensive evidence will doubtless be submitted by others. I will nonetheless refer to any particular study I rely on by name/date. Please note much of that evidence was commissioned by FSA itself to try to justify RDR. I will concentrate on consumer detriment brought about by implementation of RDR particularly Commission and Adviser qualifications

Commission I refer to Oxera study June 2009, Charles River Assocs 2002 and 2005 & FSA RDR document DP07/1 - No evidence of widespread commission bias.

10-12 years ago, before the tenure of FSA, consumers had a good savings ethic a large proportion of consumers had some form of long term savings, pensions of some sort and a Life Assurance policy. We now have what is commonly referred to as the largest savings/pension/protection gaps for 30 years-during a period when the adviser population fell by 60-70% - coincidence? A common reason cited by FSA is lack of confidence. In my view the lack of supposed consumer confidence is the result of regulatory interference in free markets and endless retrospective reviews of past business NOT widespread adviser greed and bias. Perhaps the most important question is how will the gaps be closed? It will NOT be as a result of lump sum investments from those that can afford them. It WILL be as a result of the ordinary man in the street starting to save regularly into long term savings/pension plans, that was precisely how the consumer who has pension plans and savings amassed his lump sum in the first place. Most money in the system is 'old' money, there is little new money in comparison.

The ordinary regular saver will NOT pay fees every study confirms this (the most recent being KPMG September 2010). Specifically, the vast majority of the population will not pay fees for advice and as a result of RDR become virtually extinct having no access to investment advice they can afford. The woeful take up of individual Stakeholder Pension Plans clearly shows people don't buy pension plans and given little or no financial advantage from an adviser's point of view, little point or financial viability in selling one. Removing distribution costs(commission) from regular savings plans removes distribution - is it coincidence savings ethics in the UK were highest when advisers had such an incentive? It is a provable fact the most efficient way of distributing such products is through IFAs who hold the majority of the distribution and a fraction of the complaints. If there was provable commission bias, as the FSA suggest, it is reasonable to assume this would not be the case.

This fundamental point is key or the next decade will result in larger gaps and the removal of quality advisers who cannot or will not submit to a system so intrinsically flawed as to be considered inept.

The last decade has seen mass erosion of sales of regular premium savings plans to the extent that they have virtually disappeared a massive market on its own. In order to work a long term savings plan must discourage early encashment. Whilst outwardly attractive, the ISA regular savings plan will not do its job because it can be cashed at any time - that is precisely what happens-to the extent that there is NO long term savings ethic - the result of the savings plan not being sufficiently penal to discourage premature encashment. Neither does it offer advisers sufficient incentive to advise/sell. A major part of RDR-closing the gaps, engagement with the industry and better consumer outcomes cannot possibly work as a result.

Salesman isn't a dirty word, in order for an adviser(IFA) to succeed, he advises, but having advised and found the 'problem' he must also be in a position to sell the solution. Advice in isolation seldom resolves problems (paid for by commission or fee). There are numerous examples where IFAs advise with little prospect of a resulting sale. In such cases it is often the case that cross- subsidisation is only possible as a result of commission. A solely fee based adviser cannot be in such a position. Generally, products and the sale thereof solve problems.

FSA's consumer research 65A conducted by BMRB February 2008 is damning:

'Consumers do not generally think about how people are paid' 'Consumers were not at all concerned with details of how the advisers was paid'

Commission is cited by FSA as the reason for so called 'mis-selling', there are indeed differences in the amounts of Provider paid commission. For the argument to hold water there needs to be provable bias and a marked difference in the level of complaints. Hector Sants referred to a link between commission share and market share in his letter to you, assessing consumer detriment of £18M annually. Surprisingly FSA's own study stated 'it is often argued that providers offering higher commission will buy market share. There is no evidence of this' and complaints against IFAs are less than 3%.

Sensible financial products allied to competent advice solve consumer's problems. It is no coincidence that over this period the marketing allowance or commission has eroded to the extent that it is no longer financially viable for an adviser to deal with such matters as those on a regular premium basis. Nor is it financially viable for the typical consumer- the one who is under-pensioned - to pay the relevant fee for such advice. The result-even greater reliance on the State. Demographics show that it will be increasingly difficult for the State to fund pensions and means-tested benefits in future years. The comment within the Charles Rivers Assocs study says it all

' The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation'.

Qualifications FSA states consumer mistrust and adviser mis-selling is linked to advisers not having attained QCF4 level qualifications this is the basis of RDR proposals on 14

increased qualifications. I rely comments amazingly contained within FSA's own publication titled : Firm level Predictors of Consumer Loss through Poor Financial Advice-April 2008:

'Surprisingly, we find no relationship between the share of advisers who passed the qualification exam or the share of competent advisers'

Whilst no right minded, principled and moral adviser argues against raising standards, most keep themselves up to date as a matter of course, ongoing CPD as practised in every other trade and profession is the best way of doing so, NOT cliff edge examinations threatening expulsion from a profession for which they are already suitably qualified, authorised and regulated. Why require advisers with 20, 30 or even 40 years of unblemished service, loyal clients and huge experience do an exam proving only that they can pass exams. There is no evidence anywhere that indicates incompetence and qualification are linked. The requirement that all existing, authorised, regulated advisers be qualified to level 4 or that they will be de-regulated and de-authorised is simply and morally wrong on every level and questionable legally. Leaving aside questions of legality, it is the consumer detriment and lack of access to their trusted long term adviser that will be most worrying to you - RDR proposals in reality remove millions of consumers from the advice process - most worryingly this is NOT contested by the regulator or any independent study/survey

Wide ranging research of chartered bodies, trades and professions confirmed none required existing practitioners re-qualify when entry level standards were raised. All required those same existing practitioners follow a CPD programme.

Furthermore, FSA consumer research(76) found consumers had high levels of trust in their existing adviser. Consumer research published by FSA in 2008(65a) conducted by BMRB found consumers saw advisers being above average in terms of being a trustworthy profession and on a similar footing to other professional occupations.

In 2010 FSA published its annual consumer confidence paper finding 98% of IFA clients were confident the advice received was appropriate-confidence had risen by 17% over the year. There is no lack of confidence in IFAs advice regardless of whether 'qualified' to level 4. In fact there never has been.

All currently authorised advisers are required by FSA to hold specific qualification and obtain permission to advise in specific areas of expertise. If FSA are concerned about 'inappropriate' advice, the existing permissions mechanism together with CPD seems a much more sensible approach and avoids mass extermination of hugely experienced advisers who deal in relatively uncomplicated areas of general financial advice. Advisers don't need to know everything, they need to know where to find out what they don't know and apply the resulting information, the same way as referring to expertise in every other trade or profession. As an IFA with 30 years experience, I have access to expertise in virtually every field of financial services. I don't necessarily need that expertise myself. I would rightly rely on a specialist in a particular field far more than I would someone holding themselves out a 'jack of all trades'. ( GPs would 15

not carry out brain surgery, Surveyors cant build your house any more than builders can act as an architect and Solicitors will refer to Barristers - there are limitless examples of referral).

Numerous studies conclude the proposals fail to match the original intention of RDR and that they will result in the deprivation of mass-market advice. Yet FSA rely on an outdated study (Australian Securities & Investment Commission) of just 124. This study is not representative of the UK market, being filled with inaccuracies- 8% of the study group were rated 'poor' purely because they failed to provide a general guide to the customer(nothing to do with the advice aspects whatsoever) - 15% of the overall score was based on the adviser supplying generic regulatory booklets NOT the quality of the advice. It is also true to say that the advisers were judged on providing a comprehensive financial plan not typical of day to day financial interaction with clients who generally require relatively simple financial advice and products to satisfy those requirements.

In a free market the consenting adults involved in the transaction decide who/how and what they wish to deal with, there should be no place for a regulator other than to regulate when things go wrong (FSA's Amanda Bowe stated that when she headed up RDR). It flies in the face of every freethinking individual to be told what to do for his own good by a regulator. The requirement for advisers to act in good faith and professionally is entrenched in existing FSA guidelines and rules

Those consumers wishing to deal with fee only qualified level 4 advisers have wide access to such already. If indeed fee based level 4 advisers ARE the way, those advisers NOT conforming will disappear anyway and all their clients will migrate in their masses- the reality of a free market. Strange then that mass migration has never started if indeed the FSA are correct in their summation about what is best for the consumer and that the model is broken! To coin a phrase, 'you cannot buck the market'. The distribution model is not broken, every shred of evidence proves that. FSA ignored independent evidence and studies (much commissioned by them), and the submissions and representations made as a result of the so-called 'consultations' by the majority of advisers themselves. FSA and the individuals tasked with RDR pay no price for failure-the consumer pays that price. RDR is a hugely costly mistake leaving millions without access to advice and ensuring those left are saddled with massively increased costs. The pensions gap(estimated at £318Billion by Aviva in September 2010) savings and protection gaps will get markedly bigger resulting in strain on the public purse (they may become 'un-closeable') I urge you to encourage FSA(CPMA soon) to consign this monumental mistake to history.

January 2011

Written evidence submitted by the Investment Management Association

Executive Summary

1. The Investment Management Association (IMA) represents the investment management industry in the UK. Its members manage £3.4 trillion of assets on behalf of a wide range of clients including pension funds, life insurance companies and investors in retail funds. At the end of November 2010 funds under management in UK-authorised retail funds stood at £555 billion. Almost 90% of retail fund investors now buy their funds through intermediaries, many of whom are impacted by the Retail Distribution Review.

2. We welcome the opportunity to contribute to the Committee’s inquiry into the Retail Distribution Review (RDR) and would be pleased to supplement this note with oral evidence should that be of interest to the Committee.

3. The IMA has always supported the RDR's objectives of achieving greater transparency in the retail market in the interests of ensuring a better deal for consumers. Increased professionalism and enforcing professional standards will be critical to achieving the FSA’s stated outcomes. We also support the objectives of the new rules on adviser charging: commission bias in the advice market has been a problem for many years and needs to be tackled. We fear, however, that the detailed proposals on adviser charging will not succeed in achieving the objectives of greater transparency and better outcomes for consumers. Their impact will vary between different participants in the market, and there is a real risk that this will distort competition by not providing a level playing field between different types of product and different types of firm. The ultimate result of shifting the balance of competitive advantage in this way is difficult to predict at this stage. But there is no guarantee that it will work to the benefit of consumers. We think there is a real risk that the outcome could be increased costs and less transparency for consumers.

A transparent and fairer charging system

4. We agree that the correct starting point for the RDR is to seek to remove commission bias from the decision-making process for giving financial advice to consumers. The principal change that the FSA is proposing is that adviser charging will have to be agreed with the consumer in future. But crucially a rule is also being proposed which would allow product providers to “facilitate” adviser charging out of the product. This raises the immediate prospect that advisers will demand that product providers continue to “facilitate” payments; as a result product providers will search for ways to allow them to continue payments to advisers and there is already evidence in the marketplace that certain firms are actively promoting to advisers mechanisms which will allow them to do so. This is tantamount to allowing commission payments to continue in another guise.

5. The impact of these rules will differ for different providers. In relation to investment funds, the current practice of paying trail commission will be prohibited, as the 17

payments would not be being determined by client agreement. And funds cannot offer variable payments according to whatever terms are agreed between advisers and their clients because management charges are taken through a single daily price for the fund. Similar constraints do not apply however to many other investment products, which will be able to continue to offer payments in order to facilitate agreed charges due to advisers. Indeed we are aware of providers who are already making available to advisers their proposals for this once the RDR is in place.

6. Although this continuation of commission by another name is less than satisfactory, fund management firms had believed that they would be able to participate by means of payment to client cash accounts maintained by platforms, whose disbursement – whether to advisers or to the client’s own portfolio – would be the subject of a separate agreement. But the FSA is also proposing a prohibition on rebates to clients. At the same time, however, there will be no corresponding prohibition on rebates to other intermediaries such as platforms, life companies and execution-only services. Life companies will hence be enabled to have access to cash with which to pay advisers.

7. This will significantly shift the balance of competitive advantage in the distribution of investment products. It will, for example, create an unlevel playing field between “unwrapped” funds and other products like funds which are sold via intermediaries such as fund or life insurance platforms, because the latter will be able to make use of rebates to facilitate adviser charging. Such payments will be less transparent than a disclosed annual charge. Suggestions have been made in the industry that the lack of ability to offer client rebates may require funds to consider allocating extra units which could then be redeemed for the purposes of paying advisers. Again, this would be complex to administer and lead to additional costs and opacity for the consumer. An alternative would be for wrapper providers to levy a separate charge for the wrapper in addition to the underlying investment charge; not only does this risk being opaque but it will also lead to extra costs for the consumer. The net effect will be a shift in competitive advantage between funds and life insurance savings; between wrap platforms and fund supermarkets; and between advisers who will not be allowed to receive rebates for ongoing services and non-advised intermediaries such as execution-only brokers and banks’ sales teams (as opposed to advisers) which are outside the scope of the proposals.

8. In addition, from a tax point of view consumers will have to pay VAT on fees to their advisers, paid from investment income which has already taxed rather than paying for it out of their investment contribution and not having to pay VAT.

9. Overall, there are real risks that the outcomes sought by the FSA will now not be achieved and that instead the result will be higher charges for consumers, continued high initial payments to advisers, increased complexity and opacity for consumers and an uncompetitive marketplace.

A better qualification framework for advisers

10. It is clear that a better qualification framework for advisers will contribute to improved standards of professional advice. We therefore support the FSA’s proposals that all advisers should meet a basic minimum standard. It is also right that advisers should maintain higher standards through CPD which is both relevant to their needs and effectively monitored. However, raising the bar in terms of entry level examinations and CPD will not of itself deliver significant improvement in consumers’ trust and confidence in financial services. To ensure that the RDR changes are effective, they should be communicated to consumers through a planned campaign which includes evidence of the value of advice and guidelines on how to recognise good quality advice. The FSA, together with industry practitioners and associations, should positively promote the changes and what they will mean to consumers.

Greater clarity about the type of advice being offered

11. We agree that consumers should be made aware of the distinction between independent and non-independent advice in line with the proposed new disclosure requirements.

12. It is also important that advisers should clearly disclose the basis of their non- independence, i.e. whether it is through their employment by a larger organisation (for example some retail banks offer only a small number of providers’ products) or because they have chosen to restrict themselves to a set part of the market. In the latter case, it should be made clear that this is their choice and does not represent an endorsement from the product providers whose products they have chosen to offer.

13. The FSA should also take account of non face-to-face advice, such as online advice, for which a requirement to disclose the type of advice orally would not be practical.

January 2011

Written evidence submitted by Alan Lakey, Highclere Financial Services

COMMISSION – THE CONSUMERS CHOICE

The FSA is careful to only use research that supports its preferred proposition. This submission provides contrary evidence without the intrusion of personal opinion.

1 FSA research conducted by Oxera, in June 2009, concluded, “…Commission can be seen as a margin that providers pay to intermediaries for distributing their products. On the face of it, providers have to pay this margin out of their total costs, and one would expect to find that levels of charges and commissions paid by different providers are strongly correlated. If this is the case, then higher commissions would be associated with consumer detriment. We know of no quantitative research demonstrating this to be the case, however.r ”

“In the case of retail financial services, there is a perception that both product and provider bias has existed in the past, although actual evidence to support this perception has often been hard to identify. In a 2002 study for the FSA, evidence was found of provider bias, but only for single premium products, while there was no evidence of such bias for regular premium products. With regard to product bias, the study found evidence of this in certain products, such as ISA’s and investment bonds, but it was not widespread. Since then further research has reached similar conclusions.s ”

The FSA accepts that the current UK system compares well with other countries. “Despite differing financial capability strategies, business models, remuneration structures etc, there are no models that have succeeded in tackling such issues in a way that has worked better than in the UK.” 2

The FSA assures that it has no mandate to adjust commission rates but somehow feels it appropriate to reduce consumer choice by abolishing commission.

The RDR originated, in June 2006, with then FSA chief John Tiner. “Comments such as, ‘the current distribution model is broke’ were on peoples lips. In fairness, however, the team was quick to point out that for every statement such as this, you could always find a quite 3 contradictory account elsewhere.e ” This repudiates the fiction that the RDR resulted from industry pressures.

Evidence highlighting the iniquity of commission is scant and the FSA admits that it is combating dubious thinking as much as reality. Sheila Nicoll stated, in November 2009, “We want to remove the influence of product providers over the remuneration of advisers and ensure that the perception, and indeed reality, of bias is removed.” 4

Revealingly, nine months later, her colleague Peter Smith provided an alternative view, “Product bias will still be possible within the market but I do not think it is a feature of the restricted channel, I think it is a fact of life.” 5

In searching for ‘financial nirvana’ the FSA is demolishing the financial services infrastructure and discouraging a significant number of consumers from engaging with the industry. During October 2008 JP Morgan research noted, "Interestingly, fee-based options appear highly unpopular with only 3% of respondents wanting to pay a time-based fee and only 5% welcoming the idea of an ongoing monthly or annual fee. Commission paid by the product 20

provider proved at least three times more popular than either of these fee-based alternatives.” 6

A September 2010 KPMG survey disclosed, “A new survey by KPMG of over 3,000 consumers has found that less than a third would be prepared to pay for one hour's professional financial advice, and that of those who would pay over half would only be prepared to pay £50 or less while only one percent would be willing to pay over £200.” 7

CRA research for the FSA, published in January 2002 2, highlighted that,

‘‘TheThe aadvicedvice mmarketarket iiss nnotot rriddlediddled wwithith bbias.’ias.’

‘‘ThereThere iiss nnoo ddetectableetectable bbiasias oonn rregularegular ppremiumremium pproducts.’roducts.’

‘TThehe rroleole ooff ccommissionommission iinn sstimulatingtimulating tthehe ssaleale ooff ssavingsavings pproductsroducts mmayay bbee ssociallyocially bbeneficialeneficial iinn tthehe ccurrenturrent UUKK ssituationituation.’”.

It also offered the following conclusions;

Provider Bias: “It is often argued that providers offering higher commission will ‘buy’ market share. We did not find evidence to support this.s ”

Payment Type: “It is often suggested that the trend from regular premium products to single premium products might be put down to differences in commission. This is contradicted by the fact that commission on regular premium is normally larger than the single premium equivalent.t ”

Product Bias: “It is suggested that differences in commission could be the explanation for the growth in the investment bond market relative to the unit trust market. However, the RIY in both products appears to be very similar, suggesting that at least on this measure the impact on consumers is limited. Commission differences would therefore appear to be a reflection of how returns are divided between manufacturer and distributor rather than a source of detriment to consumers.” 8

The FSA points to the CRA/ABI study from 2005 9 as proof that advice to buy unit trusts, rather than ISAs, causes annual consumer detriment of £70m. This conveniently ignores the findings of their own 2002 study, which revealed, “The initial commission paid is the same as the equity ISA and thus again while the advice led to a loss of the slight tax advantage of ISAs, it does not appear to have been induced by commission.”

The 2005 study reached the following conclusions;

“NNoo eevidencevidence ooff bbiasias bbeingeing ppresentresent aacrosscross tthehe aadvicedvice mmarketarket”

“NNoo eevidencevidence ooff bbiasias ttoo ooversellversell”

“WWee tthereforeherefore cconcludeonclude tthathat tthehe pproblemsroblems ooff pperceptionerception aarere ggreaterreater tthanhan tthehe rrealityeality”

The authors offered the following pertinent comment; “We concluded that there was no evidence that artificially moving to such a regime (fee only) would lead to benefits since consumers choosing to pay on a fee basis do not receive better advice than those opting for a commission basis.”s

A September 2010 study by CoreData Research revealed advisers offloading mass market clients. “The trend is being driven, in part, by hard-up investors either unwilling or unable to pay fees” 10

A January 2010 consumer poll by ICM found that 50% would refuse to pay anything for independent advice and would rather not receive advice at all. 17% say they would be willing to pay less than £25 p.h. and less than 3% would be prepared to pay over £100 p.h. 11

Commission Capping?

Another CRA report for the FSA, titled ‘An Empirical Investigation into the Effects of the 12 Menu’, 3 May 2007 , postulated the view that a form of commission agreement would work to the interest of consumers. “If providers who offer commission rates below the market average are encouraged to raise their rates, while providers who offer commission rates above the market average are encouraged to reduce their rates, then this could result in a reduction in the level of dispersion in commission rates without actually changing the overall market average. To the extent that information asymmetries could result in some consumers suffering particularly large detriment through purchasing poor value product due to high levels of commission, it is possible that this could nonetheless result in consumer benefits.”

CRA9 also considered the benefits of standardising commission; “The different commission structures will make apparently similar products difficult to compare.” It is notable that it did not consider the removal of commission as a valid option.

13 FSA/BMRB Consumer Research 65A , in Feb 2008, found; “Consumers were not at all concerned with details about how the adviser was paid.”

In 2002 the FSA proposed a Defined Payment System for independent advice. However, cost benefit studies showed that there were various problems with this proposal as many customers were unwilling to enter a fee-based market, and advisers incentives to seek out new customers would be reduced. Evidence for this comes from various sources:

• 'IFA Promotion/B-different found that only 11 per cent of consumers were willing to pay fees (with 63 per cent preferring commission and 20 per cent preferring fees with commission offset); 'If we only knew our sell by date',

• Swiss Re (2001) found that less than 2.5 per cent of consumers were prepared to pay more than £75 and less than 1 per cent were prepared to pay more than £100.

• Continental Research found that 70 per cent of consumers thought that any fee should be less than £70.

• The FSA found that consumers were willing to pay an average of around £70 per hour or a total fee of around £130. 14

January 2007 found the OFT noting 15, “There are several factors that appear to provide a rationale for the use of commission rates in the financial advice market:

• CConsumersonsumers ttendend ttoo ppreferrefer ppayingaying bbyy ccommission,ommission, ddespiteespite tthehe ffactact tthathat tthishis mmayay ccostost tthemhem mmoreore iinn tthehe llongong rrunun tthanhan iiff ttheyhey wwereere ttoo ppayay a ffixedixed ffeeee aatt tthehe bbeginning.eginning. TThishis mmayay bbee ddueue 22

ttoo a ppreferencereference fforor sspreadingpreading ppaymentayment ooverver a llongeronger pperiod,eriod, oorr bbecauseecause iitt ggivesives cconsumersonsumers tthehe pperceptionerception ooff rreceivingeceiving ffreeree aadvice.dvice.”

9 CRA noted a NOP survey into consumers views of lack of value for money in financial services.

Commission based IFA 14% Fee based IFA 42%

Possibly surprised at this outcome they justified it thus, “It is likely that this partly reflects the fact that commission based IFAs receive their commission through the product charges (and shoppers did not have to pay this) whereas fee based IFAs had to be paid through a separate cheque. As no purchase was made, this cheque did actually have to be paid by the shoppers.

This throws considerable doubt on the likelihood of the fee based market growing significantly in the light of depolarisation. Furthermore, it may also support the reason that most consumers start relationships with IFAs on a commission basis and later move to a fee basis once advisers have had the opportunity to demonstrate their value, which is hard to judge on the basis of one or two meetings and one piece of advice.

Commission based models has been heavily criticised by the Treasury Select Committee (TSC) and therefore it was important to test whether it might be attractive to encourage models of remuneration that were not conditional on sales, that is, encouraging the fee based sector.

A large increase in the fee based market, with remuneration that is unconditional on sales, is inconsistent with market realities. In particular, it is clear from the evidence in Chapter 2 that consumers do not like fees and are unwilling to pay them. That is, the amount that consumers are willing to pay as a fee for financial advice is much less than what it would actually cost to pay for advice through fees.

Based on evidence from consumer surveys, consumers would not purchase advice from advisers operating on a fee basis given the current rates of fees. Hence a wholesale move towards fees would lead to a dramatic decline in the advice market with a corresponding reduction in the number of consumers purchasing products and making long-term savings provision.”n

15 OFT also commented, “Another interesting point to take from this CRA study is their conclusion that artificially moving to fee based regime would not lead to benefits, based on the argument that no evidence of biased advice due to commission is found, and as such consumers would not receive better advice if they were to pay by fee.”

Commission has one further function, it provides an incentive for advisers to prospect for new clients. Searching for new clients using a menu of fees will fail for the simple reason that it introduces a negative into an otherwise positive situation. Additionally, FSA research has highlighted that consumers frequently need prompting. “Many went on to say that they were unlikely to have sought advice or purchased a product themselves without this convenient and proactive approach from their adviser”. 16

The FSA is aware of market realities; “Commission-based firms do have an awareness of the profitability of individual relationships and are more willing, or have a greater need, to cross- 23

subsidise over time. This reflects comments from intermediaries in the qualitative interviews that, for example, certain products (e.g. ISAs) are effectively seen as ‘loss leaders’ for the firm and that such work is done in the hope of either generating future business from the individual or to generate future referrals.s ” 17

January 2011

References:

1 http://www.fsa.gov.uk/pubs/other/oxera_rdr.pdf

2 http://www.fsa.gov.uk/pubs/discussion/dp07_01.pdf

3 http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2006/0614_jt.shtml

4 http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/1118_sn.shtml

5 http://www.moneymarketing.co.uk/adviser-news/restricted-advice-will-bring-back-bias/1016699.article

6 http://www.jpmorgan.com/pages/jpmorgan/am/uk/press_office/tcf-from-the-horses-mouth

7 http://rd.kpmg.co.uk/WhatWeDo/23161.htm

8 http://www.fsa.gov.uk/pubs/other/pol_res1.pdf

9 http://www.crai.com/uploadedFiles/RELATING_MATERIALS/Publications/Consultant_publications/files/pub_4152/pdf

10 http://www.ifaonline.co.uk/ifaonline/news/1732336/advisers-offloading-mass-market-clients

11 http://www.moneymarketing.co.uk/regulation/public-reject-paying-fees-for-advice/1005356.article

12 http://www.fsa.gov.uk/pubs/other/CRAreport_menu.pdf

13 http://www.fsa.gov.uk/pubs/consumer-research/crpr65a.pdf

14 http://www.fsa.gov.uk/pubs/cp/cp121.pdf

15 http://www.dotecon.com/publications/crannexes.pdf

16 http://www.fsa.gov.uk/pubs/consumer-research/crpr70.pdf

17 http://www.fsa.gov.uk/pubs/other/deloitte_research.pdf

Written evidence submitted by Beverley Davison, Highclere Financial Services

CONSUMER DETRIMENT

What is consumer detriment? The FSA’s Principles of Good Regulation state; “The restrictions we impose on the industry must be proportionate to the benefits that are expected to result from those restrictions.s ”

Lord Hunt of Wirral stated, “The public must benefit from the RDR or there is little point to it.t ” 1

The FSA measures consumer detriment as the amount lost by consumers due to poor advice. There is another form of consumer detriment - the amount lost annually by consumers failing to take financial advice.

When we assess the consumer detriment figures provided by Hector Sants in his December 2010 letter to Andrew Tyrie we find a specious calculation of the loss to consumers due to poor advice. What we do not see is the consumer benefit figure resulting from consumers taking good advice. We cannot begin to assess such a figure but one needs to consider those millions of consumers whose spouses are financially independent due to them being advised to buy life assurance and those consumers who are able to live above the subsistence line because they were urged to save within a pension plan or ISA.

A far more relevant question would be, is there any specific segment of the market, such as the bancassurance sector, that is responsible for consumer detriment?

Additionally, one has to consider the loss to consumers caused by a substantial reduction to the numbers of advisers post RDR. We will not make the FSA mistake of guessing or embellishing figures and apportioning them to theoretical behaviours, however it is manifest that the loss to consumers caused by departing advisers will be colossal.

This view is widespread and below we highlight comments made by respected organisations regarding negative RDR outcomes.

RDR Outcomes During December 2008 the Financial Services Consumer Panel told the TSC that financial advice would be less widely available in the post-RDR world. This viewpoint was buttressed by 2 the CoreData Research study from September 2010 which revealed that advisers are already offloading mass market clients. “The trend is being driven, in part, by hard-up investors either unwilling or unable to pay fees”.

During June 2009 management consultants, Winchester White, found that 64% of product providers believed the overall cost of advice would increase. 3

During July 2009 NMG Financial Services Consultancy calculated a 20% adviser exodus. 4

Origen Financial Services blamed the RDR for redundancies announced in October 2009. 5

6 During February 2010, Fitch Ratings stated that the RDR would result in fewer consumers exercising their open market option in respect of annuity purchase and in December 2010 the Investment Management Association stated, “Overall costs would go up”. 19

A July 2009 NMG Financial Services Consulting survey, “Found no evidence to suggest the RDR will improve the accessibility of advice to consumers” 4

The FSA readily acknowledges that the RDR will adversely affect both consumers and advisers. The ‘Impact on Market Structure and Competition’7 study, prepared by Oxera in June 2009, informed, “The post RDR landscape is likely to feature fewer small independent IFAs…this may lead some consumers to experience reduced choice.e ” This publication also quoted a Datamonitor study; “There is a growing concern that there are not enough young advisers entering the industry.”

There is a consensus that the proposals will destabilise the market and assist the bancassurers in obtaining a greater share of distribution. It is therefore relevant to remind the Committee that it is these self same banks that historically have provided, and continue to provide, the most complaints and subsequent escalation of complaints, to the Financial Ombudsman Service.

Complaints to the FOS 09/10 Intermediaries Banks/B Soc’s/S’Brokers Mortgages 27% 73% Investments 12% 38% Pensions 28% 14% Figures from the FOS Annual Report 2010

Complaints about mis-leading advice – January-June 2009

Numbers Percentages Banks 1,013,601 67.25% Financial advisers (inc IFAs) 17,160 1.14% Figures from the FSA

These complaints must be also be assessed in terms of the distribution figures as confirmed by the FSA.

IFAs Banks Reg Premium Pensions 79% 7% SP Pensions 83% 5% Reg Premium Investments 16% 57% SP Investments 49% 40%

The Office of Fair Trading stated, “Datamonitor suggest that the main reasons for IFAs acting as such a major sales channel appear to be a lack of effective competition from other distribution channels and the demand from consumers for independent advice.” 8

The RDR will alter the equilibrium in favour of the banks, as HBOS representative Paul Shelley outlined, “Consumers would not be able to access independent financial advice once the retail distribution review was introduced, but the bancassurers sector would pick up some of these customers.” 9

The FSA makes much of consumer confusion due to complex financial products and attempts to blame the adviser and not the convoluted product design. Equally, they explain that consumers are confused by the multitude of advisers – independent, tied, multi-tied, etc – ignoring the actuality that they who spawned this confusion by removing the simplicity of polarisation. Polarisation offered a black and white approach, you were either an IFA or tied.

In 2008 the OFT carried out a nationwide survey to identify consumer detriment across all services. Their research found that 28% of complaints were regarding household matters, with 25% due to household appliances. Financial services was coupled with professional services and provided just 14% of complaints. 10

Hector Sants letter of 13 December 2010 to Andrew Tyrie

Hector Sants quoted four distinct areas providing consumer detriment. Until now the FSA figures have not been subjected to a forensic scrutiny.

The largest detriment figure suggested was £92m p.a. due to investment bonds being recommended rather then equity ISA’s. The Charles River Associates (CRA) research10 identified that only With-profit and Distribution bonds had provided identifiable consumer loss and FSA calculations have failed to take account of the substantial changes that have occurred since the detriment was noted.

During 2005, sales of these bonds totalled 433,000. The latest statistics available from the FSA Product Sales data confirms that 2009/10 sales were 71,439 – a reduction of 83.50%.

Additionally, an Oxera report 7 compiled for the FSA, confirmed that between 2005 and 2007 the average commission differential between unit trusts and investment bonds had fallen from 1.66% to 0.36%. All else being equal this provides an annual detriment figure of £2.50m. What is more, only 93% of bond sales are advised and only 49% of this figure results from IFAs.

11 The 2005 CRA research on behalf of the ABI revealed, “We compared the RIY on unit linked bonds and that on ISAs. We found that there was no evidence that products on which there is high initial commission paid (unit linked bonds) have a higher reduction in yield…this is consistent with the evidence found in our work for the FSA in 2001.”

Hector Sants letter also claimed up to £18m p.a. detriment from a 2005 pension analysis indicating a link between commission share and market share. This conclusion is refuted by 12 the 2002 CRA survey which stated, “It is often argued that providers offering higher commission will ‘buy’ market share. We did not find evidence to support this.s ”

The FSA has also used the 2007 ‘average commission’ figure of 5.58%, a figure that is no longer accurate. At the time of writing we accessed the adviser comparative portal known as The Exchange in order to assess the maximum pension commission currently available. One provider is able to make a 6.50% payment, whereas the others varied from 5.04% to 1%. 13 Additionally, according to FSA product sales data , over the past four years advised pension sales have fallen by 27% from 721,176 to 526,837. The point we make is that whilst there may have been detriment of up to £18m the fall in sales and the dramatic reduction to commission levels serves to provide a more likely figure of £2m. Also, if high commission did produce mis-selling, then subsequent commission-rate reductions will have removed such detriment.

The relevance of this scrutiny is that the FSA has attempted to justify the loss of 20% or more of the adviser population by suggesting a counterbalance reduction to consumer detriment. The figures provided by Hector Sants are flawed as they are out of date and fail to reflect the current market conditions. We might add that if an adviser attempted to use 5-year old data to justify an investment of £1.7bn he would, quite rightly, be subject to FSA enforcement.

The FSA also places weight on the thematic pension review 14 carried out in December 2008. This review comprised assessments of just 30 firms and the basis of assessment makes it impossible to accord weight to the observations. The review excluded switches into stakeholder pensions, group personal pensions or group SIPPS thus robbing the review population of balance. A ‘poor’ rating was given to those files where the only failure was an inability to point out the need for future reviews.

The FSA holds the 2003 Australian study 15 in great esteem, however it revealed that the advice provided by advisers offering a choice of fees and commission was marked as higher than that from fee-only advisers.

Ernst & Young 16 has warned that product bias will increase as a result of the FSA’s restricted advice channel. Director of financial services Robert Wood said many people will choose the restricted advice route over the independent channel. He said; “An unintended consequence of the RDR is that product bias will increase as a result of high numbers becoming restricted. We could see a second round of bias returning to the market.”

As an epilogue to this inventory of horrors we quote the FSA’s Peter Smith17 who admitted in March 2010 that the FSA has no contingency plan. “If consumers still do not want to engage with it then we probably will have to do something else.e ”

15-year Longstop

The Limitation Act 1986, as amended by the Latent Damages Act 1986, set out time limits for claims for negligence, maladministration and other transgressions. Parliament debated and decided that there would be an overall cut-off point of 15 years from the date of the act or omission. Claims after this period could be refuted using the 15-year timebar.

All UK citizens, including financial advisers, benefitted from the protection afforded by this defence until 2001, when the Financial Services and Markets Act 2000 came into force. FSMA does not state there is a longstop defence, equally it does not proscribe one. The FSA interpretation denies the use of the longstop with regard to complaints escalated to the Financial Ombudsman Service (FOS). In September 2003, John Tiner, then FSA Managing Director, noted, “General Counsels Division advises that the way in which Schedule 17, paragraph 13 of FSMA is framed suggests that Parliament intended the FSA to be able to set time limits which can differ from those in the Limitation Act.” 18

A scrutiny of Hansard confirms that not only did Parliament not debate the removal of the longstop but it didn’t ever discuss or mention the longstop and without doubt Parliament displayed no “intention”. Neither Parliament nor the industry was consulted on this summary removal of a legitimate commercial defence. The FSA and the Treasury has continued to maintain that such a removal is in the interests of consumers.

We cannot dispute this, neither would we dispute that a similar removal of the longstop defence for architects, civil engineers, doctors, surveyors and builders would benefit consumers. This is not the point, Parliament debated such matters and agreed that 15 years 28 provided the appropriate balance between a firms liabilities and consumers rights. The Limitation Act has not been repealed or amended and we maintain that the FSA is acting ultra vires by dint of its actions.

Firms cannot be sure that a latent complaint will not arise, perhaps when the owners have retired. The FOS admits it has pursued the widows of dead advisers for financial recompense. Widows who are frequently incapable of defending, or even understanding, the nature of the allegation. No other Ombudsman body ignores the 15 year longstop.

The FSA ‘consulted’ on its reintroduction within document DP07/1 and despite an overwhelming majority of respondents supporting this they decided, within Feedback Statement FS08/6, that the proscription would remain.

We believe that an injustice has been perpetrated and that advisers human rights have been breached. We consider the reintroduction of a longstop defence to be a vital component in the restoration of balance to financial services.

January 2011

1 http://www.thepfs.org/downloaddata/RDR_position_paper_5.pdf 2 http://www.ifaonline.co.uk/ifaonline/news/1732336/advisers-offloading-mass-market-clients 3 http://www.ftadviser.com/FTAdviser/Regulation/Regulators/RetailDistribution/News/article/20090616/e5d0dbec-5 9c9- 11de-bbc4-0015171400aa/RDR-will-increase-overall-cost-of-advice-providers-warn.jsp 4 http://www.ftadviser.com/FTAdviser/Advisers/Industry/IFAFirms/News/article/20090731/04edee68-7dc2-11de-9704- 0015171400aa/Adviser-market-now-estimated-to-decline-by-20.jsp 5 http://www.ftadviser.com/FinancialAdviser/Advisers/News/article/20091022/cfb475ea-ba3f-11de-8529- 00144f2af8e8/Origen-blames-RDR-for-pending-redundancies.jsp 6 http://www.moneymarketing.co.uk/pensions/rdr-could-reduce-omo-usage-further/1007229.article 7 http://www.fsa.gov.uk/pubs/other/oxera_rdr.pdf 8 http://www.dotecon.com/publications/crannexes.pdf 9 http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft992.pdf 10 http://www.highbeam.com/doc/1G1-196421914.html 11 http://www.fsa.gov.uk/pubs/other/pol_res1.pdf 12 http://www.crai.com/uploadedFiles/RELATING_MATERIALS/Publications/Consultant_publications/files/pub_4152/pdf 13 http://www.fsa.gov.uk/pubs/other/psd_ri_05_10.pdf 14 http://www.fsa.gov.uk/pubs/other/pensions_switch.pdf 15 http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Advice_Report.pdf/$file/Advice_Report.pdf 16 http://www.moneymarketing.co.uk/regulation/ernst-and-young-warns-rdr-will-increase-product-bias/1016317.article 17 http://www.moneymarketing.co.uk/story.aspx?storycode=1022174&PageNo=4&SortOrder=dateadded&PageSize=10 18 http://www.ico.gov.uk/upload/documents/decisionnotices/2010/fs_50246664.pdf 19 http://www.moneymarketing.co.uk/investments/ima-launches-renewed-attack-on-city-fees/1024220.article

29 Written evidence submitted by Adviser Alliance

Effect of the RDR on Qualifications

Adviser Alliance is a not-for-profit body run by independent financial advisers aimed at achieving balance within financial services regulation for the benefit of both consumers and advisers. This submission focuses primarily on the question of qualifications.

Independent financial advisers perform a function that no other body can or does by advising and selecting the most appropriate products from the whole of the market. This despite the greater financial rewards available from being ‘tied’ to a product provider. In choosing this path IFAs have made a moral rather than a financial decision.

IFAs are a disparate group. Some are general practitioners whereas others specialise in one or more niche areas. All-encompassing qualifications cannot be considered sensible for such a diverse collection whereas Continuing Professional Development (CPD) enables the individual adviser to tailor the learning to his precise needs.

The RDR represents yet another FSA initiative, following in the footsteps of Treating Customers Fairly (TCF), light-touch regulation, depolarisation, the ‘menu’ and others too woolly to mention. The TCF initiative, which has been running for over five years, has yet to be analysed and we know of no extensive research establishing its success or otherwise. The pursuit of yet another initiative, when the fruits of TCF have yet to be established, seems bizarre.

The enormous cost of the RDR, originally estimated at £1.275 bn for the initial 10 years, has since soared to a potential £3.55 bn. Many commentators consider that even these astonishing figures represent an underestimate.

Mandating that all advisers qualify to QCF4 level makes for an excellent sound-bite and will naturally appeal to those who do not fully understand the issue. Superficially it seems difficult to argue with but the reality is that the outcome will prove horrendously counter-productive. The unintended consequences thwart the proposed outcome that consumers be encouraged to engage with the industry.

Hector Sants believes a 20% adviser exodus a price worth paying, a display of insouciance which has inspired industry outrage. Given the current economic climate we consider this view contemptible - it will leave millions of consumers without access to advice. FSA research, carried out by Oxera1, indicates that most of the orphan consumers will not seek any further advice. So, far from encouraging consumers to engage with the industry, the RDR will disenfranchise millions of consumers and exacerbate the current pensions gap of £318bn (Aviva estimate, September 2010)

We submit that the distribution model is not broken and should not be subjected to a costly upheaval leaving millions of consumers without an adviser. We would remind the Committee that the £3.55 bn cost will be passed on to consumers to their ultimate disadvantage.

The prospect of taking further examinations has persuaded many older advisers, with over twenty or thirty-years experience, to leave the industry, albeit unwillingly. A figure of 20% is accepted by the FSA, although numerous independent surveys have placed a figure of between 20% and 50%.

1. Figures provided exclusively to Financial Adviser by Matrix-Data Solutions showed there were 32,000 advisers in 2008. However, this plunged to 30,198 in 2009 and currently stands at 28,714. A 10.3% reduction as at June 2010. 2

2. Robin Stoakley, Head of Intermediary Business at Schroders said, “I ddoo sseeee uupp ttoo 3300 pperer ccentent ooff tthehe IIFAFA mmarketarket lleavingeaving”. 3

3. TISA Director, Malcolm Small, “HHowow mmanyany wwillill lleave?eave? PPerhapserhaps 440%0% ooff tthehe aadviserdviser mmarketarket wwillill ggoo aass a rresultesult ooff tthehe RRDRDR”.4

4. Deutsch Bank, “TTherehere hhasas bbeeneen iindustryndustry ttalkalk ooff 330%0% oorr eevenven 550%0% ooff IIFAsFAs eexitingxiting tthehe iindustryndustry ppostost 22012,012, wwhichhich iiss nnotot iimpossiblempossible" 5

5. Rachel Vahey, head of pensions development for Aegon, stated, “TThehe wwayay tthathat tthehe RRDRDR iiss ppanninganning ooutut iiss tthathat iitt wwillill rrestrictestrict aaccessccess ttoo aadvicedvice”. 6

6. Financial Services Skills Council director, Sarah Thwaites, who previously headed the FSA Training Dept, stated, “The danger is that if too few existing advisers meet the new qualifications level or the industry does not find it cost-effective to offer advice to the mass market, the very important aim of achieving good consumer outcomes may be lost.” 7

During early 2010 we carried out extensive research which involved contacting twenty three chartered bodies. We asked whether their rules required existing practitioners to ‘requalify’ when entry-level standards were upgraded. Not one body answered ‘yes’. When asked what, if any, ongoing development programmes were utilised, every respondent, apart from the teachers, confirmed that members had to follow a focused (CPD) programme.

Significantly, nurses are currently being transitioned to degree status but this uplift only applies to new entrants, existing nurses will be grandfathered across.

During November 2009 the FSA published a report by Jackie Wells & Mary Gostelo titled ‘A Summary of Existing Research’ 8. This study looked at problems of trust and reputational damage within other industries and at the consequent changes.

It advised that the medical industry reacted to the Shipman saga and other negatives by introducing ongoing CPD. The Institute of Actuaries, reeling from the meltdown of Equitable Life, increased its monitoring, upgraded its CPD programme and made revisions to its examination process, although this only applied to new entrants.

We can see that by insisting all existing advisers meet a QCF4 status the FSA is operating outside of established convention.

During October 2008 a JP Morgan Asset Management survey disclosed the following; “In the recent Retail Distribution Review, strong emphasis was placed on raising the perceived professionalism of financial advisers by among other things, raising their level of qualifications, strengthening the role and membership requirements for professional bodies and correlating prudential requirements to a firm's professionalism and resources. Yet among the consumers surveyed, these considerations play a minor role when selecting an adviser. Only 19% of respondents say evidence of professional qualifications and experience would encourage them to use financial advisers more, and only 10% say they are concerned about an adviser's lack of knowledge or expertise.”. 9

This argument was strengthened by the FSA’s own research, carried out by the Personal Financial Research Centre (Consumer Research 76). This survey revealed that 75% of consumers trusted their adviser regarding pensions, with 71% being the figure for investments. The same survey 31 found that 84% of pension purchasers and 87% of investment purchasers expressed high or medium financial confidence.

Also in 2008 the FSA published Consumer Research 65a, conducted by BMRB. Amongst its conclusions were the following;

“CConsumersonsumers ssawaw aadvisersdvisers aass bbeingeing aabovebove aaverageverage iinn ttermserms ooff bbeingeing a ttrustworthyrustworthy pprofessionrofession.” “CConsumersonsumers bbelieveelieve aaccountants,ccountants, ssolicitorsolicitors aandnd bbankank mmanagersanagers ttoo bbee tthehe mmostost ttrustworthyrustworthy aandnd pprofessionalrofessional ooccupations,ccupations, wwithith ffinancialinancial aadvisersdvisers nnotot bbeingeing ffarar bbehindehind.”

During September 2010 the FSA published its annual consumer confidence paper. When questioned, 98% of IFA clients expressed confidence that the advice provided was appropriate to their needs - this contrasted with only 83% of bank customers. The research also confirmed that consumer confidence in their adviser had risen by 17% over the year, highlighting perhaps that the general state of the economy translates into positive or negative consumer views.

Harris Interactive released the result of its consumer survey in October 2010. This highlighted that the consumers trust of IFAs was a mere 4% behind that of Chartered Accountants.

These unrelated items of research verify that there is no specific lack of confidence in independent financial advisers, although there may be a general lack of confidence in the industry as a result of the banking crisis, bankers bonuses and various company failures. There is also a widespread realisation that the FSA has proven inept at regulating financial institutions.

Within annex 3 of DP07/110, the original RDR discussion document, sat the following statement, “On the whole we understand that those who sell products in the UK are not viewed as professionals. This also appears to be the case in other countries. In some respects, however, the lack of professionalism does not appear to be such an issue.e ”

A December 2009 study by CWC Research11, in association with BNP Paribas, concluded that the qualification proposals fail to match the original intention of the RDR and that the drift upmarket would deprive the mass market of access to advice.

The FSA has made much of a study carried out by the Australian Securities and Investments Commission in February 2003 12. They claim that this survey proves that higher qualifications equals better advice.

The Australian study fails to survive a forensic scrutiny. Firstly, the number of financial plans examined was 124, which is a worryingly low number on which to base a programme of major upheaval. Secondly, the accuracy of the assessments was fatally impaired by the automatic marking down as ‘poor’ those advisers who failed to provide an Advisory Services Guide brochure, which happened in 16 instances. Additionally, 15% of the overall score was structured around the adviser supplying certain regulatory information rather than the actual provision of advice.

A third error surrounded the requirements being studied. Advisers were judged on the provision of a comprehensive financial plan involving the investment of a sizeable lump sum. This is not typical of the UK retail financial services industry where the vast majority of ‘everyday transactions’ are based around more simple and individual requirements such as purchase of a pension, the buying of an ISA or the arrangement of mortgage finance.

An FSA platform investigation of twelve firms 13 is also being used as evidence. No quantitative research exists which, given the RDR’s four-year incubation period, suggests an inability to locate any evidence of worth. 32

To support this we refer to FSA publication Firm-level Predictors of Consumer Loss Through Poor Financial Advice – April 2008. 14

“Surprisingly, we find no relationship between the share of advisers who passed the qualification exam or the share of competent advisers”.

Unsurprisingly, the FSA has been mute regarding this conclusion.

Hector Sants December 2010 letter to Andrew Tyrie offered the FSA’s negative experience of grandfathering mortgage brokers as reason why grandfathering should not be condoned. In truth the analogy is poor, mortgage brokers were new to regulation and it is not surprising that many have been found wanting. By contrast, financial advisers have been regulated since 1988 and have been subject to the various regulatory initiatives, compliance procedures and continuing professional development changes for many years.

In attempting to implement the RDR proposals the FSA uses arguments predicated on financial advice becoming a profession. This we believe to be an inappropriate ambition, surely the aim is for advisers to act professionally rather than be a professional?

Those advisers who deem it appropriate to suggest higher competence by the passing of additional examinations are free to do so. This has always been the case. If an adviser wishes to establish a niche or advertise that he/she is super-qualified then we say fine, this is excellent for them in positioning their business model. However it is entirely inappropriate to force the entire adviser population to re-qualify. A leading financial services barrister considers that such a proposal is illegal and breaches the Human Rights Act. 15

Sants argues that the industry developed the qualification standards. The ten-person RDR committee tasked with this comprised four individuals whose companies sell examinations, five industry directors and an FSA representative. This group was put together with the firm intention of producing qualifications and could never have been considered impartial or even relevant given that not one is a practising adviser.

In September 2007 Amanda Bowe, who then headed the FSA’s RDR team, stated, “We don’t think we should be making the decisions for the industry”. Of course, this is precisely what the FSA is doing. Intruding on commercial transactions between consenting adults and reducing the consumers choice whilst declaring that the medicine is for their own good.

Amanda Bowe also stated, “We have a statutory responsibility only to intervene in markets when the market itself is failing to function in a manner consistent with our objectives and where our intervention can deliver benefits that justify the costs – that is after all the role of regulation.”

There is no failure of function, the mis-selling episodes of the 1980s have been eradicated and the bad apples have been driven from the industry.

The RDR reduces consumer choice, reduces the adviser population and consequently the potential for greater engagement with the industry. Increasing costs are passed on to consumers and the public is confused yet further by the introduction of yet another type of adviser. Far from enfranchising the consumer these proposals will consign him to inferior advice or no advice. Is this the outcome that UK plc wants?

1 http://www.fsa.gov.uk/pubs/other/oxera_rdr.pdf 2 http://www.ftadviser.com/FinancialAdviser/Investments/News/article/20100617/c858ba12‐787c‐11df‐b4a9‐ 00144f2af8e8/IFA‐exodus‐nudges‐4000‐MatrixData.jsp 3 http://www.ifaonline.co.uk/ifaonline/opinion/1929511/video‐schroders‐stoakley‐rdr‐debate 4 http://www.ifaonline.co.uk/ifaonline/news/1560660/rdr‐force‐ifas‐quit#ixzz1AlKWglq9 5 http://www.ifaonline.co.uk/ifaonline/news/1560660/rdr‐force‐ifas‐quit 6 http://citywire.co.uk/new‐model‐adviser/aegons‐vahey‐calls‐for‐review‐of‐rdr‐impact‐on‐adviser‐ numbers/a368655 7 http://www.moneymarketing.co.uk/regulation/rdr‐standard‐setter‐fears‐adviser‐exodus/1023114.article 8 http://www.fsa.gov.uk/pubs/other/psct.pdf 9 http://www.jpmorgan.com/pages/jpmorgan/am/uk/press_office/tcf‐from‐the‐horses‐mouth 10 http://www.fsa.gov.uk/pubs/discussion/dp07_01.pdf 11 http://www.ifaonline.co.uk/ifaonline/news/1565579/cofunds‐choice‐ifas 12 http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Advice_Report.pdf/$file/Advice_Report.pdf 13 http://www.fsa.gov.uk/pubs/other/iap_findings.pdf 14 http://www.fsa.gov.uk/pubs/other/report_predictors.pdf 15 http://www.moneymarketing.co.uk/fsa‐outside‐the‐law?/1001679.article http://www.fsa.gov.uk/pubs/policy/ps10_06.pdf http://www.slideshare.net/MrResearcher/hi‐uk‐fsnewsletterviewpoint201010

Written evidence submitted by Glen McKeown, Financial and Tax Adviser

Summary The FSA’s proposals ignore, and are probably counter to, the sociological and psychological research that exists.

RDR is based on a set of committee based assumptions that are so far removed from the real world as to be potentially very damaging to the provision of financial advice at most levels, except for the rich, who are probably able to take care of themselves anyway. Opposing Grandfathering can have a materially bad effect on the short term and could lead to a prolonged contraction in the adviser market. Why should clients rely long term on an adviser relationship if it can be terminated without realistic cause by an outside authority.

The debate on grandfathering is non-existent, and is based on am FSA assumption of the outside world that is so badly flawed as to be positively damaging. Like so much else the FSA view has not been substantiated; a substantial part all their output is either misleading or plain wrong.

As with everything else the proposal is backed by virtually no research commissioned or published by the FSA.

Peter Smith, Head of Investment Policy at the Financial Service Authority (FSA), at a recent conference is reported to have repeated the statement made in Hector Sants letter to the Treasury Committee, dated 13 December, that financial advisers would not be permitted to be “grandfathered” under RDR because a similar allowance for mortgage brokers resulted in widespread “misselling” and 100 brokers were disqualified. Mr Sants’ words were “incompetent and unethical practices” The remark that the dismissal of 100 advisers arose because of grandfathering appears to have been taken straight out of the air. It’s a little like saying a Boeing 707 took off from JFK Airport, and at the very same time a Boeing 707 landed at Heathrow - therefore instantaneous travel is possible. The first important question is - are there any direct connections between the two facts, other than co-incidence.

The second important question is whether the grandfathering of advisers is the same process as the grandfathering of mortgage advisers, and on this point there is evidence that it was very difference.

If that is so, it would make the comparison somewhat dubious, and perhaps unethical. One initial effect of regulation is to remove those who do not meet certain standards, and many would not, grandfathered or otherwise. It is possible that if grandfathering had not been allowed far more than 100 may have fallen away from the industry, but there would have been no record. So it is not really possible to ascertain whether grandfathering was a success or failure. Figures need to be put into a context before they can be evaluated.

It is interesting how the FSA equate exam qualifications with both competency and ethical behaviour based on an exceeding low level of evidence, though this is in line with them building a business model using an old Australian report based on an assessment of 3 companies.

In any other circumstances such information, namely the disqualification of the brokers and the Australian research, would be the starting point for further research to determine if the correlation is real or accidental. But that may have resulted in a 35

refutation of the initial conclusions, making the FSA look rather silly - so no point in taking the risk.

There is no indication that the FSA have completed any further search or analysis arising from these initial deductions. After all it is perfectly clear to all right thinking people that the Sun goes round the Earth.

The evidence from Australia on qualifications was so flimsy it would, in any other context, have been dismissed as an argument either for or against any proposition linking qualifications and competency.

It did raise some curious correlations, which should have been made the subject of further research.

So far as I am aware • it did not look at correlations between quality of advice and age of adviser or length of service in the industry; • it did not specify the basis for the judgement of good and bad advice; • it did not quantify loss to the client or indeed if indeed there was any loss (bad advice does not automatically mean loss since the external factors in the advice will change over a period, and may make that advice beneficial - and the opposite is also quite possible, that is, good advice could prove damaging due to unforeseeable factors); • it did not specify the level of benefit to the clients overall i.e. did the negative exceed the positive or vice versa.

In itself the research showed no strong correlation either way between exams, competence or ethics or even benefit or detriment to clients.

The FSA is taking information and interpreting in purely to support its own point of view. This is highly unprofessional at the FSA level. As the well known Philosopher of Science Karl Popper would have maintained, the duty of the FSA would also be to find evidence to question or refute their assumptions. They have not done so.

In this respect it may be worth reading a short paper published in the British Medical Journal By Gordon C S Smith and Jill P Pell, Entitled “Parachute use to prevent death and major trauma related to gravitational challenge: systematic review of randomised controlled trials”. The document is an interesting comment on assumptions and observational studies. The FSA appear to have made neglible observations in relation to their own assumptions.

On the question of qualifications, competency and ethical behaviour, it would be useful to look at the behaviour of the FSA for confirmatory evidence of this assumption. I assume that there are a large number of graduates in Canary Wharf, so we would assume a high level of competence. Why we would also assume ethical behaviour I have no idea; some of the most ethical people I have ever met have had low levels of education. I doubt that the leaders of Enron, WorldCom, Arthur Anderson, ad nausea, were poorly educated but one would question their ethical behaviour.

The FSA use of the word is really a rather unethical attempt to use an emotive word in a context that is likely to psychologically strengthen their message, but actually has no real relevance. The ethical context is a red herring to qualification and grandfathering.

I note that Peter Smith (no notification of his exam qualifications) uses the £400m to £600m figures that were amazingly extrapolated from an estimate of around £223m and contained in Hector Sants aforementioned letter. There is a vague comment as to why the base figure was extrapolated, but no direct evidence. So there is a question here as to the correlation between qualification, competency and ethical behaviour within the FSA itself.

There is research that supports the hypothesis that people will believe the statements of confident people, and the FSA always talk with supreme confidence, or at least they always treat everyone else as wrong. So whatever figure they put out is likely to be believed - even when unsupported by hard evidence. And especially if they repeat the figures often enough.

Let us look further at the figures involved. The total detriment to the consumer, depending on which set of FSA figures are more believable (or provable) appears to be about the same cost as running the FSA (and probably its successor). Not a great sense of value for money.

But to that has to be added the £1.5bn for implementing RDR. And do not exclude the ancillary regulation industry including the compliance departments for every company. I do not know the figures, but an estimate of between £2bn and £3bn a year does not appear to be unreasonable.

All to save something between £250 and £600m, allegedly.

Let's put some of the figures into a general context. In Hector Sants letter of 13 December 2010 he includes a level of detriment to clients in respect of Investment bonds and Equity ISAs of £92m.

This figure of £92m appears to represent the detriment of unsuitable sales. But there is a 66% variance between their low and high estimates. This is extremely high. Why are they using estimates - do they not have genuine figures. Regulation had been in force for 20 years, and the FSA were in position for 5 years.

It also raises questions about the amount in question when it is realised that £92m is somewhere between 0.24% and 0.39% of the Investment Bond Market. The figures are based on the value of the 2007 and 2008 (£38.6bn and £23.6bn respectively) markets because I do not have the figures for 2005. I have no reason to believe they would be materially different. And the percentage does not take into account the size of the ISA market because I cannot access a figure. Overall then the level of detriment appears to be between 0.1% and 0.15% of the total target.

It would certainly be swamped by just one good or bad day on the Stock Market. In percentage terms it is in the “negligible” bracket.

The statement by Mr Sants that the FSA do not believe that RDR will threaten the availability of good advice is, again, just belief and not substantiated by any research. The fact is that since the introduction of regulation in 1986 the trend of independent advisers has been to advise richer individuals. This trend accelerated after 2000 with the introduction of a more onerous regulatory regime, that created excessive administration and therefore significant additional cost.

Quite simply if it not practical now to provide advice to clients below a specific wealth or income level. Recently I spoke to an employer about the way he would provide 37

investment advice for a person paying £100 a month to a pension scheme. The reply was unambiguous; he wouldn’t be dealing with anyone making such a low contribution. Whenever I have spoken to colleagues and stated that IFAs really only looked after the rich I have never had anyone deny the comment – there is actually a positive response. I have personally turned away clients who I believe would not be comfortable with the fees I would charge them.

It has always bemused me why the FSA is so keen on protecting the rich, because that is what these changes, in the main, will accomplish.

Quite simply the assertion that advice will be widely available is not sustainable. Take out 3,000 to 5,000 advisers just leaves more rich clients available. Do not expect competition for “lesser” clients.

Providing any level of advice will now require a number of hours of work to ensure that all the regulatory requirements are met. It would be difficult to charge the client less than £250. Is that likely to be acceptable to a client planning to invest £40 to £50 a month?

The FSA are living in cloud cuckoo land if they do not see that the cost levels they have laid out as being created by RDR (and when did anyone ever over estimate?) can be recouped by dealing, on an advisory basis, with lower income people.

IFA advice will not be available to them and the FSA is being disingenuous to suggest it will be.

Are you aware of many legal and accountancy practices that target the lower paid? That is the level of competence the FSA are targeting. Is the targeting actually justified? What does the research say?

These figures, and others cast serious questions about the competence and ethics of the FSA in the presentation of evidence supporting RDR. However, based on their analysis there should be no such problem, because they are all highly qualified and therefore highly competent and ethical. Does this alone not cast doubt about their base assumptions?

There is a large question about whether the consumer is getting value for money, for, ultimately, it is the consumer that pays.

Once RDR is in place the FSA must assume that the level of detriment will be reduced. It can never be eliminated, so to what level do they assume it can be reduced? I note the FSA does not provide targets for anything, presumably to avoid having to answer for failure. But let us put a base level, below which detriment is unlikely to fall at say £200m. In a billion pound industry this is actually a very, very small percentage. So the consumer saves £300m a year spread over how many million people, lets use a low figure of 10m finance clients (remember the RDR is not merely about IFAs) which equates to £30 per person. Life changing?

Lets put the figure to compensate clients for detriment at £500m pa. A workforce of about 100 could pay out the compensation; cost in the order of £10m pa. Disband everything else. Saving to the consumer - in excess of £1bn a year. So once again I ask the question - is the consumer getting value for money, or merely fleeced in order to keep a few hundred highly educated people off the unemployment register - or even doing a genuinely useful job. 38

One of the problems of casting doubt on evidence is the implication that the main topic, in this case RDR, is totally opposed. I doubt that you will find any in the Adviser section who would oppose better overall standards. What we oppose is the bureaucratic mentality in implementing them. Whilst the proposed outcome is to be welcomed, we believe that the treatment is likely to kill the patient long before we get to that outcome. There are better methods to implement the changes. The FSA has not listened to or spoken with the IFA sector. For evidence on this find any material changes between the initial report and the current implementation.

And find any targets specified by the FSA that can be used to measure success or failure.

I have been a financial adviser for 40 years, and before that was 7 years with the Inland Revenue. I have worked for accountants, stockbrokers and some of the top Adviser Firms. Over the last few years I have completed a significant level of study on the psychology and sociology of investment and human interaction with investment and finance subjects.

January 2011

Written evidence submitted by the Financial Services Authority

EXECUTIVE SUMMARY

1. We welcome this opportunity to submit this memorandum to the Committee’s inquiry into the Retail Distribution Review (RDR).

2. We launched the RDR in June 2006, to address the root causes of significant problems identified in the distribution of retail investment products and services. There was broad support from the market at that time for the need for reform which meant that our review was able to focus on solutions rather than analysing the past.

3. The RDR is a key part of our consumer protection strategy, and an example of intervention where we have decided that there is a need to address problems across a whole market because previous, more piecemeal approaches had not addressed the issues effectively. We aim to modernise the industry and establish a resilient, effective and attractive retail investment market in which consumers can have confidence and trust at a time when they need more help and advice than ever with their retirement and investment planning. The rule-making which has already taken place, and continues, will be supported by our intensive supervision of firms and complements the work of the Consumer Financial Education Body (CFEB) to improve consumers’ financial capability. We continue to work closely with CFEB as we move towards implementation of the new RDR regime.

4. A broad range of firms operate in this market, with diverging views on the best way to implement reform. We have taken these opinions into account in forming our proposals and making new rules. We recognise that the RDR involves significant change in the market so we would expect some of our proposals to be controversial. This is why we have consulted so extensively and over such a long period. We spent two and a half years (June 2006 – November 2008) encouraging ideas and views from industry practitioners, consumer representatives, investors and potential investors, trade associations, professional bodies and other stakeholders on the issues that needed to be addressed and to identify potential solutions that we could research before finalising our policy and rules.

5. We are grateful to all those who have contributed considerable energy to this review. They have helped us to identify and develop ideas, giving us feedback along the way to help us understand the likely impact of our proposals. This gave us a very clear view of where our regulatory interventions are most needed and the likely market impact. We believe that we have settled on the right combination of measures to reduce the cost to consumers of continued unsuitable advice and to deliver a clean and sustainable market for the future. We also fully recognise the need to monitor the impact of these policies on a continuing basis, both before and after, implementation of the new regime.

6. Our analysis shows that the longstanding problems in the market have been created by an asymmetry of power and information between product providers, advisers and consumers, as well as other factors such us remuneration structures, levels of 40

professionalism and a lack of clarity on the part of consumers about the service they are getting.

7. Our proposals aim to ensure that:

consumers are offered a transparent and fair charging system for the advice they receive;

consumers are clear about the service they receive;

consumers receive advice from highly respected professionals; and

advisory firms are more stable, than now, and better able to meet their liabilities.

8. Within the definition of retail investments we include, products and services such as pensions, investment funds (unit and investment trusts), life products (endowments, with-profits and unit-linked policies) and exchange-traded funds. Our new rules will apply to all advice given in relation to such products and services, regardless of the type of firm for whom any individual adviser works – so advisers within banks, asset managers, life insurers, sole traders, partnerships, stockbrokers, networks, IFAs or financial advice firms will be subject to the same regulatory environment. We have also considered the development of new distribution channels such as platforms.

9. In the following sections we cover: A. Problems in the market; B. Our extensive consultation programme; C. Myths and misconceptions about the RDR; D. Changes being introduced under the RDR; E. Contentious issues; and F. Costs and benefits.

A. PROBLEMS IN THE MARKET

10. The RDR was launched in response to both our, and market participants’ observation of significant problems in the UK market for retail investments. In deciding whether to invest, consumers are being asked to make decisions about markets which are, by their very nature, uncertain and which can be complex. When they decide to invest they are also being asked to take risks which can often be quite difficult to assess and they may not crystallise until a long time after the decision to invest was taken. This is one of the main reasons why consumers seek advice; it is also why consumers need advisers they can trust, why advisers need demonstrably to behave in a professional way and why the interests of advisers need to be clearly aligned with those of their clients. These are not characteristics of the retail investment market.

11. While risks of unfair treatment of retail customers have, in several respects, been accentuated by the financial crisis, the issues reflect longstanding problems created by asymmetry of power and information between providers, advisers and consumers, together with unsustainable business models. While we are putting measures in place to address issues that led to the banking crisis, we believe that 41

addressing the root causes of problems in the retail investment market – which pre- date the crisis - is also required if consumers are to be better protected.

Market complexity and lack of consumer understanding 12. We note above the risks and complexities involved in investments and the information asymmetries. There are sophisticated investors who are confident in making investment decisions, but, in many cases consumers purchase retail investment products relatively infrequently (such as arranging a pension), so have little experience to draw on. Retail consumers also tend to find the effect of total charges on their investments hard to determine. They simply do not have the same information as the sellers of these products and receive poor quality advice1. As a consequence of this market failure, compounded by the low level of financial capability among many consumers and their overall lack of interest and engagement, consumers do not act as a strong pro-competitive force in this industry.

Incentives from adviser remuneration 13. The role of the intermediary is to provide advice to the consumer. However, advisers’ remuneration structures are such that the cost of advice (commission) is often built into the product charges. Our consumer research shows2 that only around half of respondents understood how the long-term value of their product would be affected by commission. Consumers are left with the impression that advice is free3. The adviser’s interests are often aligned with the provider, not the customer. Competition between product providers tends to focus on encouraging the adviser to recommend a particular product. As a result, product features, including charges and commission, provide incentives to attract the adviser rather than focusing on product features which are attractive to the consumer (such as delivery of good performance and long term growth or income)4.

14. This leads to an inherent misalignment of interests between the intermediary and the consumer, which can lead to various forms of bias:

Provider bias – advisers recommending a provider’s products on the basis of commission payments;

Product bias – some products carrying higher commission payments than others, biasing advisers’ recommendations to those products paying higher commission; and

Sales bias – generation of income is contingent on a sale being made due to the advisory firm’s business model being dependent on payments of commission. This can lead to an incentive to ‘churn’ the client’s investment in order to generate income.

1 The Money Maze: Are consumers getting the advice they need? Which? (2009) 2 Depolarisation Disclosure, FSA Consumer Research Paper 64, GfK NOP (2008) 3 Services and Costs Disclosure, FSA Consumer Research Paper 65A, BRMB Research (2008) 4 Retail Distribution Review proposals: Impact on market structure and competition, Oxera (2009) and Retail Distribution Review proposals: Impact on market structure and competition, Oxera (2010) 42

15. Once products have been purchased, there is limited evidence of consumers switching if performance is not satisfactory. However, the potential conflict of interest created by commission, due to the risk of bias, or a perception of it, leads to low persistency, and undermines trust. This does not help the long term sustainability of the sector. For example, our thematic work on pensions revealed evidence5 of consumers switching for other reasons, such as inappropriate advice from advisers motivated by income generation. The table below summarises three further examples of where we have found evidence of bias:

Illustration of Examples % of unsuitable sales annual consumer detriment Pensions being transferred 16% £43m inappropriately5 Unit Trusts sold outside an ISA where a tax benefited equity 12–20% £70m ISA was more suitable6 Investment bonds sold outside an ISA where a tax benefited 12–20% £92m equity ISA was more suitable6 A 1% increase in commission leads to an Personal pensions6 Up to £18m increase in personal pension market share of 1.4%

Detriment to consumers 16. The table above reveals approximately £223m of detriment arising only from those sales that were unsuitable. The data in this table is drawn from cases of unsuitable sales of a number of different types of retail investment products, where detailed research has been conducted on mis-selling. Research on mis-selling is not available for all products in the market, and therefore this figure of £223m is likely to underestimate total consumer detriment.

17. To provide an indicative estimate of total detriment, we have extrapolated the estimates of consumer detriment to all sales in the market, taking the following approach: a) ABI and IMA data suggests that the total annual market for retail investment product new business is £109 bn; b) Assuming 12-20% of all products sales are unsuitable (as set out in Table 4 of PS10/6); and c) Using an estimate of the detriment to consumers published in CP 09/18 – 3% of the value of the amount invested.

5 Pensions switching thematic work, FSA (2008) 6 Charles River Associates (2005) and FSA calculations 43

18. This suggests that the annual detriment arising from the sale of an unsuitable product could be in the range of £0.4 bn - £0.6 bn:

Total annual Total annual Average unsuitable Level of consumer market detriment sales detriment (£ bn) (£ bn) 109 12% 3% 0.4 109 20% 3% 0.6

Cost of poor quality advice 19. Poor quality advice or unsuitable advice often results in consumer detriment. However, as noted above, this may not be identified until years after the sale, if at all. There are limitations in the way that capital resources requirements and Professional Indemnity Insurance (PII) requirements for firms currently remedy this. Product providers also have responsibilities for treating customers fairly. Again, it may be many years before problems become apparent, for instance with the performance of a product relative to what the consumer was led to believe. The result of this can be uncertainty for consumers and can mean potential claims against those who supplied the product or gave advice many years after the original purchase. By the time these claims come to light, those that gave the advice may no longer be in business, leaving others in the industry to meet the costs of compensation.

Credibility of advisers 20. Currently 70% of consumers do not seek investment advice from an adviser. While levels of trust in advisers are higher among those who use one than among those who do not, 40% of those who have recently used an adviser say they do not trust financial advice7. Our consumer research has found trust to be a more important factor than price8 when selecting an adviser and that confidence can be established in advisers through the demonstration of knowledge and qualifications9. The consumer’s current perception of financial advice presents a disincentive to consumers seeking advice in the first place. We therefore believe that trust is key - the RDR will instil more trust and confidence in the retail investment market from consumers, leading to more engagement which should attract new people to seek advice and possibly invest. 21. Taking the problems we discuss above together, we believe that the market for retail investments has not worked and still does not work efficiently. It serves neither the interests of consumers or firms, whether providers or distributors of retail financial services.

7 Wells and Gostelow (2009) analysis of the Baseline Survey of Financial Capability, FSA (2006) 8 Services and Costs Disclosure: FSA Consumer Research Paper 65a, BRMB Social Research (2008) 9 Assessing investment products: FSA Consumer Research Paper 73, Strictly Financial (2008) 44

B. EXTENSIVE CONSULTATION

22. From the start of the review there was encouraging consensus from market participants, as well as consumer groups, about the problems in the market and the need for change. There has also been consensus that the time was right for substantial change. 23. We have held an open debate about industry-led solutions, wherever possible, in what has been the FSA's most extensive and far-reaching consultation process to date. This involved some two and a half years of discussion and a further two years of formal consultation, during which we have received nearly 2,000 formal responses and proactively contacted around 2,500 firms, in addition to considerable additional correspondence and discussion. 24. We used industry working groups, as well as considering the views of individuals, consumer representatives, a wide range of firms, and their representatives, to develop our proposals. Often debate has arisen around detailed points of the proposals. We have listened to the arguments and evidence presented, amending several proposals in response to this debate, where appropriate. For instance, we have amended our professionalism proposals to allow alternative assessment methodologies to be used in light of concerns about written exam-only qualifications, and we have also allowed for an additional transitional year for our capital requirements proposals, to take account of difficult trading conditions. However, there are detailed areas where some decisions were more controversial; we explain the reasoning behind these decisions in more detail in section E. 25. This extensive consultation has enabled us to listen and respond to market participants concerns and so develop, with industry, a package of reforms that we believe is necessary to address the problems in the market, improve consumer outcomes and confidence, as well as support the long-term viability of the retail investment market.

C. MYTHS AND MISCONCEPTIONS

26. A number of misconceptions about our RDR proposals have arisen over the years. We take this opportunity to clarify our position on these

Consumers will have to pay for advice upfront; many will be unwilling to do that and will not take financial advice at all 27. We recognise that consumers may not wish, or may not be able to afford, to pay an upfront fee for advice. Our approach offers consumers some flexibility on methods of payment. They can make the payment for advice by an upfront deduction or by the charge being deducted from regular payments over time, through the product. The critical change is that payment for advice can continue to be facilitated by the provider through the product, but the amount cannot be decided by the provider; that is decided directly between the adviser and the client.

The absence of complaints is an indication of quality advice 28. Some IFAs argue that, because only 2% of complaints that go to the Financial Ombudsman Service are levelled against IFAs, it follows that the independent sector 45

provides a better service than the banks. We do not accept this. The total figure for complaints referred to the Ombudsman Service, on which this 2% figure is based, includes complaints about services and products such as banking and credit which are not provided by IFAs, so the comparison is not a fair one. The more relevant data to use relates to products and services provided by both IFAs and banks, such as investments and pensions. 14%10 of new cases referred to the Financial Ombudsman Service in 2009\10 relate to this area - 22,278 cases out of a total of 163,012 of which 50% were upheld. Of these 22,278 cases, IFAs accounted for 12% of investment-related complaints, compared with 29% for the banks. On pensions, IFAs accounted for 28% of complaints and the banks 10%. This demonstrates that there are problems which need addressing, irrespective of the advice service (independent or restricted) or firm type (small or large). These figures are broadly representative of the source of advice because the Baseline Survey of Financial Capability found that 30% of the adult population sought advice; of which 57% used an IFA and 36% a Bank7.

29. While complaint volumes are one important indication of the quality of advice or services received, a complaint – by definition - relies on the consumer becoming aware that there is a problem with the product or service and raising that with the firm. The asymmetries of information mean that a consumer may never realise they have been advised to purchase an inappropriate product, the time lag between the advice being given and a problem crystallising, and often the firm no longer being in business when a problem is discovered (this leaves others in the industry to meet any costs of compensation) mean that while complaints received can provide one indication of poor quality advice, an absence of complaints is not a reliable indicator of good quality advice.

Access to advice 30. Some in the industry believe that the RDR will reduce access to advice for the less well off. We do not agree. We have said that changes from the RDR are significant and there will indeed be changes within the market; however, the impact on market capacity and structure is likely to be limited. For example, Oxera reported11 that around 14% of firms that currently provide independent advice indicated that they are likely to provide restricted advice post-RDR. This market impact will, in some cases, simply be a shift in the service description of the firm from independent to restricted advice because of the new definition of independence.

31. Another element of market impact comes from the number of advisory firms and individual advisers who will completely leave the sector. A number of studies have been carried out which produce estimates and these indicate a range of 10 – 20% of advisory firms may leave the sector. Our own research tells us that around 23% of advisory firms may exit the market because of the RDR proposals. Whereas the number of individual advisers who may leave could be in the region of 8 – 13%, excluding those who plan to retire anyway and based on surveys of firms’ expectations of their advisers, and advisers own intentions11 12. This range is consistent with NMG’s own estimates of the impact of the RDR on IFA numbers

10 FOS annual review 2009/2010, FOS (2010) 11 Retail Distribution Review proposals: Impact on market structure and competition, Oxera (2010) 12 The cost of implementing the Retail Distribution Review professionalism policy changes, NMG (2010) 46

based on their IFA Census survey. We consistently used a forecast of 10% - 15% when considering the reduction in adviser numbers by December 2012, once planned retirement is excluded. Previous research by the FSA estimated the level of exit to be 11%. If 8% do exit the advice market, adviser numbers will fall by 3,802; at 13% this increases to 6,178. IFAs represent a disproportionate number of those most likely to leave with 11% of IFAs expressing an intention to leave the market completely compared to 8% for all advisers. A 10% fall in the number of IFAs would result in a decline of 2,635, i.e. they would account for 69% of all those exiting. Age is an important part in advisers’ decisions with the proportion intending to remain an adviser reducing from 84% (under 35 yrs) to 65% (35 – 54 yrs) and still further to 40% (55 yrs+). Firms with fewer advisers, and that earn lower revenues, indicate they are more likely to leave the industry; this is why the impact on the number of advisers is proportionately less than on the number of firms.

32. As a result of market exit, and if new firms do not enter or existing firms do not expand, around 11% of people currently receiving advice will not have access to the adviser they are using at the moment because their adviser will leave the market. They can, of course, consult another adviser, and other firms may seek them out as clients. We believe that the final figure is likely to be less than the 11% identified.

33. As we have said, we will be monitoring the changes in the market, including exits during and after the transition. Even if demand for advice outstrips supply, entry barriers are low. In the longer term, new entry or expansion by existing players is likely to fill the gap. Some customers may question whether they need advice when they understand how much it costs them (a cost which is currently opaque because of commission) but that is a personal decision based on how much individuals actually value the service they receive.

34. The majority of the UK’s population has little or no liquid savings (the median financial wealth for families in Britain was just over £1,000 in 200513). Until savings have been established, investment products and services are unlikely to be suitable. For many people in this position, the proposals by CFEB for an annual Financial Health Check seem likely to be particularly valuable. There could also be potential benefits to this group from the Treasury’s proposals for simple products. Those consumers who have established savings, and for whom investment advice is the right way forward, have access to simple, low cost stakeholder products. The charge caps and simple terms of stakeholder products provide strong consumer protection and as a result we are not extending the RDR to the Basic Advice regime. This means, for example, that advisers on such products can continue to receive commission and give advice without holding a qualification.

35. However, we acknowledge the concern of mainly product providers that the market for stakeholder products is small and we believe this is primarily due to the lack of profit margin. At the same time, we are aware that there is a widespread belief that the RDR will result in a reduction in the take-up of advice and that some lower-cost option (along the lines of Basic Advice) should be available to those consumers whose needs are relatively simple and likely to be met by straightforward products. We have had extensive discussions with the industry on the concept of simplified

13 The wealth and saving of UK families on the eve of the crisis, Institute of Fiscal Studies (2010) 47

advice to support the development of such a process and we know that a number of firms have developed pilot processes to test out the attractiveness and viability of such a service. Furthermore, to assist the firms who are developing such processes, we will produce some material on the concept of simplified advice this year.

D. CHANGES BEING INTRODUCED UNDER THE RDR

Consumers are offered a transparent and fair charging system 36. A key objective of the RDR is to address the potential for remuneration of advisory firms to distort consumer outcomes. Under our new rules, an adviser will be required to say how much their services cost and will agree with their customer how much they will pay. This means that advisers will have to talk to their customers about the cost and value of their service which could stimulate competition among advisory firms. This change realigns the adviser’s interests with those of their clients.

37. We acknowledge concerns from some IFAs that despite these changes there is still potential for certain reward structures for in-house sales staff in banks and other advisory firms to cause the types of bias we have described. We are scrutinising those reward structures for in-house sales staff across the advisory sector.

38. The new rules will also prevent advisers from receiving ongoing commission (“trail” commission) where they are not providing the customer with an ongoing service.

Consumers are clear about the service they receive 39. A further objective of the RDR is to improve the clarity with which firms describe their services to consumers. It is important for consumers to know if their adviser is able to recommend from all of the market or only from a limited range of products. At present, to describe themselves as independent, advisory firms must consider the whole of the market for packaged products (these are products such as pensions, endowments and collective investment schemes) and offer the option of paying by fee.

40. The new advice landscape will be made up of independent advice, restricted advice (including simplified advice services) and basic advice (about stakeholder products). Before any advice is provided, firms will need to make clear to the consumer which of these services they are offering. The new rules for independent advice means that consumers will receive recommendations that consider all relevant options, free from any restrictions or bias. Those advisory firms who do not meet those rules for independence will have to explain the nature and extent of the restriction, for example, whether they advise on a particular range of products or on products from a limited range of product providers.

41. These new rules have received significant support in our consultation and require firms that provide an independent advice service to have the knowledge to consider a wider range of products than now. For example, the new definition includes investment trusts and exchange traded funds. 48

Consumers receive advice from respected professionals 42. From the start of the RDR, concerns about the credibility of advisers were often at the heart of the debate, which concluded with an early consensus among stakeholders on the need for professional standards to be raised. We believe that to raise trust and instil confidence it is important that consumers receive advice from professional, respected advisers.

43. The RDR will establish standards of professionalism that, when delivered by advisers will inspire consumer confidence and build trust in the market so that financial advice is seen as more of a profession. We are doing this by instituting an overarching code of ethics, modernising qualifications and enhancing standards for continuing professional development (CPD). We will require advisers to hold a Statement of Professional Standing (SPS) confirming that they meet these standards. We developed and agreed these proposals with our Professional Standards Advisory Group (PSAG)14 which comprised trade associations, professional bodies and consumer representatives. We then measured the proposals against other professions15.

44. In developing our policy and rules, we consulted on a proposal from our industry groups that advisers wanting to provide a wholly independent service should have to achieve qualifications at graduate level16. While many advisers tell us that they want to become more professional, feedback was that this level was too high for the market at the moment. We therefore settled on the vocational equivalent to the first year of an academic degree17 as this level requires more relevant skills than is required by the current standards18. In the light of feedback about the relevance of the content, we added more on investment risk and ethics as well as practical application of knowledge to the syllabus. We believe these changes are fundamental to equip the modern adviser to give good quality advice, and many advisers recognise that these skills have great relevance to their role.

45. The enhanced professionalism requirements will also mean that advisers, on the whole, will be more competent than at any time in the past. As the professionalism and reputation of the adviser community increases, new entrants will be attracted to the sector. We are seeing more learning opportunities for new entrants and some firms are creating graduate recruitment schemes to accommodate some of the demand.

14 This group comprised the Association of British Insurers, Association of Investment Companies, Association of Independent Financial Advisers, Association of Private Client Investment Managers and Stockbrokers, British Bankers’ Association, Building Societies Association, CFA Society (UK), Chartered Institute of Bankers in Scotland, Chartered Insurance Institute, Chartered Institute for Securities and Investment, Financial Services Consumer Panel, Financial Services Practitioner Panel, Financial Services Skills Council, FSA Smaller Businesses Practitioner Panel, the Treasury, Institute of Financial Planning, ifs School of Finance, and the Investment Management Association. 15 Professional Standards Bodies: Standards, Levels of Compliance and Measuring Success, PARN (2009) 16 Level 6 of the Qualifications and Credit Framework 17 Level 4 of the Qualifications and Credit Framework 18 Level 3 of the National Qualifications Framework 49

Advisory firms are more stable and better able to meet their liabilities 46. We have put in place new rules requiring personal investment firms (which broadly derive the majority of their business from advising on and managing investments for retail customers) to have adequate capital resources in order to minimise the financial impact of unsuitable advice. We believe that it is important for firms to have a strong capital base so that they are able to deal with complaints arising from their advice. This would reduce the situations where the Financial Services Compensation Scheme (which is funded by firms who remain in business) has to pick up the cost. In developing our proposals we reviewed the extent to which such rules could mitigate the incidence, and the impact, of unsuitable advice by personal investment firms. We concluded that such rules could not mitigate the incidence of poor advice but could affect the impact on the sector as a whole. We are implementing an expenditure-based requirement (EBR) and will require firms to hold (at least) a level of capital resources equivalent to a specified number of months of their fixed expenditure. The new rules will come into effect on 31 December 2011 with two years for the transition. In response to feedback we agreed an additional transitional year because firms were experiencing difficult trading conditions.

47. We have confirmed that, in the light of the feedback we received, we will review how the new capital resources rules apply to firms with different business models to ensure that they deliver consistent regulatory outcomes. We will consult on this in July 2011.

E. CONTENTIOUS ISSUES

Absence of a Long-Stop 48. Some advisers express frustration at the absence of a long-stop time limit on the period within which complaints must be brought or the application of the statute of limitations because they want to limit their liabilities. This strength of feeling, particularly amongst IFAs, was made clear to us when we first consulted on longstop in 2007. To justify the introduction of a long-stop we need to identify benefits to firms or consumers beyond the savings for firms in compensation payments. These benefits would need to exceed the consumer detriment from time-barred complaints19.

49. Responses to our consultation focused on ‘fairness’ arguments around the statute of limitations and concerns about handling ‘stale’ claims – particularly into retirement. We were unable to convert these arguments into a persuasive analysis that it would be reasonable to impose responsibility on consumers to identify any and all issues with advice within a given period.

50. Other respondents highlighted the consumer detriment and reputational damage that a long-stop could cause. Due to the strength of feeling on the issue we made a further call for evidence in 2008 but only three firms responded with further evidence. This prompted us to seek further evidence to see if we could build a persuasive argument. We could not and we had to conclude that we should not

19 Retail Distribution Review - Interim Report, FSA (2008) 50

introduce a long-stop because we were unable to demonstrate that it would bring additional benefits to consumers and firms (for example from greater investment in the sector).

Experienced Advisers and Grandfathering 51. We considered grandfathering but the majority of respondents to our consultation20 were not in favour (including AIFA, the main representative body for independent financial advisers). Any grandfathering provision would have to be made available to all advisers operating in the market, irrespective of who they work for. There was a broad consensus that grandfathering would not support the necessary efforts to restore confidence in the industry and would thwart efforts to implement demonstrably consistent minimum standards across the profession. This was the view of the majority of advisers and their representatives.

52. Our own recent experience in allowing grandfathering rights for mortgage brokers has been that it has seen a continuation of mis-selling, resulting in nearly 100 brokers being disqualified to-date for incompetent and unethical practices.

53. The majority of those in favour of grandfathering said that to be eligible, advisers would have to meet certain conditions, such as the absence of complaints against them. As noted earlier, we do not agree that this is an objective measure of competence. Other suggestions have been that advisers tell their customers they are not qualified. However, this approach requires the consumer to exercise a judgement that they are generally ill-equipped to make.

54. We also considered a working group recommendation in 2008 to permit existing advisers a grace period of two further years (to end-2014) under supervision to allow them longer to get qualified. However, we had serious concerns about the supervision of these advisers being effective. At its most unacceptable supervision carried out within firms is a form of remote file checking with no coaching, mentoring or training of the individual. Instead, we found an acceptable compromise and said that those who are on course to complete, or already hold, an appropriate qualification can continue with this. This meant that from November 2008, existing advisers could continue or begin their studies using existing higher level qualifications, without having to wait for the new qualifications to be made available. Overall, our view is that, by the end of 2012, established advisers will have had enough time to meet the new standards.

55. While we are sympathetic to the issues raised by some advisers with significant years of experience, experience alone does not necessarily equate to competence – and it is competence that the new minimum qualification standards aim to address. We are not satisfied that the existing standards are adequate to meet the demands of today’s challenging investment market or that advisers have been maintaining their knowledge in line with changes in the market. This is borne out in our platforms thematic review21, published in March 2010, where advisers were recommending a service they did not understand themselves. So the professional standards have been modernised to reflect the role actually performed by advisers.

20 DP07/1, FSA (2007) 21 Investment advice and platforms thematic review, FSA (2010) 51

56. In light of concerns from advisers about sitting traditional written exams, and having taken advice from PSAG14 and the Office of Qualification and Examinations Regulation (OfQual), we agreed to allow alternative forms of assessment. These assessments provide those advisers who do not wish to sit a written examination with a viable alternative to demonstrate that they meet the standards. These test the relevance of advisers’ knowledge as well as practical application. PSAG, however, rejected a form of FSA kite marking, where the proposal was that we assess individual advisers against the examination standards based on the content of client files - these are unlikely to cover all of the areas within the examination standards. In summary there are a number of different ways in which advisers may become qualified without taking a traditional written exam, notably: a) There are two qualifications that do not involve any written examination instead they use what is called a 'competency day'. This involves reading a series of case studies and discussing these with an assessor. b) We are currently consulting on including a work based assessment in our qualifications list. c) There are also case study based written exams which involve the candidate being given a fact file prior to entering the examination hall and then being asked to write their recommendations on the file in exam conditions.

57. However it should be noted that the take up of these types of options is very low.

Market Impact of Professionalism 58. We do not believe that the RDR will result in the loss of the most experienced advisers, despite recent concerns, as we expect that those advisers who have actively sought to maintain competence by keeping up to date with market developments not to have to commit a significant amount of time to study. OfQual guidelines suggest the average new learner takes 370 hours to complete a diploma: this includes directed study, homework, assessment, and preparation time. This is the expected time that a new entrant would take: we would expect those advisers with considerable experience to find that the time they need to study will be significantly lower than that. The main qualification providers for this sector have indicated to us that it is taking between 6-24 months for most experienced and new advisers to complete their qualifications.

59. We have worked closely with qualification providers to ensure we recognise as many relevant qualifications as possible. In some cases qualification providers have altered their qualifications to meet the new standards e.g. including practical application of knowledge in university degrees and adding UK taxation into overseas qualifications. This approach differs radically from regulators in other countries, who provide no choice at all as they set their own qualifications. The list now includes over 60 appropriate qualifications. There is a wide range of support available to individual advisers to help them complete the qualifications, some of it free of charge.

60. Our experience is that advisers are now, on the whole, getting on with attaining qualifications. In March 2010, 49% of all advisers were already appropriately 52

qualified22. A further 40% expected to have attained an appropriate qualification by end-2012. Of the remaining 11%: 6% did not know or did not answer the question, 4% will not qualify at all, and 1% will not qualify by end-2012. In fact, far from being put off by studying, many advisers are going further and taking more advanced level qualifications. We will continue to monitor market developments and the progress being made towards the deadline.

Removal of Factoring 61. In developing our proposals, and in response to feedback from our industry working groups and our consultations, we explored with the OFT whether a maximum commission agreement or a standard commission rate could be created for all investment products. However, the OFT expressed the same concerns about the competitive impact as they did when they banned the maximum commission agreement in 1989.

62. Under our new rules product providers will be allowed to offer consumers the choice to have adviser charges paid out of their investments. In particular, consumers who contribute to their investments on a regular basis will be able to spread the cost of initial advice fees, thus helping to maintain access to the market. However, unlike the current indemnity commission, providers will not be allowed to advance this money to advisers before it has been collected (a practice sometimes referred to as factoring).

63. Effectively this means that providers cannot use their own funds to advance this money to advisers before it has been collected from regular premium insurance products (such as endowments), as they currently can by using indemnity commission – where a future stream of commission payments is rolled up and paid in a (discounted) lump sum when the product is sold. It should be noted this is only a feature of the insurance market and does not feature in other product markets such as mutual funds. In a market without commission, but with adviser charges, it has been suggested that product providers should be allowed to achieve the same result by “factoring” the stream of adviser charges that would accrue over time in a regular premium product, discounted at a rate of interest chosen by the product provider, in order to encourage new saving and provide stability in the adviser sector of the market.

64. However, we see a number of reasons why this would be undesirable. First, there is no evidence that the current indemnity commission, which proposals for factoring by product providers would replace, has led to any substantial increase in new saving. In fact, there is some evidence that it has encouraged churn in the market, adding to its lack of sustainability. Second, the discount rate in factoring offered by product providers would have the potential to bias the recommendations of adviser firms, as different discount rates would generate different “factored” amounts for the adviser. Product providers could compete not on the price of the product to the consumer, but on the discount rate that generates income for the adviser. We have discussed a single factoring rate with OFT and their view is that this would be anti-

22 The cost of implementing the RDR professionalism regime, NMG (2010) 53

competitive23. During pre-consultation and consultation, we asked the industry for reasons to allow product provider factoring but no compelling arguments were provided.

65. We recognise that some advisers have been dependent on upfront remuneration and that there may be transitional liquidity problems for some advisers. However, we believe that a limited proportion of income is earned via sales of regular contribution products and it is important to note that advisers may still be able to arrange third party factoring if this is something they would find valuable in running their business and improving stability.

F. COSTS AND BENEFITS

66. We published our cost-benefit analysis (CBA) for the RDR in June 2009 which we updated in March 2010 in light of responses to our consultation. We have published additional CBA as and when we consulted on other rule changes that also relate to the RDR, such as in June 2010 for the supervision and enforcement of professional standards. Some of the market impact costs of our CBA have drawn specific comment which we respond to below, but the RDR is a package of measures and to realise the benefits those changes must be delivered as a package.

67. We used data provided to us by firms to estimate that costs for the first five years of the RDR would range from £1.4bn to £1.7bn; an increase from our earlier estimate of £0.6bn (also based on estimates provided by firms). The difference arises because the draft rules we published gave firms a better understanding of the changes they will need to make and the costs they are likely to incur. Consequently, firms’ responses to our second CBA survey are materially different in some areas from the responses to our first survey on estimating compliance costs. The main changes in the cost estimates are increases in the costs of introducing the move away from commission to ‘fees’.

68. Clearly any additional compliance cost for firms, and ultimately consumers, is a matter of concern to the FSA. We believe these changes are necessary to increase consumer protection. The main benefits of the RDR changes would be an improvement in the quality of advice and a reduction in the incidence of mis-selling caused by product, provider and sales bias. In our March 2010 Policy Statement24 we presented evidence of annual benefits in the region of £225mn which was from a sample for mis-selling cases. To give an indication of scale of potential detriment to consumers caused by mis-selling annually, we have extrapolated the levels of mis-selling in these studies to the whole market and used an estimate of detriment presented in our June 2009 Consultation Paper25 to obtain an estimate of £0.4bn to £0.6bn.

69. An increase in the quality of advice should lead to increased persistency and a reduction in unnecessary transaction costs. In addition, Oxera concluded that

23 Published correspondence regarding factoring arrangements between product providers and adviser firms, Office of Fair Trading (2010) 24 PS10/6, FSA (2010) 25 CP09/18, FSA (2010) 54

providers are likely to compete on the cost of advice and by offering better services to advisers post RDR, and that this is likely to benefit consumers indirectly.

70. We based our decision to raise professional standards on recommendations from our initial industry working groups, which were refined and developed by PSAG, throughout which we carried out substantial consultation. This was supported by some focussed research on how higher professional standards might lead to better outcomes. The research we obtained indicated that both in the UK and non-UK markets advisers meeting higher professional standards give more suitable advice. We have summarised this research, and the main findings, in the following paragraphs: a) Professional Standards and Consumer Trust26: This research found that in the longer term, measures to improve compliance with professional standards may result in improved consumer trust and engagement in markets. b) Professional Standards Bodies: Standards, Levels of Compliance and Measuring Success27: This research demonstrated that professional bodies operating in markets with potentially similar consumer problems are taking a broadly similar approach to us in standard setting and establishing processes for monitoring and enforcement. c) Linking Professional Standards to ‘Consumer’ and Other Outcomes in the Financial Sector28: The research presents two case studies showing positive links between standards and outcomes. The first was a review of financial planning advice by the Australian regulator and consumer agency. The evidence suggests that qualification at the level of higher education and engaging in Continuing Professional Development (CPD) contribute to increasing professionalism and improving the quality of financial advice. The second study aimed to identify whether qualifications of fund managers could be used to explain differences in the performance of their funds. The research concludes that clients with advisers holding professional membership and/or higher qualifications ought to improve outcomes. d) Platforms thematic review29: Our data from early 2010 on platforms shows the advice of advisers meeting current qualification standards was deemed to be ‘suitable’ less often than that of advisers with a similar qualification to the new standard. e) Major banking group - internal review: The review analysed quality of advice provided by level 4 and level 3 advisers. Analysis of fail rates (a measure of ‘poor’ quality) and risk scores (a blend of Key Performance Indicators including complaints) showed that indicators were better for higher qualified advisers.

71. In the longer term the RDR should remove some of the negative perceptions of the advisory process, which undermine confidence and often deter people from seeking advice. This could provide further opportunities for the advice sector.

26 Professional Standards and Consumer Trust, Wells and Gostelow (2009) 27 Professional Standards Bodies: Standards, Levels of Compliance and Measuring Success, Professional Associations Research Network (2009) 28 Linking Professional Standards to ‘Consumer’ and Other Outcomes in the Financial Sector, Professional Associations Research Network (2010) 29 CP10/14, FSA (2010). This information is based on 12 firms and 46 advisers and 113 cases. 55

CONCLUSION

72. The number of people currently seeking advice, as a proportion of the population, is small. If more people are to seek advice in the future, then they must both trust the advice and view the service as good value for money. Our proposals address both these issues by improving the likelihood of there being trust and confidence in the market and by making clear to consumers the cost of advice and the nature of the service they are going to receive.

73. The RDR is absolutely vital if we are to build consumer trust and confidence in the advice sector. We expect the package of changes we are making will result in a sustainable market that is a better place in which to do business in the long-term and advisers will be better equipped to give good quality advice. Any dilution of the proposals will result in an increase in the cost to consumers through continued unsuitable advice.

74. We will continue to support advisers towards the end-2012 deadline to ensure they fully understand the new requirements. We will be running further industry events this year, producing more material - particularly for smaller firms - and continuing our supervisory programme to assess firms’ readiness for the RDR.

January 2011

Written evidence submitted by Investment and Life Assurance Group

1. Executive Summary

1.1 We welcome the Committee's decision to re-examine this issue and the opportunity to put forward our views on FSA’s objective to create a transparent charging system, clarity around the types of advice open to consumer and increase the professional standards of advisers, or consider if they could be achieved in other ways.

1.2 In their discussion document DP07/1 (June 2007), FSA set out the six outcomes it sought to achieve its aims. However, we feel the evolution of RDR is flawed and falls well short of these intentions. The only area where we feel that real progress has been made concerns qualifications, although this remains a huge issue for advisors.

1.3 Whilst it is good that professional standards for advice would be raised, there appears to be widespread agreement (including from FSA) that the availability of advice will reduce. Advice will be unaffordable for the ‘mass market’, creating isolation and forcing this group to make decisions alone. This cannot be a good outcome for customers and would be extraordinary given that RDR has been driven by a regulator who has been promoting an expectation to ‘Treat the Customer Fairly’ several years.

1.4 Whilst we are aware that that some firms and ABI have been working on simplified advice (which could address the needs of the mass market), we do not believe that a solution is imminent. In any case, in order to make simplified advice work firms need certainty that such a process will not fall foul of future regulatory or FOS actions; we are not aware of any comment on this aspect from FOS / FSA to date.

1.5 Moreover, there are current EU consultations (MiFID and IMD) that might restrict execution only / non advised distribution. If this should this happen, how will the mass market access to investment products other than via unaffordable fee based advice? Presumably their only option would be cash deposit accounts?

1.6 We also do not think that RDR will significantly increase confidence in the financial services industry and suspect it may well not be understood in any level of detail by most of the population.

2. FSA Outcomes

Our view on the downsides of RDR's evolution against the FSA’s outcomes are illustrated below:

An industry that engages with consumers in a way that delivers more clarity for them on products and services

2.1 It is difficult to see the division of advisory services (independent, restricted etc), delivering any improved clarity for consumers. In particular those not already engaged with the industry, who must be drawn into and attracted to the products and services on offer.

A market which allows more consumers to have their needs and wants addressed

2.2 Indicators continue to suggest that a significant number of advisors will leave the industry, and the FSA has indicated that a 20% reduction is acceptable. It is difficult to see this outcome being achieved, certainly in the short to medium term. We think that it is highly questionable whether there is justification for the acceptance of the exit of such a large proportion of advisors from the market.

Standards of professionalism that inspire consumer confidence and build trust

2.3 Despite recognizing the long period to conclude what "professionalism" actually looks like (in terms of qualifications), in general we think there is overall agreement that this is a good outcome. However, we are not aware of consumer views on what would generate confidence and trust.

Remuneration arrangements that allow competitive forces to work in favour of consumers

2.4 We do not think there can be any doubt about the downside and negativity of commission, but are doubtful that the payment of fees will be acceptable to the population as a whole. The leap from commission to fees is too severe, and will alienate the mid to low markets. Consideration should, perhaps, be given to imposing maximum commission agreements to ensure a level playing field with penalty for both provider and advisor if levels are exceeded. This would serve to focus attention firmly on products and service.

An industry where firms are sufficiently viable to deliver on their longer term commitments and where they treat their customers fairly

2.5 High level comparative analysis of FOS complaints data suggest that there appears to be greater likelihood of IFAs delivering the service expected than, say, banks. Whilst acknowledging that there is evidence that banks have controls over their sales force and have sales compliance in place, it is clear that some bank sales practice has created some very poor outcomes (eg PPI).

A regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers

2.6 We appreciate that the Review was intended to generate debate on the 58

proposition that distribution of financial services is in some way broken, and that there have been examples where distributors have clearly acted with little or no regard for the consumer. Whilst we have no wish to defend such practices, it remains our view that, whilst RDR outcomes are laudable, we do not yet see comprehensive delivery of them.

January 2011

Written evidence submitted by AXA UK

AXA UK is one of the largest insurers in the UK and markets a broad range of products and services for individuals and businesses. Products are distributed primarily through brokers, intermediaries, corporate partners and direct to consumers. AXA Wealth, AXA Insurance and AXA PPP healthcare form part of AXA UK which in turn is part of the AXA Group, a worldwide leader in financial protection. AXA’s operations are diverse geographically, with major operations in Europe, North America and the Asia/Pacific area.

1. Executive Summary

1.1 AXA believes that the Retail Distribution Review (RDR) will deliver a more transparent and fairer charging system for customers who choose to pay for financial advice. It will remove commission bias, a feature that currently means there is a potential conflict of interest and furthermore, the new framework around advice will provide much greater clarity around the type of advice being offered to customers.

1.2 The RDR was launched in June 2006. Through a comprehensive consultation process providers and advisers alike will have known from the outset both the parameters and timeframe being contemplated by the Financial Services Authority (FSA) for the implementation of the RDR. Since over four years have now passed we are surprised that fundamental questions around whether there are better ways of delivering the desired outcomes are now being asked. We believe the RDR will deliver the better outcomes for consumers needed to restore trust and we do not feel that the industry will be well served if either the timescales for the introduction of the RDR are delayed or the proposals are somehow watered down.

1.3 One of the outcomes of the RDR may be the creation of an ‘advice gap’ which will have the potential to disadvantage some consumers who may find it difficult to access suitable advice, because some advisers have walked away from the new regime rather than undertake the necessary qualifications. For this reason AXA has called for a simplified advice service that would sit above basic advice and below full advice. While we understand this is not a simple process to define and implement, we believe more could be done by all parties to find a solution.

2. A transparent and fairer charging system

2.1 There can be little argument that commission payments have helped to perpetuate product bias and spurious buying behaviours across providers, advisers and consumers. Many customers continue to believe that advice is free and on the basis that products and services that are given away freely are often perceived as being of little or no value, we need to move away from this as a basic concept. Customers would expect to pay for the services of a lawyer or accountant; we need them to expect to do the same for financial advice. Commission payments have a material impact on the performance of a particular product - a fact that is not widely understood by consumers. Fundamentally a 60

charging system based on commission is unlikely to offer the same degree of transparency as one based on paid advice.

2.2 Recent mystery shopping exercises continue to show that payment by commission leads to a conflict of interest and by removing the potential for commission bias to distort buying patterns, the RDR will also deliver a transparent and fairer charging system. Historically, it has been widely acknowledged that the commission system has, in part, created a culture of product bias, and resulted in a long list of mis-selling issues, that has significantly damaged the reputation of the industry.

2.3 AXA completely agrees with the ban on commission payments; indeed this has increasingly been our model of operation, particularly since the acquisition of Winterthur, which was built on a fee-based system, and the launch of Elevate, our wrap platform business, both in 2006, which has been developed as a new model, open and transparent proposition, costing already around £40 million in investment spend.

2.4 Furthermore, the current model is clearly letting down consumers. Hector Sants, in a letter of 13 December 2010 to the Treasury Select Committee’s Chair noted that the annual cost to consumers from the sale of “unsuitable products” amounted to somewhere between £400 – 600m. Developing the framework for a market in regulated products in which consumers pay for advice upfront thereby enabling them to receive the best products for their circumstances, rather than that of their adviser, is essential to tackling this problem. This should also lead to a more efficient regulatory structure which may provide the potential for a regulatory dividend.

3. A better qualification framework for advisers

3.1 AXA has noted that many Independent Financial Advisers (IFAs) have already reached the necessary qualification standard so as to be able to give full investment advice under the new regime. We fully expect this number to rise significantly before the end of 2012, particularly in the knowledge that qualifications can be obtained by techniques that are not solely reliant on written examinations – a feature that may well deter a number of experienced practitioners.

3.2 In order to raise standards, restore trust in the financial services industry and turn independent advice into a recognised profession, whereby advisers are treated with a comparable level of professionalism alongside the likes of architects, accountants and the teaching profession, it is only right that they should be required to adhere to a common set of professional standards set at a meaningful level. The RDR’s implementation is essential to achieving this. The requirement to obtain a general qualification would put IFAs on a similar footing to, as mentioned, architects who must meet the standards of the Architects Registration Board on an annual basis in order to maintain their registration or teachers who must obtain a PGCE to practise and are consistently reassessed by external regulators.

3.3 AXA would therefore not welcome any relaxation to accommodate ‘grandfathering’ whereby mature advisers with long (and unblemished) service in the industry would be able to offer full advice without need of the necessary qualifications. This is because professional standards need to be raised throughout the UK and, similarly, we would not advocate any relaxation in standards that would allow advisers in rural communities to operate within a different qualification regime.

3.4 Fundamentally the reason for not creating provision for grandfathering is that the changes heralded by the RDR have been in the public domain since 2006. By the time the RDR’s provisions take effect IFAs and other advisers will have enjoyed 6 ½ years notice. This is ample time for advisers to obtain the necessary qualifications needed or plan their exit from the industry.

3.5 AXA would assert that the RDR is a huge opportunity for the industry to demonstrate that some of the practices of the past should have no place in the profession, and that those who may be arguing out of self-interest to preserve the status quo, which we believe leads to significant consumer detriment, are in the minority. AXA believes if we hold firm to the principles of the RDR then it will create a powerful legacy for future generations of consumers requiring independent financial advice.

4. Greater clarity around the type of advice being offered

4.1 AXA believes that there continues to be a genuine lack of understanding around the type of advice being offered and to whether this advice is truly independent, covering the full range of investment options or restricted (for example advising on products from one or a limited range of product providers).

4.2 Whilst we do believe that greater thought could be given to a simplified advice regime, AXA supports the clear separation between Basic and Full advice. The obligation on advisers to ensure that customers are aware of the differences will go some way to correcting the current issues in the marketplace.

4.3 What is more important is that the advice can be trusted. From the 2006 baseline survey of financial capability we are aware that 70% of consumers do not seek advice from a professional adviser but it is worrying that 40% of consumers who have used an adviser say that they do not trust financial advice. The fact that 40% do not trust advice they have received serves to bolster the case for qualifications and the removal of the proven biased commission regime. Clearly the current model is providing a disservice to those consumers who do use it.

5. Basic, simplified and full advice

5.1 AXA believes that further consideration should be given to the concept of simplified advice. One of the impacts of the RDR might be to push a number of advisers ‘upmarket’ to serve the needs of the higher net worth customer. With 62

the needs of the basic advice customer relatively well served by the existing infrastructure (albeit recognising that the launch of the National Financial Advice Service – previously known as Money Guidance – has been put back a year because of budget cuts) this will potentially create an advice gap. AXA has supported the idea of a simplified advice concept although little progress has so far been made.

5.2 A solution must be found that provides a trusted advice model for those on lower incomes or for those with less sophisticated financial services needs. AXA is keen to see more focused consultation to identify a workable solution that is simple for customers to understand, cost effective for firms to administer and in keeping with the principles of the RDR.

January 2011 63

Written evidence submitted by the Association of British Insurers

1. The Association of British Insurers1 (ABI) represents the views of the UK insurance industry including investment, pension and long-term savings providers. The Retail Distribution Review (RDR) will change the future relationship between our members, advisers and customers.

Executive summary

2. Despite the significant costs to the industry of major changes to systems and product design, the ABI and our members have supported the principles of the RDR since the review began in 2006. We believe the RDR will improve consumers’ experiences when accessing financial advice and address a number of long-standing market problems including:

• the financial incentive which rewards advisers for distributing products; • the potential for advisers to favour some products or providers based on the level of commission payable; • the mis-selling of financial products; • a lack of awareness amongst consumers that they are paying for advice; • the low level of minimum qualification standard required to provide financial advice; • a minority of advisers providing a poor standard of service, that are undermining consumer trust in the wider industry. We think the RDR will deliver important benefits and increased trust amongst consumers. However, this is in danger of being undermined by a disproportionate focus on professional standards within the advisory community.

3. We believe the introduction of adviser charging will create a more transparent and fair charging system. According to research we commissioned in 2008, consumers find the concept of adviser charging straightforward to understand and it removes the misconception that advice is free.2 The research also found that adviser charging should help rebuild consumer trust in financial advice by removing any perception of bias.

4. We agree that the RDR will help lead to an increase in adviser professionalism by raising the minimum qualification standard. At the end of 2010, we undertook a consumer survey which found that 92% of people believe advisers should hold a higher level of qualification than the current minimum standard.3 The new qualification framework is an integral part of the RDR and we believe it should improve consumers’ experiences when receiving financial advice and help build a profession on par with accountants and legal practitioners.

1 The ABI is the voice of the UK’s insurance, investment and long-term savings industry. It has over 300 members, which together account for around 90% of premiums in the UK domestic market. The UK insurance industry is the third largest in the world and the largest in Europe. Employing more than 300,000 people in the UK alone, it is an important contributor to the UK economy and manages investments of £1.5 trillion, over 20% of the UK’s total net worth. 2 Charles Rivers Associates on behalf of the Association of British Insurers, Customer Agreed Remuneration: Research into the market impact of encouraging customer agreed remuneration, 2008 3 Association of British Insurers, ABI Quarterly Consumer Survey 2010 Q4, 2011 64

5. We also believe the RDR will provide greater clarity for consumers around the type of financial advice an adviser offers. The changes should help ensure consumers are aware of any restrictions on the scope of the advice, the range of products which could be recommended and the providers’ products available through the service.

6. Although we are supportive of the RDR and believe the changes will address long-standing market problems, we are concerned they could lead to consumer detriment by further reducing the number of people who feel financial advice is suitable and affordable for them. We have consistently encouraged the FSA to deliver on one of their primary objectives for the RDR – to enable more consumers to have their needs and wants addressed.4 As we outline in our response below, the industry is keen to work with the Government and regulator to ensure all consumers are able to access financial advice and financial products appropriate to their needs. This will ensure the RDR benefits all consumers, including those who cannot afford, or do not require, full financial advice.

7. We are also concerned that further regulatory and political initiatives emanating from the EU Commission (MiFID, PRIPs and IMD review) and the Government (Simple Products) have the potential to either enhance or undermine the benefits of the RDR, depending on how they are taken forward. We continue to encourage Government and regulators to ensure that the implementation requirements and timetables for all changes are harmonised wherever possible, keeping industry costs, ultimately passed on to consumers, to a minimum.

8. Our evidence to the Treasury Committee has been provided under the four main objectives of the RDR.

A transparent and fairer charging system 9. The ABI supports the RDR ban on commission for advised sales. This has been developed in consultation with the industry over several years and is consistent with the views expressed by the Treasury Select Committee in 2004 who commented: “In the Committee’s view it seems likely that as long as most of the selling activity in the long-term savings industry is rewarded on a commission basis, many savers may remain suspicious that they are being sold a product for the wrong reasons. Shifting away from the current commission-based sales system common in much of the industry is likely to be a key component of any strategy to rebuild consumer confidence in the industry”5

10. We are concerned that the current commission model does not encourage good consumer outcomes as it rewards quantity over quality of product sales and can lead to incentives to inappropriately favour some products over others. According to research we commissioned in 2005, these commission payments undermine consumer trust in the financial advice process.6 In contrast, separate research found that the introduction of adviser charging will contribute to an increase in consumer trust.7 We believe adviser charging is a fairer charging system than the current commission model as it removes any perception of bias by ensuring

4 Financial Services Authority (FSA), Retail Distribution Review: Including feedback on DP07/1 and the interim report, 2008. 5 House of Commons Treasury Committee, Restoring confidence in long-term savings, 2004 6 Charles Rivers Associates, Study of intermediary remuneration: A report for the Association of British Insurers, 2005 7 Charles Rivers Associates, Customer Agreed Remuneration, 2008 65

advisers receive the same level of remuneration irrespective of the product or provider they recommend.

11. We believe adviser charging is also a more transparent charging system which helps consumers understand how much they are paying for advice and appreciate they are receiving a valuable professional service. Under the current commission-based model, consumers indirectly pay for advice through higher product charges, although many do not appreciate this. As our Q4 2010 Consumer Survey shows, 70% of people who have received full financial advice believed it was free.8 With adviser charging, consumers will be clear how much they are being charged for the advice and the impact this has on their investment.

12. The ABI also supports the extension of the RDR to the corporate pensions market, where group pension schemes are arranged by employers for their employees. We believe it is appropriate to ban commission payments by product providers to advisers in this market. Many of the market problems evident in the retail investment space occur in the corporate pension market. Applying RDR style reforms to this market should help correct these problems and help lead to better consumer outcomes.

A better qualification framework for advisers

13. The ABI supports the RDR requirement for financial advisers to achieve a new higher level of qualification to provide financial advice. This has been increased to QCF Level 4 from Level 3 standard which has been in place since 1994. We believe the change will lead to an increase in the quality of advice consumers receive, which should further increase consumer confidence. Although challenging, we believe the new qualification is achievable. We are aware that a large number of advisers have already made significant steps towards achieving the new higher level of qualification. Furthermore, some product providers, such as Aviva, Scottish Widows and Standard Life, have opened academies to help advisers meet the new standard.

14. We support the FSA’s decision not to allow existing advisers to be ‘grandfathered’ through the increased qualification requirements. This would have enabled existing advisers to be permanently exempted from the new qualification requirement. We support this position for five main reasons: i. The new minimum qualification is at a fairly low level. ii. Advisers have had a number of years to complete the new qualification and still have two years before the new rules come into force. There is also a ‘no-regrets policy’ allowing advisers to fill any gaps in their knowledge with Continual Professional Development rather than sitting formal examinations. iii. Any advisers that prefer not to sit a formal exam can choose an alternative form of assessment, such as an on the job assessment. iv. Allowing grandfathered advisers to continue providing advice could create consumer confusion, as consumers could think an adviser is more qualified than they really are. v. It could also undermine the benefits of the RDR in increasing consumer trust in advice. 66

15. We believe grandfathering will undermine attempts to increase adviser professionalism. If grandfathering were allowed, most advisers would take advantage of the option, including younger advisers in their 20s or 30s, who would continue practicing under their existing qualification until they retire or leave the industry. This would significantly delay the benefits of the RDR from being realised. For those who have already studied and made major inroads into, or achieved, the required qualification, any change in policy at this stage would be seen as a retrograde step appeasing those unwilling to make efforts to demonstrate their professionalism.

Greater clarity around the type of advice being offered

16. The ABI supports the requirement for any individual delivering advice on a retail investment policy to disclose what type of advice they offer. We believe it is important for consumers seeking financial advice to be given clear information about the service an adviser offers. This ensures they are aware of any restrictions on the scope of the advice, the range of products which could be recommended and the providers’ products available through the service.

Enable more consumers to have their needs and wants addressed

17. Although we are supportive of most of the RDR reforms, we are extremely concerned that an unintended consequence of the RDR will be to reduce the number of consumers who can access financial advice and financial products. According to research commissioned by the ABI in 2010, an existing full advice service typically costs £670 and is beyond the reach of about two-thirds of the UK adult population.9 Although many full advice propositions provide an excellent service for affluent individuals, the research has found that they are too expensive for many mass market consumers.

18. At the outset of the RDR the FSA outlined the key outcomes the review was looking to achieve. Three of these were covered by Hector Sants at the Treasury Select Committee meeting on 23 November 2010 and have been covered already in our response. However, a fourth and equally important objective is now being omitted by the FSA. In addition to improving consumers’ experiences when accessing full financial advice, a key objective for the RDR was to ensure more consumers could have their needs and wants addressed.10 Both the ABI and our members believe the RDR as it stands fails to deliver on this promise. Indeed, it is widely predicted that the cost of full advice will grow following the introduction of the RDR. This will prevent a large and important group of consumers from accessing advice and products that will enable them to save for their future and ensure their families are protected in a way that best meets their individual circumstances.

19. In 2010, the ABI undertook a review of existing research which found that consumers prefer to access investment products with financial advice.11 For this reason, we are very supportive

8 Association of British Insurers, ABI Quarterly Consumer Survey 2010 Q4, 2011 9 Charles Rivers Associates on behalf of the Association of British Insurers, Cost of providing financial advice: Identifying and quantifying the costs of the key components of a full service, 2010. 10 Financial Services Authority, Retail Distribution Review, 2008. 11 Association of British Insurers, Research Brief: Financial advice and information research review, 2010 67

of Government plans to offer a free annual health check. To complement this, and the Government’s recent announced plans for a simple range of products, we have developed proposals for a simplified advice process. Simplified advice could help consumers who need more than information and a financial health check but cannot afford, or do not require, full financial advice. As part of the process, consumers would receive a personalised recommendation suitable for their needs which can be delivered through a range of distribution channels, including the internet.12

20. The ABI and its members are keen to work with the Government and FSA to enable firms to develop simplified advice models and make these available to consumers. In particular, as this is a new type of financial advice there is currently a high degree of uncertainty around how the FSA’s supervisors and the Financial Ombudsman Service will view purchases made through such services. The industry requires regulatory guidance which clearly outlines the rules and practices which will apply. Unless the FSA takes urgent action to help more consumers to access financial advice and financial products, there is a danger that the RDR will marginalise those consumers who cannot afford full financial advice. This would limit the benefits of the RDR to a wealthy few.

January 2011

12 For further details of the ABI’s simplified advice proposals see: Association of British Insurers, Increasing consumer access to advice, May 2010 68

Written evidence submitted by Garry Heath, Life Change Ltd

Nearly 10m Million Orphans

The Retail Distribution Review Section 1 concentrates on the number of clients who can depend on receiving IFA advice after RDR comes into force. It also looks on how the RDR proposals engage with the FSA Objectives under the FSMA 2000 Section 2 is a critique of the proposals, the reasons for their existence and their likely outcomes. Section 1 – RDR: How many clients will lose their adviser? In 1999; The IFA Association was asked by the EU to estimate the number of clients covered by the IFA sector in the UK and concluded that 10m was a reasonable estimate. In the last 10 years, the market share of the IFA sector has increased 10% from 58% to 68%. ABI Statistics This would give us an estimate for the current number of IFA Clients as circa £12m. Ernst and Young As a check, the ABI offers current figures on pensions held. From this it is clear that there are over 18.5m individual pension policies serviced by the IFA sector. There is also 1.5m occupational pension who will have multiple beneficiaries. Even allowing for some clients having more than one pension - 12m IFA clients appears a very modest estimate. It may be significantly higher. ABI Statistics 2011 When RDR is completed two actions will have happened: 1) A significant percentage of the current older advisers will refuse to complete the new examinations and will decide to retire en masse in 2012/3 leaving their clients unadvised – Estimates start at 30% (Ernst and Young) and top around 50% (Deutsch Bank). The diagram below takes the lower estimate 2) In order to substantiate the fees charged the adviser needs to gives a more detailed and more labour intensive service to the reduced number of clients. This new IFA remuneration system is commonly called the New Model Adviser (NMA) concept. There are so many hours in the day and this maximises the number of clients each adviser can handle at around 200. Currently; established advisers may have 800 - a loss in capacity of 75%. Lose Ca p acit 30% y

for advisers 12m IFA Clients 2.1m Fee paying

8.4m clients onl clients y

25%

3.6m Orphans 6.3m Orphans Total 9.9m Orphans

3) To move to the NMA; the adviser needs cut the number of clients by around 75% from 800 to 200. The traditional IFA distribution model has depended on each adviser 69

dealing with a pool of around 800 clients with between 100 – 150 clients receiving advice in any one year; giving an average client turnaround time of between 5 and 7 years.

4) The move from the traditional IFA distribution to the Post RDR fees only model requires the adviser to slim down those advised to those who: a. Can and are willing to pay for the advice. b. Are of a number that can be given the elevated level of service Typically the adviser top slices 150/200 of their wealthiest clients able to pay an annual fee, often based on a percentage of the funds invested. The remaining 600 clients receive little or no servicing. At best, this leaves 75% of those clients with advisers with no practical access to that advice There are currently 28,714 advisers in the IFA sector down 11% from 2008. Matrix Data 2011 There is no significant spare capacity in the adviser population to absorb orphaned clients

Can the FSA use their statutory objectives to justify RDR? The Financial Services Authority is tasked by the Financial Services and Markets Act 2000 with four statutory objectives: Market Confidence - maintaining confidence in the financial system; Financial Stability - contributing to the protection and enhancement of the UK financial system Consumer Protection - securing the appropriate degree of protection for consumers; and The Reduction Of Financial Crime - reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime. a) RDR cannot be justified in terms of Consumer Protection, Market Confidence or Financial Stability as a large number of consumers will lose access to their adviser and be forced to use distributions with vastly poorer consumer protection records. b) It cannot be justified in terms of Consumer Protection as despite a decade of the regulators attempting to prove the widespread existence of commission bias – their research has not offered any significant evidence. c) It cannot be justified in terms of Consumer Protection as we have had over 200 years where the remuneration of advice has been primarily commission based. For over 15 years, any amounts of commission have been clearly identified to the consumer. There is no significant level of complaints from clients that they have been overcharged through the commission system. Interestingly this is not the case in the legal profession where fees’ overcharging is a major area of complaint. d) The option to pay by fees has always been available and has been rejected by the vast majority of consumers. The RDR proposals demand that the consumer chooses between paying for Independent and whole of market advice in cash or receiving restricted sub standard advice by commission. There is no consumer pressure for this change. e) There is no Reduction of Financial Crime argument in the RDR proposals.

f) Surely changes in the market should either be consumer driven or by widespread evidence of abuse. Neither of which apply here.

Section 2. Critique of the current RDR proposals and their proponents It has proposed two major changes which must be considered from the current clients’ point of view. The FSA seeks to create a new level of examination which all advisers wishing to denote themselves as Independent must pass by 2013 a) There is no popular demand from clients for yet another hike in examination standards and no evidence of significant client disadvantage being created by the current regime. b) The average age of an IFA is 54. Therefore there are many advisers in their 60 and 70s. Many are unwilling to go though yet another set of exams having passed previous versions and maintained annual continuing professional development. c) Since 1988, there has been 23 years of regulation in which an increasingly expensive series of regulators have overseen in increasing detail every IFA practice in the UK. As a result, a significant number of incompetent and dishonest advisers have been removed in the 23 years. d) The vast majority of those who are left must have both a satisfied regulator and a happy and contented client bank. Otherwise they would have a poor complaints record or no longer be in business. Discontented clients do not return. e) The new examinations do not take into account that many IFAs are generalists who pass clients with specialist needs to other colleagues. f) A number of advisers will simply retire. Estimates start at 30% (Ernst and Young) and top around 50% (Deutsch Bank) g) Currently there are no grandfathering provisions and therefore the whole provision is open to challenge via human rights legislation. h) These proposals are also against the Treaty of Rome as passported Non UK advisers will be able to continue to act as they see fit whilst UK advisers will restricted by the new proposals. Successful challenge was made to the French Authorities in the 1990s when they created a very similar system. RDR seeks to impose a single method of fees based remuneration on any firm giving investment advice that wishes to promote itself as being independent. i) There is no popular thirst amongst real consumers for this to happen. It is a non-issue. Complaints about the current remunerations system are so small; the FOS does not even track them. Some professional consumerists may want to create a “perfect market” but it does not have popular support. j) In suggesting RDR; the regulator takes no account of the willingness or ability of the vast majority of clients to pay fees. This group does not pay fees for financial advice because historically the cost of advice was absorbed in the cost of the product. k) Whilst clients see the advice as valuable in the abstract; traditionally it has been “free” and this opinion and behaviour will not change overnight by regulatory decree. l) The regulator has also ignored the likelihood of clients being forced to pay 20% VAT on their fees which does not happen under of commission.

m) Consumer surveys on this issue have put the potentially acceptable rate per hour from £0 - £50. 25% of what may be considered an economic rate. n) The top 25% of the wealthiest clients are more used to paying fees, usually in their business lives, and are therefore more willing to accept a fee based solution delivered at an economic rate. It is these clients that fuel the New Model Adviser concept (See Above) o) Clients unwilling to pay fees will be forced to seek “restricted advice” which will mostly be delivered by Banks and Insurance Companies; both of whom have a demonstrably poorer regulatory record. p) For every one IFA client complaining the Financial Ombudsman Service; there are 47 Bank customers purchasing the same range of products. q) IFAs are not in the position of many professionals who derive a considerable amount of their income from “distressed sales” caused by the system or events. Example: Clients who seek solicitor’s advice on Inheritance, divorce and civil disputes do so because there has been event which needs urgent resolution through the legal system. The same is true for accountants and medical professionals. r) The whole purpose of an IFA is to create a solution to a potential event before it happens and therefore there is no urgent event which triggers the client’s need to visit his adviser. All IFA income is derived from making a client understand that they need to use some current income to avoid a potential event in the future. Who wants RDR? The whole concept seems illogical if you believe that regulators are meant to protect clients. It has everything to do with a change in the distribution of financial services, removing the influence the IFA sector on pricing by restricting it to a fee based income only. • The excuse is that by creating the post–RDR world the consumer will face less misadvice. Mark Hoban in a recent speech suggested that the IFA sector has caused the Pension Review. Bank customers were 8 time more likely to be judged in need of compensation for misadvice than IFA clients. The misadvice is primarily in the Banking sector, where it is both endemic and structural, a more productive action might be to do something positive about this abuse. But it appears not only are banks “too big to fail”, they are also “too big to regulate”. • Informed sources suggest that at a FSA executive meeting in March 2010 it was suggested that the RDR proposals should be shelved but this did not happen as the FSA “didn’t want to lose face”. • The FSA sees RDR as a convenient diversion from their total failure to prevent a massive banking crisis and in its general inability to regulate the poor market practices of the UK’s High St Banks. The FSA also wishes to remove the smaller players from the market as they deem larger firms easier to regulate. • Product providers who both want a bigger share of the retail market and hope that shrinking the IFA sector will lead to a less sophisticated and easier to manipulate market creating greater margins for them. • Theorists who see RDR as another step to some form of “perfect market”. • A number of professional bodies who will receive increased membership and fees due to the new level of exams and for whom RDR has been a long term policy objective.

• Fee Based Advisers who wish be the only beneficiaries of the goodwill built up by all IFAs in the last 30 years and to top slice the wealthier clients from the much wider IFA sector which will then offer no competition • The Banks who want to marginalize the influence of the IFA sector particularly in the SME market and make the Independent sector an eccentric minority servicing HNW clients. Conclusion: There is nothing in the RDR proposals that cannot be done as a consumer market driven improvement. Its enforcement has nothing to do with consumer protection and everything to do with the keen lobbying of the major players.

January 2011

Written evidence submitted by Seymour Pierce

THE FSA RETAIL DISTRIBUTION REVIEW

1. This submission is made by Seymour Pierce Ltd (“SPL”), a firm of stockbrokers which traces its history on the London Stock Exchange back to 1845. We provide stockbroking services to both institutional and private clients. SPL is a member of APCIMS and supports the submission made by that trade body.

Executive Summary

2. SPL supports the FSA’s aims in devising the Retail Distribution Review (“RDR”) to address persistent problems in the retail investment market and reduce the risk of mis- selling and other consumer detriment. However, we believe that the implementation of the RDR in relation to stockbroking is fundamentally flawed. The RDR will impose substantial costs upon stockbrokers when there is no evidence either that stockbrokers have had similar failings to those in other parts of the retail investment market, or that the RDR will address those failings which have been observed in private client stockbroking firms.

3. The requirement for existing investment advisers to take examinations is particularly illogical and particularly increases firms' costs.

4. The additional cost and bureaucracy which the RDR will impose on the provision of stockbroking advice to private clients can only reduce the availability of advice to such clients. This seems completely unnecessary when the FSA has no evidence that the RDR is necessary to address any failings in the private client stockbroking market.

Differing Business Models

5. Although private client stockbrokers, independent financial advisers, and the direct sales forces of banks and insurance companies all give investment advice to consumers, and are therefore all affected by the RDR proposals, in fact they are very different businesses. Stockbrokers provide services to a completely different client base, and in a completely different way, than do IFAs and bank/insurance company direct sales forces engaged in financial planning and advising clients on their overall financial situation.

6. As a stockbroker we focus solely on advising clients on readily realisable investments – primarily securities traded on recognised stock exchanges. The RDR was designed to address the failings of IFAs and the direct sales forces of banks and insurance companies; it is unnecessary and disproportionate for stockbrokers. The FSA states that they regard three measures as most fundamental to delivering their desired market outcomes:

• To improve the clarity with which firms describe their services to consumers; 74

• To address the potential for adviser remuneration to distort consumer outcomes; and • To increase the professional standards of investment advisers.

7. There is no evidence that any of these issues have been a concern within the private client stockbroking industry. We recognise that there have been examples of very improper behaviour by stockbroking businesses – such as the high-pressure “boiler- room” operations of Pacific Continental Securities UK Ltd and Square Mile Securities Ltd – but these problems were not such as would be corrected by the RDR project. Those firms deliberately adopted a business model involving high-pressure sales of high-risk securities to inexperienced investors. They were clearly in breach of any number of existing FSA rules and principles. FSA already has plenty of enforcement tools available to take action against such firms and to its credit has already done so, in advance of the RDR coming into effect.

8. As no evidence has been presented of market failure in relation to private client stockbrokers which would be addressed by the RDR, the RDR will not result in any benefits to clients which could conceivably outweigh the significant costs which will be imposed on the firms involved.

Adviser Charging

9. SPL strongly supports the proposal that an investment adviser should only be paid by his own client and should not be remunerated in any way by a product provider. Stockbrokers already operate on this model. In our opinion, this commission-bias has been the root cause of most mis-selling by IFAs and should be abolished.

Professionalism

10. SPL has no objection to the proposal to increase the standards of the threshold examination for new entrants to the industry from Level 3 to Level 4 standard.

11. We do, however, have a very strong objection to the decision that for the first time grandfathering of existing staff will not be permitted and that therefore all existing investment advisers will be required to take the examination. The objection is based upon a number of grounds: • There is no evidence that historic examples of mis-selling (personal pensions, endowment mortgages, insurance bonds, payment protection insurance etc) were caused by a lack of training or competence by investment advisers. Rather, they were caused by commission bias; • There is no evidence that passing an examination improving knowledge and understanding of investment products leads to investment advisers being less likely to engage in mis-selling or any other improper behaviour. This is particularly the case for private client stockbrokers providing focused advice on traded securities: the content of the required examination is much broader than the scope of the services that we actually provide, so the examination necessarily 75

includes much material that has no relevance for private client stockbrokers. Having passed the examination, our investment advisers would have no use for this information so would be unlikely to remember it;

• Since 2001 we have been required under existing FSA rules to ensure that our staff have been formally assessed to be trained and competent to advise their clients, and that they maintain their competence through ongoing relevant Continuous Professional Development (“CPD”) training. Our existing staff are already competent, and the FSA has no reason to believe that they are not. • The proposal imposes very significant costs on firms, in particular because the timetable for taking the examinations is completely impracticable.

12. We have identified no client demand at all for enhanced qualifications for our advisers. In fact, we are not aware of any instance of clients asking about advisers' qualifications. What clients do want and expect to see in their advisers is thoughtful assessment of clients' requirements and a thorough understanding of risks, and they recognise that this expertise is built up over years of experience rather than by taking examinations. Regardless of qualifications, clients frequently do express concern if they perceive that their adviser is young, and therefore assume him or her to be inexperienced.

CPD training

13. As noted above, since 2001 we have been required under FSA rules to ensure that our staff undertake sufficient relevant CPD training to ensure that they maintain their competence to advise clients. However, we believe that the proposals in the RDR unnecessarily lead to additional bureaucracy and costs for firms and ultimately to higher costs for consumers. As we have an established CPD programme under the existing FSA rules, we believe that the extremely detailed and prescriptive proposals in the RDR are unlikely to yield benefits for clients outweighing the costs involved.

January 2011

Written evidence from St James’s Place Wealth Management

Introduction

1. This paper sets out comments from SJP on the three specific outcomes that the Financial Services Authority (FSA) seek from the Retail Distribution Review (RDR). We would be happy to meet with the Committee and provide further detail if it would be of assistance to the Committee.

2. By way of background, SJP is the leading provider of face to face wealth management advice in the UK with 200,000 clients and £27bn of assets under management. Readers of the Daily Telegraph recently voted that SJP was the Best Wealth Manager in the UK in 2010, the third time in the last four years we have won this award.

Executive Summary

3. Whilst we support some of the desired outcomes of RDR, most notably greater transparency, as recently set out by Hector Sants in his letter to this committee, we believe that some of the underlying data cited in support of RDR is, at best, flimsy. We have seen no substantive evidence to support the view that the desired outcomes will be achieved by RDR in its current form.

4. In particular, we believe there is a real danger that RDR will not achieve its objectives unless a focus is retained on total costs to clients rather than disclosing ‘unbundled charges’ which consumers will find confusing and hard to compare, as has been seen in other markets. The RDR demonstrates an unhealthy obsession about adviser charging the outcome of which is simply driving the market to re-engineer with no consumer benefit. Ironically, total charges could increase.

5. The RDR discusses the concept of a “level playing field” across the market. In reality such a level playing field does not and cannot exist due to the very different business models from sole traders through to large, well capitalised adviser firms and banks. Simply assuming rules for small firms can be applied across very different business models is disproportionate both in terms of application and also in terms of costs. It is also inappropriate and flawed. We believe that one of the key lessons from the recent financial crisis is the need to ensure the rules are able to effectively to cope with differences in business models, and not to rely on a ‘one size fits all’ approach.

6. We welcome the drive for better qualified advisers but believe that the RDR’s proposals are in danger of “throwing out the baby with the bathwater” in terms of the need for experienced, competent, professional advisers to cease working by January 2013 unless they have passed all the required exams by that date. We believe that such individuals should be allowed to continue to practice with appropriate supervision and responsibility taken for their advice.

7. We would welcome the opportunity to discuss these points with the committee.

Detailed Comments

8. Hector Sants, Chief Executive of the Financial Services Authority, advised the Committee that the Retail Distribution Review had three specific outcomes:

• A transparent and fairer charging system • A better qualification framework for advisers • Greater clarity around the type of advice being offered

We comment on each of these in turn.

9. A transparent and fairer charging system

9.1. We welcome the FSA’s desired outcome in this area but do not believe that the current approach to the RDR will achieve this. Indeed we believe that the RDR rules will lead to lack of transparency in total costs and increased levels of overall charges.

9.1.1. For the majority of investment products today, a single, comparable cost measure is disclosed to all clients called the Reduction in Yield (RIY). The calculation method is prescribed and used by all firms and enables consumers to compare costs.

9.1.2. The RDR rules lead to separate disclosure of the cost of the advice, the cost of the investment itself and, if relevant, the cost of the platform used to access the investment in a way that will make the total cost less visible. There may no longer be a combined RIY disclosure and consumers will struggle to understand the total cost payable for their investment. Whilst the components will be set out separately, how will the consumer understand the total costs and be able to compare them, as the example below highlights:

Investment A

An advice charge of 3% upfront and 0.5% each year An investment charge of 1% each year A platform charge of 0.5% each year

Investment B

An advice charge of 6% upfront An investment charge of 1.5% each year

Which investment has the lower charges – A or B? Whilst this can be calculated (and it depends on investment growth as well as time invested), it simply isn’t an easy comparison and transparency is lost.

Today’s disclosure would show a RIY for A of 2.3% and an RIY for B of 2.1% - a straightforward comparison.

Unbundling of charges will lead to lack of transparency and consumer confusion, as we have seen in other markets and industries (eg airline ticket pricing).

Lack of transparency in a market may lead to charges increasing to the detriment of consumers.

For the RDR outcomes to be achieved, we believe it is essential that total charges (for advice and product) are disclosed to clients in a simple and comparable form, such as the current RIY approach or an appropriately considered evolution thereof.

9.1.3. The present rules enable companies to use their resources to structure the charges to the client in a simple and transparent manner.

The RDR rules will force a return to “old fashioned” product structures from the ‘90s with upfront charges for clients. As Hector Sants acknowledged in his letter to your Chair on 13 December, the retail investment market has seen significant problems with mis-selling and associated consumer detriment, some of which has arisen due to these very product designs the RDR will mandate.

We are concerned that these rules will stifle innovation and restrict competition and thus distort the market for retail investments.

We believe that the desired RDR outcomes can be achieved without restricting product design and reducing choice to consumers and that the rules which give rise to this should be amended.

9.1.4. The separation of charges between advice and product presents challenges in terms of tax treatment for clients. As yet we do not have clarity from HMRC.

For example, if an adviser receives an ongoing commission from a product provider today (say 0.5% pa), this is paid for out of the product charges and has no tax implications for the client.

Under the RDR rules, an equivalent payment would be a payment from the client to the adviser, facilitated by the provider. This is an instruction from the client to withdraw funds from his investment and pay an adviser which could have tax implications for the client in terms of chargeable events or gains.

In addition, for the provider of the investment product, this change will affect their tax computation as the payment will no longer be treated as an expense and may lead to providers increasing charges to offset the loss of tax relief on what was previously 79

treated as an expense.

We do not believe that the details on these areas have been sufficiently worked through or clarified and urge rapid resolution of these aspects.

9.1.5. The RDR rules will only apply to firms which provide advice on retail investment products.

9.1.5.1. Firms which facilitate “execution only” services are outside the scope and often operate significant charges and receive substantial commissions.

We understand that many clients perceive some “execution only” services as providing investment recommendations.

We strongly believe that, if the FSA’s objective of transparency and a fairer charging system are to be achieved, all market participants must be within the scope of the RDR rules and disclosures.

9.1.5.2. The rules make no allowance for the very different business models which exist. For example, the risk of consumer detriment is very different with say an adviser in a bank with the full resources of the bank supporting the advice and responsible for it (and making it right if something goes wrong) compared to a sole trader adviser. We believe that the simple read across of the rules to all market participants is disproportionate and that the rules should be tailored to the different models which exist.

9.2. In summary, we do not believe that the outcome of a transparent and fairer charging system will be achieved by the current RDR.

With some changes to the current rules to ensure total cost disclosure and flexibility in product design we believe a better result can be achieved.

10. A better qualification framework for advisers

10.1. We welcome FSA’s desired outcome of better qualified advisers.

10.2. However, we do not believe that the consumer interest is served by a significant number of experienced and professional advisers leaving the industry purely because they have not passed the requisite exams by an arbitrary date.

10.3. We believe further flexibility is needed – for example experienced advisers who have made reasonable efforts to meet the qualification requirements by the December 2012 deadline should be able to continue to operate with appropriate supervision from a suitably qualified supervisor. 80

It would seem inconsistent to prohibit an experienced professional from operating in this way while a lesser qualified newcomer to the profession is advising clients under supervision.

We recommend that more flexibility is introduced for experienced advisers.

11. Greater clarity around the type of advice being offered

11.1. We do not believe consumers are terribly interested in the ‘type of advice’ being offered. They are only interested in whether the advice can be relied upon, ie can they trust the advice. The label used to describe the advice/adviser won’t alter that.

11.2. Simply because advice is labelled as “independent” or “restricted” does not guarantee a particular outcome. Indeed, the FSA recognise this in their approach to professionalism, rightly in our view, insisting that all advisers have the same minimum qualification, they also recognise that advice is not restricted for any adviser; it is the solution they use which potentially is. What is more important for consumers is the quality of the advice they receive and the financial resources and guarantees which stand behind it rather than the type of advice being given.

12. We believe the Committee should also be mindful of impending EU regulation which may overlap with some of the RDR scope. For example, the current consultation on Packaged Retail Investment Products (PRIPs). It is perhaps premature to proceed with RDR until we have clarity on EU regulation.

13. We have noted Hector Sants’ letter to your Chair of 13 December and, despite our support for the aims or RDR, the fact is, we believe this shows little evidence that RDR will work.

13.1. The underlying data is flimsy (the professionalism statistics on page 5 are based on a tiny sample of cases) and in places flawed (for example, page 2 cites an annual consumer detriment of £223m which simply does not follow from the preceding table).

13.2. We do not accept that RDR is necessary to avoid a reduction in cost to consumers through continued mis-selling. FSA has the powers and mandate to deliver this through its existing rules.

13.3. We do not believe there is any need for “dilution of the proposals”, but do believe refinement is necessary to increase the likelihood of RDR meetings its aims.

13.4. As we explain in our summary, by insisting on unbundling costs and introducing more fragmented disclosure, the RDR will lead to more difficulties for the consumer.

14. We welcome the Committee’s call for evidence and reiterate our willingness to discuss in more detail should it assist the Committee’s work.

January 2011

Written evidence submitted by Justice in Financial Services

Summary and introduction 1. Justice in Financial Services does not represent anyone. We have had support in the past fight injustices and there is a need for us again and we are seeking new support.

2. This document is based on the author’s perception of an industry he has been involved in since about 1 May 1952 when he was adopted by the investment manager of Britannic Assurance and a regulatory system he has worked with and written about since 1986. These include briefings for the Clerk to the Committee over the West Bromwich Building Society/Home Income Plan scandal in the 1990s and evidence to the Financial Services & Markets Tribunal described as ‘learned and impressive’.

3. We start from the FSA’s latest statement of its case (13 December 2010) and specifically the claims:

a. ‘Any dilution of the RDR will result in an increase in the cost to consumers through continued mis-selling’

b. ‘..the RDR is absolutely fundamental to address the root causes of the numerous problems that we have observed in this sector and to improve consumer outcomes.’

4. We first ask an open question: ‘is justice engaged?’ to which the answer is ‘Yes’.

5. We go on to a series of questions about propositions advanced by the FSA, each answered in the negative. We believe that these show that the RDR is misconceived

6. We conclude with a suggestion for a way forwards.

QUESTIONS AND ANSWERS 1. Is justice engaged?

Yes.

a. Justice requires that advisers should give customers good advice, should have acquired adequate knowledge to advise them, should give that advice clearly

b. Justice requires truthfulness so regardless of the financial consequences for the adviser, they must always give advice in the best interest of the customer 83

c. Preventing a person earning their living by exercise of their skills is unjust unless there is some compelling reason for the prohibition. The RDR will prevent over 10000 individuals from pursuing an activity they were previously able to pursue. The burden of showing that this is justified rests with the FSA.

2. Will the RDR result in investors being better off in its first five years of operation?

Not on the data that the FSA produced in its letter of 13 December

a. The FSA now calculates the likely costs that will end up being passed back to consumers as between £1.4bn and £1.7bn over its first five years.

b. The FSA estimates the total detriment to consumers to be between £0.4bn and £0.6bn a year - i.e. £2bn to £3bn over a five year period.

c. The RDR would therefore need to reduce consumer detriment by between 47% and 80% - mid range is 60%. And this is unrealistic.

3. Is the FSA’s data in its 13 December letter reliable?

a. The pension switching figure (p1) is based on a sample of ‘bad’ firms so is too high; the ISA figures have been questioned and they assume that there has been no action to address problems identified 6 years ago. ‘Up to’ is quite hopeless. The FSA has extrapolated from too high a base.

b. The data given at the first dot point on page 5 is incomplete. There is a conflation of suitability and clarity of advice; there needs to be separation to ascertain how much advice is unsuitable. Without this it is not possible to produce a reliable extrapolation of consumer detriment.

4. Will the FSA’s proposals for professionalism benefit consumers economically?

a. There will be greater clarity in documents - and the new exam based qualifications will probably lead to the FSA being able to tick more boxes on reviewing files; but economic performance is determined by the quality of advice and CPD would almost certainly achieve the uplifts needed in knowledge with greater focus on activities advisers undertake

b. Publication of the FSA’s final proposals for professionalism is being held back to prevent rude comments being made to the Committee. The consultation proposals will not draw advisers together into a structure that enhances their ability to resist aberrant desires to profit at the expense of good conduct - which is what we suggest a historic profession 84

or guild provided. Advisers will be given pieces of paper rather similar to those the auditors of Enron obtained. A profession is created by a shared commitment built up over time, not by paying £2500 to the FSA. Adam Smith rightly had a jaundiced view of gatherings of businessmen - ‘professionalism’ will turn out to be a device to persuade investors to part with their money. And indeed the FSA seems to be selling it to the industry that way.

5. Will the FSA’s proposals for adviser charging eliminate incentives to mis-sell?

No. It will leave some in place and create new incentives

a. Much mis-selling has arisen from incentivising sales forces. This will not be affected by the RDR – banks will, as far as one can see, be able to ask customers to sign agreements that allow the bank to charge a percentage of the amount invested. The only difference is that the rate will be determined by the agreement with the customer, not fixed by the product provider. But that will not stop the Bank (or life office) operating a system that incentivises its sales force. Nor will it remove an incentive from an IFA to sell (or even churn) once the agreement that makes payment conditional on transactions is in place

b. Any system based on hourly or daily fees contains an incentive to create work, so fee based systems do not eliminate but incentivise both churning and selecting the products requiring the most time.

c. A peculiar quirk of the RDR is that an adviser who takes on a client after the new rules come into effect will be required to rebate trail commission to that client. Some firms will undoubtedly use this to promote switching of advisers - they will be able to advertise ‘you will not have to pay a penny for a review of your investments if you sign up with us’. If they keep the client signed up but do next to nothing and charge next to nothing they will then get the trail commission while the investor is unadvised.

6. Will the capital resources rules allow a competitive market?

a. These rules will impact on IFAs, and in particular on those who employ staff on fixed salaries (so the RDR will encourage firms to move to bonus based systems)

b. The proposed new rules on PI exclusions - a consequence of the 2010 Financial Services Act introducing uninsurable risks - will be very onerous.

7. Will the RDR increase the availability of financial advice? 85

No. It will greatly reduce availability of important advice to those who most need it

a. Nobody denies that there will be a significant short term reduction in the number of advisers. A reduction in capacity will lead to a reduction in advice. The FSA suggests that all the benefits it claims the RDR will bring will lead to long term growth. This is unquantified optimism.

b. The market will almost certainly be more concentrated. Oligopolistic markets are characterised by concentration on the more valuable customers - implying that the less valuable clients will be ignored, at least initially.

c. Mr Blenkinsop observed in the House on 29th November that the RDR will reduce advice to those on low incomes in his constituency. While stakeholder products will not be covered by the RDR, an adviser will be unable to give general advice on existing pensions and investments without meeting DRD requirements. Also stakeholder products are often not suited to those receiving a modest inheritance.

d. The RDR will cause particular problems for those nearing retirement as this advice is usually funded by commission:

i. Advice on what annuity to choose is vital - and too many people are not receiving i . Advice on choice of annuities is usually paid for by commission. The commission is usually very small compared with the benefit of obtaining the right open market annuity

ii. With the reduction in final salary schemes, more people will need advice on what to do with their pension plan - including drawdown versus annuity. Even some people in final salary pension schemes can benefit from transfer - single people can often obtain a higher income from an annuity than a final salary scheme offers and switching from a final salary scheme may protect the interests of a partner (usually a female partner). The RDR is almost certainly biased against women and gay men.

e. The economics of advising on regular pension contributions have already become doubtful for IFAs. The RDR will make giving such advice very unattractive - the ban on factoring will stop IFAs capitalising a future income stream based on a small annual charge. They will have to levy an upfront charge, which will be a high proportion of the first year’s payments. IFAs will largely withdraw from this segment of the market. Others will replace the IFAs for individuals when they first set up a scheme but: 86

i. These investors will not then have anyone they will instinctively turn to on changing job, or temporarily leaving employment on having children, or if they become chronically ill

ii. ‘One size fits all’ advice will be bad advice for some whom any decent society would support - e.g. somebody with a degenerative disease, or with some condition such as epilepsy

iii. The practice of advising the children of clients is dropping and will drop still further.

iv. Some product providers impose heavy penalties if a saver stops making regular contributions - and many employers limit the firms to which they will make pension payments in their scheme. If early advice is not independent there is a higher risk of individuals being locked into a disadvantageous arrangement .

8. Will the FSA’s strategy of more intrusive regulation, personal responsibility and credible deterrence work?

No.

a. Most complaints to FOS (and an even higher proportion of those upheld) are made against banks and insurance companies, not IFAs.

b. Credible deterrence against the banks requires action against chief executives and main boards that set high targets to their retail distribution arm without implementing effective procedures to guard against mis- selling. But will the FSA charge Mr Diamond with breach of principles and rules if evidence emerges of systemic mis-selling in Barclays on his watch? Of course not. The protests at palns for restricting bonuses would fade into insignificance if the FSA or its successor did such a thing.

c. As Mr Sants has helpfully made clear, consumer protection is not allowed to cause instability in a major player or players. Big firms will not be ordered - and in the past have not been ordered - to pay compensation if that threatens their position.

9. Is there any source of objective information for the Committee?

No. Everyone (including the FSA and the author of this paper) has some interest to further - in the FSA’s case, avoiding embarrassment for a grade one cock-up, in the case of the banks, market share, in the case of the networks, trail commission of orphaned clients, in the author’s case, vainglory. 87

A POSSIBLE WAY FORWARDS 10. Put the RDR on ice until after the legislation to establish the new regulatory system is in place:

a. This may allow us to know what the EU regime will be

b. There will be time for peer-group reviewed academic research to be commissioned and published

11. Get FOS to publish all its decisions to provide better guidance on what is going wrong.

12. Look at breaking up the banks so that there are people accountable for the running of the retail side.

January 2011

i See for instance Aviva’s powerful comment: http://www.ftadviser.com/FTAdviser/Pensions/Personal/RetirementPlanning/News/article/20110113/6deea8 6e‐1e6e‐11e0‐8c6c‐00144f2af8e8/Aviva‐lashes‐out‐at‐dysfunctional‐retirement‐market.jsp

Written evidence submitted by Graham Franklin, First Financial IFA

Rather than load criticism on the FSA, Trade Bodies and the Examination Groups who all have clear vested interests in the RDR, I put forward the following suggestion on behalf of my and many other older sole trader IFA’s clients:

1.All new entrants to the profession must be level 4 qualified 2. All IFAs up to age 55 on 31.12.10. must be level 4 qualified by 2016. 3.All letterheads / business correspondence should list the level of financial qualifications. 4.IFAs over 55 at 31.12.10 should complete annual gap fill CPD in the areas in which they specialise with evidence of testing of knowledge. The FSA could establish this from the cost of our fees plus an extra levy from those advisers over 55. By 2016 virtually all working IFA's will be fully level 4 qualified. 5.Allow clients to decide how we are remunerated. My clients pay via fees or commission and they have done so over many years. My charges are spelt out up front before any agreement is signed. I wish my accountant and solicitor would adopt the same practice.

This allows me and other sole traders in my position: 1.To continue to work for a few more years, 2.It allows me to keep my knowledge upto date, 3.It allows my clients access to the advisor they have worked with and trusted over a number of years, 4.it allows for fair charging for the work I do in the way the client wishes to pay for it, 5.It allows the younger element of the profession to obtain the level of academic qualifications the FSA require, 6.It gives the client choice as to what type of IFA they require, those with higher qualifications vs those with greater experience.

The FSA have already signaled that they are concerned about the efficacy of the RDR, so they should consider modifications, the clients surely deserve choice in who advises them and how they pay for that advice. There are however 2 groups of people who will be angered by these changes and I don't mean the banks although they have much to gain from the demise of the sole trader IFA.

1. The trade bodies and examination bodies whose fees are a real problem for the sole trader

2. The larger IFA groupings who traditionally have younger IFAs who feel we should all sail through exams never mind the cost to our businesses in terms of time and monetary cost.

Neither of these groups are clients which is what the RDR is about. So lets 89

be sensible, modify the system don't destroy it. This country has a long tradition of abolishing systems and replacing them with things that are even worse.

January 2011 90

Written evidence submitted by Financial Services Consumer Panel

Introduction

The Financial Services Consumer Panel welcomes the opportunity to respond to the Committee’s call for evidence on whether the FSA’s Retail Distribution Review (RDR) will achieve its stated outcomes and whether the outcomes could be achieved in other, potentially better ways.

The Panel has supported the FSA’s work on the RDR as well as being involved in its development and, as we have set out in this memorandum, we believe that the outcomes can be achieved. We accept that there are still some significant issues to be resolved – in particular the regime for the regulation of platforms and the development of models for the delivery of simplified advice, on which we have commented later in this submission – but we have not seen any evidence of better ways of delivering the RDR outcomes over the four years that the FSA has been developing its RDR proposals. Nor do we accept the argument that has been put forward by some that the implementation of the RDR should be delayed beyond the end of 2012.

The savings market is undergoing rapid change as defined benefits pensions schemes close. This will undoubtedly increase the demand for advice, even though many companies provide defined contribution schemes. The changing nature of employment means that individuals will need to become more involved in providing for their old age, creating both customer demand and sales opportunities. The RDR presents an opportunity for independent advisers to raise the perceived value of their advice and of professional standards within the industry. It will leave the advice market better equipped to respond to these changing circumstances and the development of models to deliver simplified advice should create an environment in which the needs of those requiring a less holistic service can be met.

Executive summary

The Panel has taken a close and active interest in the development of the RDR and we continue to support both its objectives and how the FSA proposes to achieve them. In our view the RDR presents great opportunities to the industry as well as challenges, but with consumers being the true beneficiaries of the RDR – the advice market is currently weighted in favour of industry and the RDR will establish much needed equilibrium.

How will this be achieved? By:

• Eliminating bias in the market

• Changing the relationship between the independent adviser and their client to one where the adviser is the agent of the client, not the product provider

• Providing clarity about the nature of the advice service being offered, how it is to be paid for and by whom. As the FSA has said, “it cannot 91

be right to hide the cost of advice from consumers, with the intention that they neither see the cost involved nor value the services they receive. We cannot both support structures that conceal the cost of advice and complain about consumers not being prepared to pay for it. A paradigm shift is needed”1.

• Ensuring that financial advisers are appropriately qualified, complying with standards of ethical conduct and aware of developments and innovations in the market.

The FSA launched the RDR in 2006 in response to failings in the advice sector – with the remuneration structure described by the then Chairman of the FSA as, amongst other things, suffering from “product bias, provider bias and churn” with customers “not being advised to take action consistent with their priority needs.” Five industry working groups were set up to inform the FSA’s considerations and there has been a series of public consultations over the last four years or so leading to the current RDR model. Given the detriment that the RDR is designed to address and the length of time spent in active consultation, there can be little excuse, if any at all, for delay now.

We have heard a great deal of late about objections from some industry participants to the FSA’s professional qualification requirements in particular. Yet Fay Goddard, CEO of The Personal Finance Society, recently said2 that 40% of PFS adviser members have already attained CII level 4 or above and that 44% were part qualified ahead of the 2012 deadline. A higher level of qualifications can only enhance the professional standing of financial advisers and the trust that consumers place in them – pre-requisites for a revitalised market which delivers what consumers are entitled to expect. “Grandfathering” existing advisers will simply not achieve this and it is an option to which we continue to object.

We accept that there is likely to be some shrinkage in the advice market as some advisers decide to leave rather than meet the RDR requirements, or re- focus their business models on more affluent and more profitable clients. There will be many consumers too for whom a full independent advice service is neither needed nor affordable. We believe that a Simplified Advice service could meet the needs of these consumers and we have taken a close interest in work underway in this area. We plan to meet representatives of the FSA again soon to discuss how the simplified advice debate can be re- energised. Filling the advice gap will be an important step in achieving some of the broad objectives that the RDR was set up to address.3

1 Speech by Dan Waters to the Personal Finance Society 10 July 2009 at www.fsa.gov.uk 2 Speech at the PFS event “Are we there yet?” in October 2010 at www.thepfs.org/app/events 3 CP09/18 Delivering the RDR at www.fsa.gov.uk: (1) an industry that engages with consumers in a way that delivers more clarity for them on products and services; (2) a market which allows more consumers to have their needs and wants addressed; (3) remuneration arrangements that allow competitive forces to work in favour of consumers; (4) standards of professionalism that inspire consumer confidence and build trust; (5) an industry where firms are sufficiently viable to deliver on their longer term commitments and where they treat their customers fairly; and (6) a regulatory 92

We agree too that there is further work required on the future regulation of platforms. There are significant issues still to be resolved in this area and platforms, along with simplified advice, will be a major subject of engagement between the Panel and the FSA in the immediate future. But these are not reasons to re-think or delay the implementation of the RDR.

Our more detailed views are set out in this paper.

Objective 1: a transparent and fairer charging system

1. The argument for a fundamental change from the current adviser remuneration model is well made.

2. There are two main issues that need to be addressed: first, actual and potential consumer detriment caused by the commission based model – commission bias; and second, the lack of clarity around how much is actually paid for advice and how that in turn affects the value of the investment being purchased.

Commission bias

3. In January 2008 the Panel published a piece of qualitative research (“the GfK research”) into consumer attitudes with regard to financial advice and the implications of the RDR proposals4. This confirmed that, in essence, many consumers do not value advice because they are under the mistaken impression that they do not pay for it – and most of those in the sample did not understand what an independent financial adviser was. Most of the sample had a negative perception of financial advisers in general, with the minority who held a more positive view tending to be those who were less financially sophisticated and savvy.

4. The FSA’s 2008 research into accessing investment products5 revealed that, amongst other things, “Advice, whatever its shortcomings, was known to be available, and there was a feeling that at least some of it must be good, even if it is hard to tell good from bad. And the information from advisers, e.g. about what specific technical language and jargon actually mean, was seen as helpful, even if recommendations needed to be treated warily.” As regards adviser remuneration, “This was not a subject that was well understood: everyone knew that advisers got paid, but there was confusion about how and with whose money. Furthermore there was little understanding about the true cost of advice, regardless of who was paying… and related to this, and more important,

framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers 4 “Exploration of consumer attitudes and behaviour with regard to financial advice and the implications of the RDR proposals”, GfK at www.fs-cp.org.uk 5 CR73 Accessing investment products November 2008 by Strictly Financial at www.fsa.gov.uk 93

was the effect commission could have on the adviser’s impartiality, and thus on the advice itself.”

5. In his letter to the Committee of 13 December6, Hector Sants (Chief Executive Officer of the Financial Services Authority) set out a short table of illustrations of annual consumer detriment found in different mis- selling reviews. This included an annual consumer detriment of up to £18mn in the case of the FSA’s investigation of personal pensions mis- selling in 2005. In the same letter Mr Sants goes on to refer to evidence of product bias in the equity ISA market, where 20% of mystery shops with commission based IFAs and 12% of mystery shops with tied advisers an ISA was not recommended. Instead, clients were advised to purchase products that could potentially pay the adviser higher commission.

6. In May 2005 BBC Radio 4’s Moneybox programme7 looked into commission bias and considered research produced by CRA International for the Association of British Insurers. The research was quoted as finding that a 0.5% rise in commission - from 5% to 5.5% - could lead to an increase in market share of 14 percentage points, from 20% to 34%. The Sales and Marketing Director of Norwich Union told Moneybox that the firm “operated commission as a fine-tuning mechanism... to maintain our position in the market place. We adjust our commission all the time." He also agreed that Norwich Union had cut the commission on unprofitable stakeholder pensions to discourage IFAs from selling them - "We cut our stakeholder commission by two thirds. Sales have been down considerably." In August 2009 Andrew Fisher, chief executive of independent financial adviser Towry Law said8 "I'm concerned that sales have been made in order to generate commissions ... we have seen initial commissions of up to 9% to entice advisers to sell their products. Investors have faced a sustained period of reduced payouts, falling bonus rates and increased exit penalties."

Lack of clarity 7. The GfK research found that while most consumers were aware that financial advisers were paid by way of commission from providers, the majority were unaware of the existence of trail commission at all. Often, they did not know specifically how they were paying and sometimes “the absence of a visible payment means that advice feels free”.

8. Lack of clarity about how much is being paid for advice and how that impacts on the value of the investment being purchased is fundamentally wrong. Consumers are entitled to know how much the advice will cost, how it will be paid and in addition how much the investment itself will cost. It is no surprise that the September 2010 survey9 by KPMG of over 3,000 consumers found that less than a third would be prepared to pay

6 Published on the FSA website, www.fsa.gov.uk 7 Article available at www.news.bbc.c.uk 8 www.guardian.co.uk/money 9 At http://rd.kpmg.co.uk/WhatWeDo/23161.htm 94

for one hour’s professional financial advice, and that of those who would pay, over half would only be prepared to pay £50 or less while only one percent would be willing to pay over £200. It is the Panel’s view that at least part of the reason for this is that consumers are unaware of how much they are paying for financial advice now, so the sums involved seem shockingly high.

9. It cannot be sustainable to offer a service where fees are obscured and where consumers are unaware that they are even paying for the service provided. This is particularly worrying when charges are often high and eat in, sometimes excessively, to the consumer’s savings or investments. In a Panorama programme broadcast on 4 October 201010 it was claimed that between 60% and 80% of the money contributed to a private pension over 40 years could be taken in fees of various kinds.

10. We believe it is the case too that financial advice is not as valued by consumers as other professional services, nor as trusted. This is borne out by the main findings of the KPMG research. Across the survey sample, levels of trust in any source of financial advice appeared low. Independent Financial Advisors (IFAs) were the most trusted source of financial information (47 percent of consumers) and the most trusted source of financial advice (50 percent of consumers). A third of respondents said that they would trust a bank representative for advice, but only eight percent of consumers would trust a representative of an insurance company to provide financial information and only four percent would trust them for financial advice. Trust and confidence in the sector are pre-requisites of greater consumer engagement. The Panel’s recent research on consumer perceptions of fairness in financial services11 revealed that financial services fare particularly poorly in perceptions of treating customers fairly, with criticism of the lack of individual and personalised service and the lack of transparency, including small print.

Will the RDR proposals deliver what is needed in the best way?

11. It is our view that the FSA’s proposed Adviser Charging model will deliver a transparent and fairer charging system and that this will address the failings that have been identified in the current commission based remuneration model. We supported12 the FSA’s proposals13 to widen the range of products to which the new independence standard will apply to include national savings and investments products, which do not pay commission – the clear implication behind the proposals being that despite National Savings products being 100% secure and backed by HM Treasury, many advisers were not recommending them to clients.

10 “Who’s taken my pension?” at bbc.co.uk/programmes and bbc.co.uk/press office 11 “Consumer Perceptions of Fairness in Financial Services” by Opinion Leader, June 2010, at www.fscp.org.uk 12 Consumer Panel response to CP09/18 at www.fs-cp.org.uk 13 CP09/18 Delivering the RDR at www.fsa.gov.uk 95

12. The independent adviser will become the agent of the customer not the product provider, changing the relationship into one where the intermediary has a much stronger interest in maintaining a long term relationship with the customer.

13. Over time suspicions of bias in favour of particular products, product types or product providers that will generate high levels of commission for the adviser will fall away and consumers will know – and have the opportunity to discuss – the level of charges set by their advisers, which will be addressed up-front. As with other professional services the adviser’s charge will be directly related to the service provided by the firm. Investors who would rather not pay separately for advice will retain the option of having the agreed fee deducted from their investments. The new system will ultimately make it easier for consumers to ‘shop around’ than at present and to consider such factors as value for money in terms of the advice they receive.

14. As for the question of whether there could be better ways of delivering a transparent and fairer charging system, it may be that there could be variations of the ‘factory gate pricing’ model that could work, but we have not seen any specific proposals that would achieve the same result as the FSA’s proposals. If ideas are put forward now that would not delay the implementation of the RDR we would be happy to consider them from a consumer perspective. But without doubt there must be an end to the commission based remuneration model and an end to the lack of clarity around how much the consumer is paying for what and to whom.

Objective 2: a better qualification framework for advisers

15. As with the issue of commission, the case for improved levels of professionalism and qualification for financial advisers is, in our view, well made. The Professionalism Working Group14 set up by the FSA to contribute to the development of the RDR recommended that minimum qualifications must be raised. On 7 January this year the FSA published guidance for advisers15 on assessing suitability. The need for this guidance was clearly demonstrated by the findings of FSA thematic work, where the FSA concluded that “of the investment files assessed as unsuitable between March 2008 and September 2010, we rated half of these as unsuitable on the grounds that the investment selection failed to meet the risk a customer is willing and able to take16.” This is a fairly

14 Chaired by Michael Foot, it included the Chartered Institute of Bankers in Scotland; Chartered Insurance Institute; Institute of Financial Planning; ifs School of Finance; Securities and Investments Institute; and Financial Services Skills Council 15 Guidance consultation: assessing suitability at fsa.gov.uk 16 of the 366 cases that the FSA judged to have failed the suitability requirements, 199 did so because the investment selection did not meet the customer’s attitude to risk 96

fundamental issue17 and one which goes to the heart of understanding and meeting consumer needs.

16. Although the range of financial advice available is quite wide, consumers will tend to seek advice for what they regard as the most important financial decisions they need to make, such as provision for retirement. With the disappearance of defined benefit pension schemes for most of the working population and the introduction of National Employment Savings Trust pensions, the demand for reliable advice can only increase. It is entirely right that the professionals to whom consumers turn have appropriate levels of relevant qualifications and knowledge of the market to deliver advice on these crucial issues.

17. The FSA’s 2006 Baseline Survey18 found that consumers’ trust in financial advisers is higher for those that actually use one, than for those who do not. But of those, 40% said that they did not trust financial advice. Further research two years later19 found that confidence in advisers can be established through the demonstration of knowledge and qualifications. The May 2010 PARN Report20 also found positive correlations between higher level qualifications and positive consumer outcomes.

18. In terms of specific proposals on professionalism, we see the RDR requirement for QCF level 4 as a good starting point for advisers – we do not think that the equivalent of a first year university standard is too onerous or demanding - but ultimately we believe that Level 5 is the appropriate standard. We strongly support the measures that are being put in place to ensure that a programme of continuing professional development and for compliance with standards of professionalism and ethics will be undertaken and independently verified. As we have indicated, it is our view that these enhanced standards will raise levels of confidence in the industry and lead to greater consumer engagement.

Will the RDR proposals deliver what is needed in the best way?

19. There has been much media coverage recently of suggestions that rather than insisting on advisers achieving level 4 qualifications there should be a programme of ‘grandfathering’ for experienced advisers. We remain opposed to grandfathering. Such a move would only detract from the important objectives of raising standards within the financial services industry. It is conceivable that it might be acceptable to extend the qualifications deadline for advisers who, say, have largely achieved level 4 but perhaps have one module yet to complete, but given the length of time advisers have had to prepare for the RDR, we would hope that this

17 The FSA has said that the files reviewed were indicative samples and in some cases it was focusing on higher risk firms 18 Baseline Survey into Financial Capability at www.fsa.gov.uk 19 Consumer Research Paper 73 Assessing Investment Products, at www.fsa.gov.uk 20 Linking professional standards to consumer and other outcomes in the financial services sector, at www.fsa.gov.uk 97

would be a rare event. In any case the FSA has decided to permit workplace assessments as an alternative to sitting an examination in an approved examination centre, so providing some flexibility.

20. We support too the requirements for continuing professional development that the FSA is putting in place. The GfK research showed that some consumers perceived financial advisers as having greater expertise than they did themselves, attributing expertise to having the time to observe the market and follow its trends. In our view CPD would be an important part of delivering this perceived expertise and consequently a driver for a better and more vibrant advice market in the longer term.

21. As regards the question of better ways of achieving this objective, as we have indicated, we would have liked the FSA to go further and ultimately aim for Level 5 as the appropriate professional qualification standard for financial advisers. We would also have liked to see a separate Professional Standards Board, independently chaired; separately accountable for its professional standards function; led by an identifiable senior executive who is responsible for driving the work forward; and with a clear mechanism for ensuring that consumer interests are taken into account. In our view the proposed ‘internal’ FSA model is second best and we will be looking for evidence that it is working.

Objective 3: greater clarity around the type of advice being offered

22. The GfK research concluded that the current advice framework was characterised by a good deal of confusion, with consumers not distinguishing between the different types of advice and advisers when talking about financial advice. The lack of understanding was found to be more pronounced amongst those with less financial sophistication and expertise. Given the significance of the differences between independent and non-independent advice therefore, it is important that the disclosure regime delivers the right messages to consumers.

23. Finding labels to describe the nature of advice is difficult. Post RDR consumers should know from the outset whether their adviser if truly independent and acting as their agent, providing advice that reflects the customers’ interests; or offering a restricted service which is limited in scope in terms of the number of providers or products included within the adviser’s range of business – effectively making clear the distinction between “sales” and “advice”.

24. We agree with the FSA’s split between “restricted” and “independent” advice, but additional supporting information to provide context and clarity is necessary. Following testing21 of labelling and descriptions, the FSA made its final decision on disclosure requirements in March 201022

21 Consumer Research Paper 78 Describing Advice Services & Adviser Charging by IFF Research June 2009, at www.fsa.gov.uk 22 PS10/06 at www.fsa.gov.uk 98

and although we would have liked to have seen a greater degree of prescription around the additional/contextual information to be provided, we have no specific objection to the FSA’s proposals.

Will the RDR proposals deliver what is needed in the best way?

25. The FSA consulted extensively on the split between “independent” and other forms of advice, as well as on labelling. As we have said, we accept that there are real difficulties in describing the differences between types of advice in a way that will help rather than confuse consumers, who will have to decide which type of advice best suits their needs. There will be a number of different, but not necessarily better ways of describing the types of advice service available and in reality, only time and consumer research will tell whether the RDR requirements could be improved to assist both consumers and advisers in the delivery of professional financial advice.

Simplified advice and straightforward products

26. As we have said earlier in this submission, the Panel accepts that there is likely to be some shrinkage in the traditional advice market as a result of the RDR. We are conscious too of the savings gap that exists at the moment, and which has existed for some years, and the general need for consumers to save more. Figures vary, but Aviva’s November 2010 research23 revealed a European annual “pensions gap” of €1.9trillion of which the UK accounted for €379bn. According to the recent YouGov survey24 on behalf of the Institute of Financial Planning and National Savings and Investments, eight out of ten people in the UK say they would be more likely to save if financial products were more flexible and made easier to understand. Fewer individuals are planning ahead – the same research found that only 14% had goals they were working towards (compared to 26% in 2008), yet 59% of those surveyed were worried about their finances. These findings indicate a real need for affordable financial advice delivering straightforward products, a need which the Panel believes appropriate models of simplified advice could help to fill.

27. The simplified advice debate however appears to have reached an impasse. Our understanding of the key issues from discussions with the FSA, trade bodies and individual firms is that the FSA is satisfied that the current and post-RDR regulatory frameworks allow for the delivery of simplified advice and it is ready to discuss specific proposals from the industry; but the industry is struggling to develop financially viable models for simplified advice in the absence of specific assistance from the FSA on issues such as mandatory level 4 qualifications for advisers and the potential impact of Ombudsman decisions on advice delivered through this process.

23 www.aviva.com/investor-relations 24 UK Financial Planning Survey 2010 at www.financialplanningweek.org.uk 99

28. It is important that this apparent stalemate is resolved in a pragmatic way which both protects consumers’ interests and rights and enables firms to make a profit. We oppose any reduction in the professionalism and CPD requirements for advisers per se, but we believe there is a useful debate to be had around the appropriate level of qualification for advisers delivering simplified advice. For example, while we would expect level 4 advisers to be closely involved in both the design of models for simplified advice and in the delivery of models that permit adviser discretion, for IT- based models for which there is no scope for adviser discretion, either level 3 or a level 4 qualification that is limited in scope, might be appropriate. Similarly while we would not support any new restriction on consumers’ right of access to the Financial Ombudsman Service, for simplified advice delivered through technology without adviser discretion it might be possible to ensure that the process itself was compliant, thereby ensuring a compliant outcome. Consequently we believe it will be possible to address the needs of consumers whose access to financial advice is and/or will be limited by its cost in relation to the amount they have available to save, without compromising the principles and objectives of the RDR.

January 2011

Appendix

About the Financial Services Consumer Panel

29. We are an independent statutory body, set up to represent the interests of consumers in the development of policy for the regulation of financial services.

30. We work to advise and challenge the FSA from the earliest stages of its policy development to ensure they take into account the consumer interest.

31. The Panel also takes a keen interest in broader issues for consumers in financial services where it believes it can help achieve beneficial change/outcomes for consumers.

32. Since the Panel was established in 1998, we believe the Panel has helped deliver significant, positive benefits for consumers. We support the FSA where we believe policies can help consumers and challenge the FSA forcefully when we feel consumers would be disadvantaged.

33. Members of the Panel are recruited through a process of open competition and encompass a broad range of relevant expertise and experience. The current membership of the Panel is:

Adam Phillips (Chair) Kay Blair (Vice Chair) Stephen Crampton Mike Dailly 100

Caroline Gardner David Harker Frances Harrison Tony Hetherington Bill Martin David Metz Dan Plant Faith Reynolds Lindsey Rogerson Claire Whyley

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Written evidence submitted by CFA UK

Executive summary:

1. The CFA Society of the UK (CFA UK) is a professional body representing close to 10,000 investment professionals. The society participated in the working groups advising on the development of qualifications standards for investment advisers within the Retail Distribution Review (RDR). CFA UK’s evidence relates exclusively to qualification standards and does not address charging or clarity of advice.

2. CFA UK believes that the qualifications standards introduced through the RDR are appropriate and not unduly costly. Raising qualifications standards should contribute to a move towards greater professionalism within the investment sector. It is in the public interest to raise professional standards. In particular, the society welcomes the greater understanding and emphasis on the ethical context of advisers’ work.

3. The Treasury Committee has called for written evidence on whether the RDR will achieve its stated outcomes and whether the outcomes could be achieved in other, potentially better, ways. The stated outcomes are:

• A transparent and fairer charging system • A better qualification framework for advisers, and • Greater clarity around the type of advice being offered.

4. The CFA Society of the UK (CFA UK) is a not-for-profit professional body representing the interests of close to 10,000 members. The society was founded as the Society of Investment Analysts in 1955. Most members work as analysts or portfolio managers in firms providing investment services, though members are located broadly across the financial services sector and fill a wide variety of roles. CFA UK is a member society of CFA Institute, the global, not-for-profit association of investment professionals that awards the CFA designation. First introduced in 1963, the CFA charter, which emphasizes ethics within each of three strenuous examinations, has become the most respected and recognized investment credential in the world.

5. CFA UK participated in the development of proposed standards for qualifications within the RDR programme. Society representatives took part in the Professional Standards Advisory Group (PSAG) and the Professional Standards Working Group and the society was a regular respondent to the discussion and consultation papers issued by the FSA in relation to the RDR. These responses are accessible through the society’s site (www.cfauk.org).

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6. Our response to the TSC’s call for written evidence is limited to consideration of whether the RDR process is likely to lead to a better qualification framework for advisers.

7. We believe that the RDR will introduce a more robust, trustworthy and appropriate qualification standard for investment advisers. We do not believe that the qualifications are unduly onerous or costly.

8. Raising the standard of qualifications required for retail investment advisers from Ofqual’s Level 3 to Level 4 means that advisers will be tested on the practical application of investments and the investment environment. Critically, their studies will now include review of a robust ethical framework (such as CFA Institute’s Code of Ethics and Standards of Professional Conduct) for their work with clients. New question types will challenge candidates to demonstrate their learning at a greater depth. Our own experience (admittedly over a short time period of just three months) is that candidates are rising to the challenge of meeting extended content and exam standards.

9. Similarly, we believe that there was value in revisiting the curriculum and standards relating to the provision of investment advice, though we (and others) were disappointed that relatively few investment practitioners took the opportunity to participate in that process. The work led by the FSSC was well-planned, thoughtfully considered and carefully reviewed.

10. In the same vein, we support the work that the FSA has done to understand the degree to which existing and legacy qualifications meet the new requirements and their approach to allowing these to be carried forward with gaps then being filled through continuing professional development. This was an appropriate and sensible approach.

11. Wholesale grandfathering existing practitioners into the qualifications regime (by exempting them from the qualifications requirement) was not an option that PSAG was invited to consider by the FSA. The FSA’s view was that failing to impose an improvement in qualifications standards across the board at a single point in time would undermine their efforts to improve public trust.

12. The society agrees that appropriate qualifications standards should be required by all investment professionals. We also believe that an increase from Level 3 to Level 4 is probably appropriate as advisers will now be tested more rigorously and required to demonstrate their ability to apply their learning. As said earlier, the costs – in terms of both time and money – of doing so (at least to a new candidate) are not much greater than they would previously have been.

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13. The RDR’s aim was – at least in part – to improve professional standards in the market for investment advice. We support that aim and believe that the FSA’s proposed approach is likely to achieve that objective. We hope that improved professional standards will further enhance the emphasis on client outcome and thereby contribute to greater trust in the sector and assist in diminishing the frequency of market failures.

14. We trust that these comments are useful and would be pleased to meet committee staff to explain them or to develop them for committee members.

January 2011 104

Written evidence submitted by the Association of Financial Mutuals

1. I am writing in response to this call for evidence on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:

• Highlight our concern that FSA’s current approach to the RDR will reduce consumer access to advice and add unnecessary complexity; • Stress that FSA’s approach is not consistent with the original ambitions and cannot now be effectively delivered by 31 December 2012.

2. The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies. Financial Mutuals are member- owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.

3. AFM currently has 57 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £80 billion.

Missed opportunity

4. The terms of the call for written evidence confirm it is focused on whether the RDR will achieve the stated outcomes1 and whether the outcomes could be achieved in other, potentially better, ways.

5. To summarise our position, we believe the RDR will only go some way to achieve these outcomes. RDR will result in greater clarity on the cost of advice (versus the cost of products); independent financial advisers, who have always sought equal recognition with other professional advisers will benefit from the higher reputational standards that better qualifications imply; and consumers will be better informed about the nature of advice.

6. However we believe the RDR is a missed opportunity to fully and finally address areas of potential failure in the retail market. The outcomes that FSA’s Chief Executive presented to the Committee were not those stated at

1 The outcomes stated by FSA to the Committee are:

• A transparent and fairer charging system • A better qualification framework for advisers • Greater clarity around the type of advice being offered

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the review’s outset2. The revised outcomes have therefore been developed with the benefit of hindsight, and fit the emerging construction of the RDR rather better than they do the aim of achieving good outcomes for consumers. In our view the outcomes FSA should have sought to achieve were that post-RDR financial advice would be readily available to all consumers, and that consumers would have been better informed and better able to purchase investment products confidently- this is much closer to the originally stated outcomes.

The failure of the FSA approach

7. In our assessment, FSA should reinstate the original stated aims of this project. As it is, the FSA’s revised outcomes are achieved even if the result of the RDR is that the majority of consumers are unable to access financial advice, and as a result unable to buy the (investment) products they need. Indeed we are concerned that this is very likely to be the result of the RDR, as this economic description demonstrates:

a. FSA accepts that post-RDR the number of fully qualified investment advisers will fall; b. In any market where there is scarce supply, prices tend to increase; c. As a result the supply curve will move upwards, meaning that in future the price (ie adviser charges) rises, and the quantity purchased/ demand falls;

2 The RDR was launched in June 2006. FSA published a discussion paper in Janaury 2007 in which it proposed the following:

“2.9 We want the RDR to stimulate delivery of a number of specific outcomes. These include:

• an industry that engages with consumers in a way that delivers more clarity for them on products and services; • a market which allows more consumers to have their needs and wants addressed; • standards of professionalism that inspire consumer confidence and build trust; • remuneration arrangements that allow competitive forces to work in favour of consumers; • an industry where firms are sufficiently viable to deliver on their longer term commitments and where they treat their customers fairly; and • a regulatory framework that can support delivery of all of these aspirations.”

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d. Where this happens, the reduced number of IFAs will spend all or most of their time servicing the needs of the most affluent, who are best able to absorb the higher costs of advice; e. So to the extent that the RDR offers better protection to consumers, the advantages will be enjoyed mainly by the most affluent who, it can reasonably be argued, need that protection less.

Mass market problems

8. The majority of consumers, including vulnerable groups, will have less access to independent advice and their needs are likely to be unmet, or they will need to purchase products differently. With no independent advice available to them this implies a combination of:

• non-advised purchases, where the consumer identifies their own needs and takes on all the risk of assessing the suitability of the product; • non-advised purchases supported by generic advice, which may help to identify broad needs and eliminate unsuitable product types; and • purchases conducted wholly or partly with the benefit of ‘simplified’ advice.

9. Members of AFM are already active in the first two of these, with many mutual providers having built strong businesses on the back of directly marketed or introduced business. However for this to be successful the provider needs to invest heavily in brand building and support tools; in addition there is a threat that new European proposals (in PRIPS and MiFID) will prevent consumers from purchasing many products on a non-advised basis.

10. Furthermore, direct marketing in particular works most effectively with financially confident consumers, and FSA’s research indicates that there is a 107

significant minority of the population that lack the skills, confidence and knowledge to purchase products without more hands-on guidance.

11. Most large mutuals conduct much of their business nowadays through independent advisers. We are concerned that the supply chain post-RDR will be constrained by a fall in the availability of advisers, and providers will need to consider other routes to the market to maintain their market ambitions, or else explore different markets.

One size does not fit all

12. As mutual organisations that typically develop products for the mass market and for the financially less advantaged, our greatest concern is that FSA has so far done very little to articulate how people other than wealthy investors might gain access to advice. There has been some discussion of “simplified advice”, but the basis by which this will be differentiated from full advice has not yet been defined.

13. FSA has indicated that even where the rules permit “simplified advice” there will be no reduction in the qualifications required for the adviser. In our view this is wrong- advisers that are selling a single product to a clearly defined need do not need to be fully qualified.

14. When the previous government introduced the concept of “Sandler” products, FSA was charged with developing a regime for basic advice to accompany simple products. The resulting basic advice rules have proved difficult to implement and for the most part companies have not entered this market. We envisage similar problems with simplified advice unless there is a clear ambition to identify ways of helping to deliver adequate advice in a cost effective manner.

15. FSA has indicated that some firms might need to accept that their current distribution methods, customer base and product pricing will need to change post-RDR. However FSA’s cost-benefit case should accept that this might not always be possible, and that some firms at acute risk of being forced out of the market. In respect of mutuals, examples include:

a. we attach the transcript of part of the recent parliamentary debate [not printed] on the RDR which focuses on the plight of one of AFM’s members. It is unreasonable to expect customers from low income communities to significantly pay higher premiums, or higher charges; b. some products such as the Child Trust Fund, have capped charges, as will be proposed simple products that Treasury is consulting on, so there will be no scope to raise prices; c. many mutuals are constituted to work entirely within a particular community or trade. 108

16. FSA ought to abandon its “one size fits all” approach- to foster the availability of advice through different distribution channels and to accept that different types of advice should be provided. A recent and welcome proposal from FSA is to enable certain types of Holloway friendly society products to be exempted from the RDR. This indicates there is acceptance from FSA that a one size fits all approach doesn’t work and we suggest they consider this more widely.

Current timeline is no longer tenable

17. RDR is due for implementation at the end of next year. Even if all the proposals had been finalised this would be a very tight timetable for providers, with significant costs and disruption to business. For example the proposals require a new disclosure regime: FSA consulted on similar though less ambitious proposals in 2002/3, which were abandoned at the time because it was not possible to identify benefits that would adequately offset costs estimated at £400 million. This work also estimated that the transition period would need to be two years from the point where the final rules were made.

18. The insurance industry is also facing a host of other market developments to similar timescales, including new solvency rules, a new tax regime, new accounting rules, and a range of other regulatory and legislative changes. With scarce resources (by its own admission FSA has had problems hiring the actuarial staff it needs for this work), firms are being forced to manage a range of complex projects, and risk having to make difficult choices between them.

19. But FSA needs to better recognise that its role is developing policy is changing, with the growing powers of the new European regulators, and the determination of the UK government to implement EU Directives with the minimum of variation. It is completely illogical for FSA to maintain its timeline for the RDR without taking account of changes being imposed by the IMD, PRIPS and MiFID, or indeed of changes being made elsewhere in its own rulebook. The absence of co-ordination is alarming.

20. Ultimately, we remain concerned that some of our members will find it easier to temporarily close to new business rather than try to implement RDR requirements at the same time as other business critical projects. We also see some evidence of greater merger activity, and we believe that the combination of providers focusing on new markets, closing and merging will reduce choice and access to financial products.

21. So in conclusion, the RDR is currently destined to fail to achieve its original objectives. To be successful, the priorities need to be reassessed, there must 109

be more attention given to ensuring that it achieves good outcomes for the generality of consumers, and the implementation deadline must either delayed or phased in over a more appropriate timetable.

22. We would be pleased to discuss further any of the items raised by our response.

January 2011

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Written evidence submitted by Standard Life

1. Standard Life is a leading provider of long term savings and investments to over 6 million customers worldwide.

The Standard Life group operates across UK, Canadian and International retail markets; with corporate pensions and benefits businesses in the UK and Canada; Standard Life Investments, a global investment manager, which manages assets of over £154bn; and its Chinese and Indian Joint Venture businesses. At the end of September 2010 the Group had total assets under administration of £192bn.

Executive Summary

2. Standard Life fully supports the Retail Distribution Review (RDR). Alongside initiatives such as Treating Customers Fairly (TCF), financial capability and simplification, it presents an unprecedented opportunity to transform financial services distribution in the UK, generating greater consumer trust in financial advice and engaging more people in long term saving. It has a vital role to play in helping to close the UK’s savings gap, and delivering the social benefits this represents.

3. The RDR proposals for a more transparent and fairer charging system are welcome and will: • Produce better outcomes for consumers by ensuring that providers compete on the basis of best service provision and value-for-money, as opposed to commission; • Clarify what consumers are paying for and how much; and • Empower consumers to negotiate charges for financial advice.

4. A better qualifications framework for advisers will increase consumer confidence in the industry and ultimately lead to greater use of professional, financial advice by consumers. We recognise that the new rules around charging and qualifications pose significant challenges for advisers and Standard Life will continue to invest in technology and a range of support services to help advisers meet these challenges.

5. Standard Life has limited, albeit important, concerns in relation to RDR. Action must be taken to mitigate potential risks to consumer access to financial advice and to improve consistency and clarity. Our concerns, and recommendations for how to address them, are included below.

6. A pragmatic approach to offering simplified advice for customers who have less complex needs must be confirmed soon. Simplified advice can make a major contribution to addressing the risk that some consumer groups may be excluded from accessing financial advice as a result of the RDR.

7. Sustained investment by private and public sectors in financial literacy is vital to ensure consumers engage with financial products and seek financial 111

advice where it is their best option. This investment, coupled with efforts to ensure that overall access to advice is protected, or enhanced, is crucial to help address the UK savings gap.

8. The proposal in the recent FSA Platforms paper to ban cash rebates into customer accounts is inconsistent with the wider approach of the RDR and will increase complexity and reduce transparency for customers. We recommend the cash rebates option is retained and the FSA’s concerns are instead addressed through charging and disclosure requirements.

9. Care must be taken to ensure the RDR complements emerging EU legislation such as PRIPs (Packaged Retail Investment Products) and MiFID (Markets in Financial Instruments Directive). This is important to minimise costs for the industry and complexity for customers.

10. Standard Life is committed to working with the Government, the FSA and others in the industry through the ABI to progress these issues and support the Retail Distribution Review in achieving its intended, and laudable, outcomes for consumers.

A transparent and fairer charging system

Removal of commission

11. Standard Life supports the proposed ban on commission. This will ensure providers compete on the basis of best service provision and value-for-money, delivering a better outcome for consumers. Adviser charging will clarify what consumers are paying for and how much and empower them to negotiate charges for financial advice.

12. This will generate enhanced consumer trust in financial advice, which has been eroded in recent years. Rebuilding consumer trust is vital to achieving the fundamental societal objective of more people saving more for the long term.

13. The move to adviser charging does involve risks. Consumers may be discouraged from seeking financial advice as a result of: (i) restricted choice in how they pay for services, (ii) the perceived greater cost of advice and/or (iii) having to pay more for advice than previously.

14. Over time, increased consumer confidence in the industry generated by customer agreed remuneration should increase demand for financial advice. ABI research supports this view1. However, action must be taken to mitigate the risks outlined and ensure consumers continue to access financial advice where appropriate.

1 Charles Rivers Associates, Customer Agreed Remuneration: Research into the market impact of encouraging customer agreed remuneration, January 2008 112

Corporate pensions

15. Greater clarity is needed on remuneration rules for corporate pensions. The consultancy charging model is still evolving, and we need to fully understand who is paying, who is really getting advice (individuals or employers) and how this is communicated to individuals.

16. There are still some anomalies between contract (FSA) and trust-based (DWP) regulations. As with Pensions Reform and Auto Enrolment, consideration should be given to how RDR will operate across the different pension regimes, and what, if any, rationalisation is needed. Some proposals have already been made around commission and fees, but this has yet to be finalised. Guidance is expected from the FSA later this year, which must address the risk of ambiguity and provide clear guidelines to ensure consumers are treated consistently.

Financial education

17. Increased financial education that enables consumers to better understand and engage with financial products and, where appropriate, encourages them to seek financial advice, is vital to the success of the RDR. Sustained investment in financial literacy is necessary to achieve the goal of more people saving more.

18. The new Consumer Financial Education Body (CFEB) has a central role to play in improving financial literacy. We would welcome greater clarity from the Government and the FSA as to how this body will actively support the objectives of the RDR. The industry must also play its part, and Standard Life will continue to support this agenda through initiatives including the Standard Life Charitable Trust and third party bodies such as the Life Academy.

19. More generally, it is important that the FSA considers how best to communicate the forthcoming RDR changes to consumers so that they fully understand the benefits. To date, there has been very little discussion of the RDR outside of the industry.

Improved disclosure

20. Standard Life supports efforts to introduce improved disclosure as an important element of increasing transparency and clarity for consumers. For this to benefit consumers in practice, what providers send customers has to be simple, meaningful and supported by communications that inform and educate them. Customers tell us that that they do not currently value much of the information we are required to send them. The industry must work closely with the FSA to ensure the RDR produces changes to disclosure rules that genuinely benefit consumers and that operate effectively alongside planned EU legislation that will also influence disclosure, e.g. the current PRIPs (Packaged Retail Investment Products) consultation.

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Platforms and cash rebates

21. Overall, we're supportive of the FSA’s recent platforms paper: • We welcome the proposals on re-registration • We are pleased that the FSA has recognised that clients' needs can be satisfied by an adviser firm operating a single platform for the majority of investment business, and • We welcome additional scrutiny on capital adequacy for platform providers. We believe these proposals will deliver real consumer benefit.

22. Standard Life is concerned that the FSA’s proposal to ban cash rebates on platforms is inconsistent with the overall objectives of the RDR and the desire to increase transparency for consumers. Paying rebates into cash accounts is a transparent process well understood by consumers – both cash payments and account movements are disclosed. Mandating product rebates instead, as advocated by the FSA, will prove more complex for consumers. We recommend that the current cash rebates option is retained and the FSA’s concerns are instead addressed through charging and disclosure requirements.

A better qualification framework for advisers

23. Standard Life supports the proposed increase in adviser qualifications. Over time, we hope that advisers will obtain a status similar to other professions, such as lawyers and accountants, and will achieve the recognition they deserve for the valuable services that they provide. This will lead to an increase in demand for their services over time.

24. We know through our close relationships with intermediaries that many advisers have proactively taken steps in recent years to adapt their business models and increase their level of professionalism. However, we recognise that the RDR requirements still pose significant challenges for some advisers.

25. Given these challenges for advisers, who are investing in qualifications and business model changes at the same time as managing their businesses as usual, Standard Life is providing support in the run-up to RDR implementation through investment in: - technology to ensure advisers have the right propositions to support their businesses and their customers - our support services subsidiary, threesixty, and our account managers to provide consultancy services such as compliance and business model advice - new client propositions in the retirement and investment fields - marketing support so advisers are better placed to reach out to new and existing customers

26. Our investment in these key areas will help advisers to make the transition within the planned timescales and enable them to make the most of 114

opportunities to deliver the best possible services to customers.

Greater clarity around the type of advice being offered

‘Independent’ and ‘restricted’ advice

27. Providing clear information to consumers regarding the advice and services offered by an adviser is an indispensable element of increasing transparency and improving consumer confidence in the industry.

28. It is important that consumers are given information that goes beyond simple high level labels such as ‘independent’ and ‘restricted’. While Standard Life understands the rationale for these labels, we think there needs to be some flexibility within the ‘restricted’ category to capture the clear difference between advisers that advise only on their own products (i.e. tied) and those that essentially advise in a whole of market manner but on a limited number of products. The risk with the current labels is that consumers are discouraged from seeking advice from a ‘restricted’ adviser, when in reality this may be beneficial for consumers without complex needs.

Simplified advice

29. Another area that is not yet confirmed is simplified advice. Full financial advice will continue to play an important role in a post-RDR environment, but it may not be an appropriate or cost-effective option for many consumers. Our research2 tells us that a large number of customers want the option to select their investments with limited guidance rather than through a full, independent advice service. Confirming a simplified advice process will help to ensure that such consumers still have access to advice and long term savings.

30. Our proposal to the FSA for a simplified advice model that will work in practice, suggests that it should not necessarily be about delivering simple products only, but about using a simplified process to deliver advice, primarily online, in line with customers’ needs. In other words, the products recommended through a simple advice model may be simple products, but could also include simplified versions of products that address more complex needs.

31. Given the substantial investment needed to develop a technology-based simplified advice solution, the industry needs clarity soon. To attract customers who may be unable and/or unwilling to pay for full intermediated advice, simplified advice needs to help providers offer flexibility to customers around how they pay. The industry wants to understand what charging models will be acceptable under a simplified advice regime. We feel that the same qualifications should not be required to offer a simplified advice process.

2 Standard Life Market Participation Strategy research, 2009 115

32. Standard Life will invest in our direct to customer business to ensure we can satisfy our duty of care to customers who may become ‘orphaned’ by intermediaries who change their business models, or who do not wish to pay for a full, independent advice service.

January 2011

Confidential Restricted - Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties

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Written evidence submitted by the Association of Independent Financial Advisers

EXECUTIVE SUMMARY

1. AIFA is fully supportive of the original RDR objectives and the main elements of the reforms. However, the RDR is far from perfect, and there are several improvements which we believe FSA needs to make in order to ensure the successful delivery of the original objectives. Unless these improvements are made there is a real danger that substantial numbers of advisers will leave the market prematurely, meaning that there will be fewer places for consumers to go for independent financial advice in the future.

2. Qualifications The raising of professional standards is a key element of retaining and building consumer trust in financial services, and demonstration of competence at Level 4 is entirely appropriate in the modern world. We cannot support ‘grandfathering’ on the grounds that thousands of non-independent advisers (young and old, to avoid age discrimination) would by an administrative device be brought up to the level that most AIFA members are achieving through a great deal of hard work. However we are concerned that a fixed deadline for all advisers will cause unnecessary hardship for some advisers and their clients when greater flexibility would not undermine the effect of the reform.

We call on FSA to: • take a more flexible and pragmatic approach for those advisers who are demonstrating commitment in attaining Level 4 as the deadline approaches. • make it clear the basis on which they would entertain dispensation requests from advisers for an extension of the timescale to complete their qualifications.

3. Remuneration AIFA believes that an effective market requires customers to be clear about the services they are receiving and what they are paying for them. However we have two main areas of concern regarding the remuneration changes: if FSA is not highly vigilant about attempts to cross-subsidise advice costs from product manufacturing, banks and other vertically-integrated firms may disguise the advice costs and so undermine the foundations of the RDR; secondly, we are extremely concerned by FSA’s decision to ban the practice of ‘provider factoring’, which we believe is critical for preserving and encouraging a much-needed regular savings culture. In particular we are concerned about the impact on the Group Personal Pension (GPP) market which could cause many employers, who are unwilling to pay a fee for advice, to turn away from offering or developing their staff pension proposition.

We call on FSA to: 117

• be absolutely clear and public about how it will police its commitment to ensure a level playing field between IFAs and vertically integrated firms on Adviser Charging. • review its ban on provider factoring and work with the OFT to facilitate a standardised approach.

4. Consumer Access Whilst consumer access to financial advice is arguably more important than ever before, the RDR has not proposed reforms which will achieve this. It is all very well to make improvements to the quality and professionalism of the advice proposition for those who receive it, but the broader objective should be to achieve the greatest good for the greatest number.

We call on FSA to: • revisit its original consumer access objective. • take a much more energetic role in developing a regime which will allow greater numbers of customers to receive cost-effective professional advice.

5. Advice Categories and Labelling AIFA is concerned that despite considerable endeavours, the division of advice categories and the labelling of those services will confuse customers as to the nature of the service they are receiving. It is also crucial that consumers have a good understanding of what sort of adviser they are engaging with, whether ‘independent’ , ‘restricted’ or ‘basic’.

We call on FSA to: • provide clarity as to how the new labelling regime will work in practice, particularly the policing and enforcement of the use of the ‘independent’ , ‘restricted’ and ‘basic’ labels • review its projections for the proportions of ‘independent’ versus ‘restricted’ advisers, with a view to mitigating the risk that the eventual distribution of advisers will be incongruent with the intentions of the labelling distinctions.

6. Regulatory Dividends The RDR was a prime opportunity for FSA to seek to encourage positive behaviour through providing “regulatory incentives and dividends” for firms who invested in their business and people to deliver the RDR outcomes. Regulatory dividends would provide a clear demonstration of a regulator that wishes to work with the sector to bring about consumer benefit – and this would engender a far more constructive response from the wider adviser community on the RDR as a whole. However the impact of the banking crisis saw the notion of dividends removed, which we believe was an unreasonable response given that IFA firms did not cause the crisis.

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We call on FSA to: • revisit the notion of regulatory dividends which we propose could take the following form: − A regulatory fee system which favours firms that have invested in compliance and management ability and so pose lower regulatory risks − Regulatory capital requirements based on a firm’s compliance record and other behavioural indicators. This would see a tangible reward for better run, lower risk, firms. − Supervisory approach based on intelligent use of the regulator’s data to recognise those firms that pose lower risks than others. This would see low risk firms subject to less intensive scrutiny.

7. Statute of Limitations The lack of a liability long stop for the industry means that businesses have the burden of making provision within their accounts for the increasing risk of complaints, the cost of maintaining records over a long period, as well as the proposed increases to capital- adequacy provisions.

We call on the Government to: • consider again the question of a liability long-stop for advisory firms and bring Financial Services in line with the Statute of Limitations.

8. Timescales and Implementation The RDR is an extremely important and far-reaching reform programme and it must be implemented properly. However FSA has delayed the publication of many of its proposals, including information on the use of platforms, its final professionalism proposals and qualification gap-filling requirements. As a result the final post-RDR ‘landscape’ is still not clear, posing several issues from a firm management perspective. Furthermore FSA has not published an implementation plan nor provided confidence that it has sufficient control over the inherent risks to allow the RDR to proceed on schedule.

We call on FSA to: • provide clarity for firms on outstanding issues and establish a moving deadline whereby RDR will be put in force only after a reasonable period has elapsed after publication of the final outstanding elements of the rules. Unless FSA proactively demonstrates it has the confidence it can implement the RDR successfully, then we believe FSA should delay it until it has. • publish an implementation plan which outlines the success criteria, assesses the risks, and sets out the mitigating actions the regulator will take to ensure that the RDR delivers its desired outcomes, while clarifying who will be accountable in the new regime for the RDR decisions that have been taken and the outcomes that will be created as a result. 119

ABOUT AIFA

9. The Association of Independent Financial Advisers (AIFA) is pleased to have this opportunity to contribute to the Treasury Committee inquiry into the Retail Distribution Review (RDR).

10. AIFA is the representative body for the IFA profession. IFAs account for over 70% of all financial services transactions in the UK (measured by value). As such, IFAs represent a leading force in the maintenance of a competitive and dynamic retail financial services market. AIFA’s role is to work with industry stakeholders and policy makers to bring about a more positive regulatory and business environment for members. It is AIFA’s objective to play a critical but constructive role within the regulation. AIFA is a non- commercial, not-for-profit trade body.

INTRODUCTION

11. AIFA is fully supportive of the original RDR objectives and the main elements of the reforms. When customers see a financial adviser it is entirely appropriate that they should be told very clearly the costs involved and the services they can expect in return, and it is also appropriate that advisers should be competent at a level that commands public trust.

12. However it is fair to say that AIFA’s membership is best described as a ‘broad church’; some IFAs are firmly opposed to the RDR, whilst others believe it should have happened long ago. We have therefore consulted our membership extensively on the RDR over the four year period to ensure we have taken into account our members’ views appropriately and are representing the interests of the profession and the customers it serves. We have conducted research, held working parties and discussion forums, and of course we have considered the complexities of RDR issues regularly in our Council, whose membership is elected from IFA firms of all shapes and sizes.

13. It is this consultation with our membership which has led us to the RDR viewpoint we hold today. This is also supported by independent research which found the substantial majority of IFAs are either ‘enthusiastic’ or ‘willing’ adopters of the RDR requirements, and are actively preparing for the new trading environment1. Nevertheless we recognise there are some IFAs who passionately object to the RDR and wherever possible we have incorporated their concerns into our consensus position.

1 NMG Financial Consulting 120

14. The current shape of the RDR is actually considerably better than was originally proposed due in part to the participation of AIFA and other organisations in the consultation process. Early in the RDR consultation it was proposed that payment for advice should be by up-front fee alone, and that the qualification standard for a Professional Financial Adviser should be Level 6. As we know, the final rules allow advisers to be remunerated through the product, and to be qualified at no more than Level 4.

15. However, the RDR is far from perfect, and there are several improvements which we believe FSA needs to make in order to ensure the successful delivery of the original objectives. Unless these improvements are made there is a real danger that a large number of advisers will leave the market prematurely, meaning that there will be fewer places for consumers to go for independent financial advice in the future. This will not deliver FSA’s originally intended RDR outcome of increased consumer access and will also further contribute to the erosion of the savings culture in the UK. The proposed improvements are set out in more detail below.

Qualifications

16. The raising of professional standards is a key element of retaining and building consumer trust in financial services, and demonstration of competence at Level 4 is entirely appropriate in the modern world – an increasing majority of IFAs are either there already or are well on their way. This has been aided by the availability of qualifications based on case studies, such as the DipIP which AIFA has developed with the Chartered Institute of Bankers in Scotland (CIOBS), and which are more suited to the experienced adviser. Work is also continuing to develop qualifications based on practical assessment, but we would encourage the bodies involved to redouble their efforts to reach a conclusion that is both economic and practical.

17. On the issue of ‘grandfathering’, which was debated at length during the consultation period of 2007-9, it is worth noting that the term means different things to different people. However FSA’s definition of grandfathering is to deem someone of a lower qualification level to be at a higher level without any further demonstration of competence. On that basis it would mean that thousands of non-independent advisers (young and old to avoid age discrimination) would by an administrative device be brought up to the level that most AIFA members are achieving through a great deal of hard work. We therefore cannot support grandfathering as we believe it would be unfair to the majority of our members. At a time when we are seeking to improve consumer confidence in our market, it would be difficult to explain to the public how an adviser could be elevated to a higher level of qualification without any further assessment of capability.

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18. However we are concerned that a fixed deadline for all advisers will cause unnecessary hardship for some advisers and their clients when greater flexibility would not undermine the effect of the reform. We therefore call on FSA to take a more flexible and pragmatic approach with regard to the deadline for those advisers who are demonstrating commitment in attaining Level 4 as the deadline approaches. The objective must be to ensure that the maximum number of advisers are able to trade at the higher level of competence and this is not best served by simplistic lines in the sand. We believe that FSA should make it clear the basis on which they would entertain dispensation requests from firms for an extension of the timescale to complete their qualifications.

19. There are a wide range of predictions as to the number of IFAs who will exit the industry post-2012 as a result of the RDR, but AIFA categorically believes that FSA is wrong to say that a 20% drop is acceptable. It is incompatible with the original RDR objective of improved consumer access to accept a significant reduction in the number of places that consumers can go for independent financial advice.

Remuneration

20. AIFA believes that an effective market requires customers to understand clearly the services they are receiving and what they are paying for them. This is the foundation of public trust in the advice profession. What Adviser Charging does is put advisers in the position of determining their own remuneration and explaining it clearly to customers. It means they will have to show their customers that the service they are offering represents value for money.

21. However we have two main areas of concern regarding the remuneration changes. Firstly we call on FSA to be absolutely clear and public about how it will police its commitment to ensure a level playing field between IFAs and vertically-integrated firms on Adviser Charging. If they are not highly vigilant about attempts to cross-subsidise advice costs from product manufacturing, vertically-integrated firms may disguise the advice costs and so undermine the foundations of the RDR.

22. Secondly, we are extremely concerned by FSA’s decision to ban the practice of ‘provider factoring’, which we believe is critical for preserving and encouraging a much-needed regular savings culture. Whilst some would have us believe regular savings are inconsequential, ABI figures suggest otherwise. In Q3 2010, new regular premium investment savings and individual pensions together amounted to 14% of the entire amount invested in investment savings and individual pensions.

23. Factoring is the cost-effective way that consumers can receive advice at outset, with the cost spread over a period. It is not practical for an IFA to charge hundreds of pounds 122

up front when the savings plan may be only tens per month, and if the adviser can only recover the cost of his advice over a long period the focus is likely to shift away from serving customers who are seeking regular savings.

24. The Group Personal Pension (GPP) market will be the largest regular premium market impacted by the RDR factoring ban. The impact of banning factoring on GPPs could cause many employers who are unwilling to pay a fee for advice to turn away from offering or developing their staff pension proposition.

25. AIFA feels that there are important parallels to draw from, and precedents set by, NEST. Banning factoring in the GPP market, will mean that the cost of establishing a scheme will need to be paid up front, either by fee or through market solutions such as nil- allocation periods. However, the initial cost of NEST is not being paid upfront by members, instead being paid for by the factoring of the 1.8% on-going charges being taken from all contributions. This is both evidence that schemes prefer to pay for the initial cost of establishment by monthly deductions, and also raises competitive issues between NEST and the wider commercial GPP market.

26. We therefore call on FSA to review its ban on provider factoring, and work with the OFT to facilitate a standardised approach.

Consumer Access

27. The objective of increased consumer access, was fundamental to Sir Callum McCarthy’s vision for a reformed market. It appeared as a key objective in the original FSA discussion document in 2007 and was also the subject of one of FSA’s cross-industry RDR working groups. However it has been dropped from subsequent papers without explanation and no longer features as a key RDR outcome.

28. Given the worrying savings and protection gap in the UK, we believe encouraging people to re-engage with their long term financial well-being should be paramount. Research commissioned for the ABI, and conducted by Oliver Wyman and Co, identified in 2001 a £27 billion p.a. savings gap between what we are currently saving and what we need to save for an adequate income in retirement. A more recent study by Aviva put the figure much higher at £300 billion.

29. Whilst access to financial advice is arguably more important than ever before, the RDR has not proposed reforms which will achieve this. It is all very well to make improvements to the quality and professionalism of the advice proposition for those who receive it, but the broader objective should be to achieve the greatest good for the greatest number.

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30. We are also concerned that Hector Sants’ letter of 13th December to the TSC only appears to reference the detriment caused to those who buy unsuitable products, rather than the detriment of products not being bought at all, which we believe should be of equal if not greater concern.

31. FSA’s solution for increased consumer access was Simplified Advice, but it has never got beyond the concept stage and appears to have been side-lined. The cost of developing economical advice solutions in an intensely demanding regulatory environment precludes market innovation and it is essential that FSA should recognise that it has a responsibility to be more proactive in engaging industry stakeholders in the development of an approved model.

32. We therefore wish to see FSA revisit its original consumer access objective – and take a much more energetic role in developing a regime which will allow greater numbers of customers to receive cost-effective professional advice.

Advice Categories and Labelling

33. AIFA is concerned that despite considerable endeavours, the division of advice categories and the labelling of those services will confuse customers as to the nature of the service they are receiving. It is crucial that consumers have a good understanding of who they are engaging with, whether ‘independent‘ , ’restricted’ or ‘basic’. It is worth noting here that in the mortgage market the same labels are due to be applied but with different definitions, potentially adding further consumer confusion.

34. We also need much more clarity from FSA as to how the new labelling regime will work in practice, particularly the policing and enforcement of the use of the ‘restricted’, ‘independent’ and ‘basic’ labels.

35. Additionally, given the changes to the definition of independence, we call on FSA to review its projections for the proportion of ‘independent’ versus ‘restricted’ advisers post-2012, with a view to mitigating the risk that the eventual distribution of advisers will be incongruent with the intentions of the labelling distinctions.

Regulatory Dividends

36. Change is expensive and change on this scale, and during these economic conditions, demands the co-operation of the regulatory authorities with the industry. The RDR was a prime opportunity for FSA to seek to encourage positive behaviour through providing “regulatory incentives and dividends” for firms who invested in their business and people to deliver the RDR outcomes. Indeed at the start of the RDR, FSA discussed ways 124

of doing this which included statements in DP07/01 such as “well-managed firms, which treat their customers fairly, should be given regulatory incentives for doing so, and it should be these firms that benefit from regulatory change”, and that “Firms with good market practice would receive a regulatory dividend but those with riskier market practice would need additional FSA supervision”.

37. There was a recognition that firms would need to invest in their people, and may need to change their business models, if the RDR’s objectives were to be seen through. AIFA welcomed this regulatory support and proposed a “regulatory dashboard” which could be published so firms could be sure of accessing dividends in their regulatory journey, and making any changes appropriate for their business.

38. However the impact of the banking crisis saw the notion of dividends removed, which we believe was an unreasonable response given that IFA firms did not cause the crisis. AIFA therefore calls on the regulator to revisit the notion of regulatory dividends which we propose could take the following form: • Regulatory fees - the new fee system should favour firms that have invested in compliance and management ability and so pose lower regulatory risks to the regulator or their client base. • Regulatory capital - there is a strong case for the regulator to develop its regulatory capital requirements based on a firm’s compliance record and other behavioural indicators. This would see a tangible reward for better run, lower risk, firms. • Supervision - intelligent use of the regulator’s data should be deployed to recognise those firms that pose lower risks than others. This would see low risk firms subject to less intensive scrutiny.

39. These are only examples of how FSA could seek to encourage positive behaviour. They would provide a clear demonstration of a regulator that wishes to work with the sector to bring about consumer benefit – and this would be welcomed by all participants. We believe progress on this issue of dividends would engender a far more constructive response from the wider adviser community on the RDR as a whole.

Statute of Limitations

40. If RDR is about making the industry work better, and enabling better outcomes for consumers, then the introduction of a 15 year long stop is an issue that needs to be addressed. The lack of a long stop means that businesses have the burden of making provision within their accounts for the increasing risk of complaints, the cost of maintaining records over a long period, as well as the proposed increases to capital- adequacy provisions. Furthermore, the uncertainty generated by open-ended liabilities 125

makes it difficult for firms to be sold and also hinders their ability to attract new sources of capital.

41. Introducing a 15 year long stop would address these issues while bringing financial services into line with the Statute of Limitations. Indeed research we carried out with YouGov showed that the majority of consumers were actually in favour of a time limit for responsibility, with 75% of clients questioning agreeing there should be some time limit for IFAs to be legally responsible for advice given.

42. We believe the introduction of a long stop would be a very positive move for the future evolution of the advice market if it were achieved.

European Agenda

43. Increasing amounts of financial regulation are now emanating from Europe, and it is therefore crucial that the UK is best placed to achieve positive engagement on the continent in the coming years and ensure we remain a leading player, for the benefit of consumers.

44. However revisions to IMD and MiFID, and the PRIPS initiative are all expected over the coming year, potentially with ramifications for the market. However FSA has failed to articulate how it will account for the impact of these pieces of legislation on the intermediary market, and how in turn the various streams of the RDR will thus be affected.

Timescales and Implementation

45. The RDR deadline was set early on in the process and it is fair to say a great deal has happened in the intervening period – the financial crisis and the resulting economic fallout, a raft of European legislation, not to mention the election of a new Government, and its proposals to reform the entire regulatory structure.

46. During the four year consultation process FSA has also delayed the publication of many of its proposals. Indeed we are still waiting for further information on the use of platforms, FSA’s final professionalism proposals, and qualification gap-filling requirements. As a result the final post-RDR ‘landscape’ is still not clear. This obviously poses several issues from a firm management perspective, as firms need sufficient time for operational and business planning – which they are unable to do with confidence until they have clarity from FSA.

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47. Furthermore FSA has not published an implementation plan and has not provided confidence that it has sufficient control over the inherent risks to allow the RDR to proceed on schedule. The RDR is an extremely important and far-reaching reform programme and it must be implemented properly. The planning, and risk management must be of a very high standard and the industry needs confidence that FSA is proceeding with due control and governance.

48. We therefore call on FSA provide clarity for firms on outstanding issues and establish a moving deadline whereby RDR will be put in force only after a reasonable period has elapsed after publication of the final outstanding elements of the rules. Unless FSA demonstrates it has the confidence it can implement the RDR successfully, then we believe FSA should delay it until it has.

49. Further, we call on FSA to publish an implementation plan which outlines the success criteria, assesses the risks, and sets out the mitigating actions the regulator will take to ensure that the RDR delivers its desired outcomes, in much the same way in which FSA expects the firms it regulates to operate. There should also be greater accountability so that it is clear who is responsible for the decisions being taken and the outcomes that will be created as a result. Bearing in mind the creation of the CPMA from 2013, and the current operation of a shadow regime, it is essential that the industry should also be told who will carry the post-implementation accountability for the decisions that are being made today.

CONCLUSION

50. In summary, AIFA fully supports the original objectives of the RDR and the intended outcomes. However we want to see several improvements to allow these original objectives to be ultimately delivered, namely:

• FSA to take a more flexible and pragmatic approach with regard to the deadline for those advisers who are demonstrating commitment in attaining Level 4 as the deadline approaches. FSA should make it clear the basis on which they would entertain dispensation requests from firms for an extension of the timescale to complete their qualifications. • FSA to be clear and public about how it will police its commitment to ensure a level playing field between IFAs and vertically-integrated firms on Adviser Charging. • FSA to re-think the question of provider factoring on regular premiums, including the ban on factoring in the Group Personal Pension (GPP) market, and work with the OFT to facilitate a standardised approach. • FSA to revisit its original consumer access objective – and take a much more energetic role in developing a regime which will allow greater numbers of customers to receive professional advice at low cost. 127

• FSA to provide further clarity as to how the new labelling regime will work in practice, particularly the policing and enforcement of the use of the ‘independent’ and ‘restricted’ labels. • FSA to review its projections for the proportion of ‘independent’ versus ‘restricted’ advisers post-2012, with a view to mitigating the risk that the eventual distribution of advisers will be incongruent with the intentions of the labelling distinctions. • FSA to make good on its concept of ‘regulatory dividends’ where well-run advisory firms have invested in their business and people to deliver RDR outcomes. • The Government to again consider the question of a liability long-stop for advisory firms and bring Financial Services in line with the Statute of Limitations. • FSA to provide clarity for firms on outstanding issues and establish a moving deadline whereby RDR will be put in force only after a reasonable period has elapsed after publication of the final outstanding elements of the rules. • FSA to publish an implementation plan which outlines the success criteria, assesses the risks, and sets out the mitigating actions the regulator will take to ensure that the RDR delivers its desired outcomes, while clarifying who will be accountable in the new regime for the RDR decisions and outcomes that will be created as a result.

51. There is a great deal more work to do to deliver the RDR vision, but if the above points are addressed there is every reason to believe that Sir Callum McCarthy’s vision could be realised. There is much more consensus on core issues than recent publicity suggests, but that consensus is still looking in the direction of Canary Wharf for further action.

January 2011

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Written evidence submitted by the British Bankers’ Association

The British Bankers’ Association (BBA) welcomes the opportunity to provide written evidence to the Treasury Committee on the Retail Distribution Review (RDR). We represent 220 banks from 60 countries and have 40 associate firms within membership.

Executive Summary

The BBA supports the objectives of the RDR which seek to deliver the following:

• A step change in professional standards across the financial advice industry;

• Greater impartiality in the investment advice process; and

• Improved clarity for consumers on the nature and costs of the services they receive through clearer service labelling and cost disclosure.

All of which is designed to improve consumer confidence and trust through:

• An improvement in the quality of advice received by consumers;

• The removal of incentives which work against the interests of consumers and which undermine consumers’ trust in the industry; and

• A greater appreciation that advice has a value that is worth paying for.

We broadly agree that the RDR is on course to deliver on its objectives. However, we continue to have some concerns on a number of aspects as follows:

• We firmly believe that the widening of consumer access to the savings and investment market is an essential objective of the RDR. However this objective has been sidelined in the implementation of the proposals and consequently the RDR is likely to result in a significant section of mass market customers being excluded from financial advice. The dual effect of increased costs of advice, coupled with proposals which make it less likely for customers to pay these costs, will probably result in an increased savings and protection shortfall in the UK.

• We do not believe that the Financial Services Authority (FSA)’s cost-benefit analysis has properly accounted for the negative impact on consumers that arises from the increased savings and protection gap, caused by a reduction in advice provision. We strongly believe that new, fit for purpose, Simplified Advice services are required to deliver better consumer outcomes than Basic Advice and to fill what we consider to be an important gap between full advice and execution-only services.

• Delays to the FSA’s consultation process for some of the professionalism aspects under the RDR have caused uncertainty and hindered implementation. Whilst we oppose grandfathering, consideration should be given to extending the implementation 129

deadline for certain aspects, such as the requirements relating to Continuous Professional Development (CPD) and transactional sales data reporting.

• The RDR has been applied as a one size fits all solution across a diverse array of advice and distribution services, including those provided by the UK’s wealth management and private banking sectors. These sectors service internationally mobile clients and access a broad suite of international products in doing so. Certain aspects of the RDR, such as the Adviser Charging rules, are super-equivalent to EU law and risk placing UK based businesses at a competitive disadvantage to their international peers. This is especially so in relation to services provided to High Net Worth Individuals who are comfortable trading on an international basis.

A transparent and fairer charging system

1. The FSA’s Adviser Charging proposals involve a ban on advisers receiving sales commission from product providers. Instead they will be remunerated by way of a fee separately agreed between the client and the adviser. We support the principles behind the FSA’s Adviser Charging proposals and the objective of removing the potential for bias from the adviser’s decision-making process.

2. The Adviser Charging proposals address the risk of provider and product bias stemming from the payment of commission by product providers to independent financial advisers and multi-tied advisers. The removal of this link offers the prospect of improved consumer outcomes by enhancing the impartiality of the advice process and may help to nurture increased consumer trust. If so, that is clearly something to welcome.

3. Adviser Charging will also help to raise consumer awareness on the cost of advice which is often obscured under the existing commission-based model where the adviser is paid indirectly by the product provider. The removal of inappropriate provider influence on the setting of adviser remuneration ensures advisers are better rewarded and valued for giving advice, as opposed to arranging an investment transaction.

4. However, we do have concerns on the impact on the UK’s wealth management industry, within its international market place, from the application of the RDR Adviser Charging rules to business conducted with High Net Worth Individuals. Remuneration structures in the international wealth management sector frequently involve the payment of product provider commissions to advisory firms. Indeed, many of the financial products that have been structured for distribution in this international market are designed to allow for adviser remuneration by way of commission rather than on a fees-only basis. Those products are frequently not provided by UK firms and there is therefore a reasonable prospect that they may not be restructured to take account of the RDR. On that basis, it seems unlikely that it would be possible for UK wealth managers to continue to distribute them under the new Adviser Charging rules.

5. In addition, High Net Worth clients of the UK wealth management sector are commonly internationally mobile and can just as easily access services in Switzerland or other offshore jurisdictions as they can in the UK. Further, offshore firms are generally able to come to the UK and carry on business with High Net Worth clients without having to 130

comply with the FSA’s rules, whether under an EU financial services passport or in reliance on exemptions under the UK regulatory regime. Against this background, it is apparent that the RDR regime will place the UK wealth management sector on an unlevel playing field with its competitors in other EU Member States and beyond and international product providers could be deterred from distributing products through UK firms by refusing to restructure their products in line with RDR rules.

6. In view of that, we believe there is a strong case for revisiting the wholesale application of the RDR regime to wealth management business. Particularly given the more sophisticated client base who are likely to focus on performance, availability of products and quality of service over whether remuneration is by way of commission.

A better qualification framework for advisers

7. We support the FSA’s pursuit of a step change in professional standards across the financial advice sector. We agree that this is necessary in order to help restore consumer trust, deliver improved consumer outcomes and attract new talent into the industry.

8. To this end, we support the removal of grandfathering whilst acknowledging the need for flexibility in providing alternative ways that seasoned professionals can meet the new QCF Level 4 standards. We therefore welcome the FSA’s approach to permitting alternative assessments as a pragmatic solution for experienced advisers who would prefer not to take written exams.

9. The banks are committed to delivering meaningful change by supporting the increase in the minimum qualification for advisers to QCF Level 4 and a greater role for the professional bodies in raising industry standards.

10. Transition to the higher minimum examination requirements will be challenging both operationally and logistically for the banking sector as the vast majority of bank advisers will need to take either additional exams or some form of CPD. However, the banks are actively delivering this step change, making use of the FSA’s ‘no regrets’ policy which allows advisers to use CPD to fill knowledge gaps between existing and new qualifications.

11. We note however that the ongoing debate and uncertainty around professionalism is reducing the time available to implement the step change effectively. The delay in the publication of FSA’s Professionalism Policy Statement, which will confirm the professional standards governance framework, and the proposed consultation on sales data reporting planned for 1H 2011, has only added to this uncertainty.

12. The FSA should therefore stand ready to show flexibility in the implementation deadline of end 2012 where this is required to support the step change towards higher professional standards. Such flexibility would also help to mitigate against an expected reduction in the number of advisers, in the short term at least, as a result of the RDR requirements.

Greater clarity around the type of advice being offered 131

13. We recognise that customers need to be well informed on the nature of services that they receive and that the diverse financial advice landscape presents a challenge in this regard.

14. We agree that the ‘Independent’ label resonates well with the public and is an effective differentiator between independent advice and non-independent advice services.

15. We have doubts that the ‘restricted advice’ label will be as effective in helping consumers to properly understand and differentiate between the non-independent advisory services at their disposal, given the wide range of services to be covered by this label. The restricted advice label will need to be supported by additional disclosure by firms to clarify what the service is providing and equally what it is not providing to customers.

16. An option would be to rely exclusively on inclusion or exclusion of the word ‘Independent’ from the service label as the key means of differentiation, universally supported by a Scope & Range of Services Statement to be provided to the customer at the point of sale.

17. However, we consider service labelling as secondary to the need to ensure that customers have access to professional investment advice in the first instance.

Consumer Access to Advice 18. The encouragement of greater savings and investment and consumer access to advice were original objectives of the RDR and these remain important public policy objectives.

19. The FSA’s original RDR Discussion Paper1 identified a number of key target outcomes, including “A market which allows more consumers to have their needs and wants addressed”. We are concerned that this important target outcome has been sidelined as the RDR has progressed. 20. We expect the RDR to lead to a reduction in the overall supply of investment advice to consumers unless new mass market propositions emerge. There is a broad consensus, that a significant number of financial advisers will exit the market place as a result of the RDR and this view is shared by the FSA. 21. Hector Sants commented, at his meeting with the Committee on 23 November 2010, that a possible reduction in IFA numbers of up 20% is an acceptable cost to deliver the specific improvements sought under the RDR. 22. In addition, we expect to see a shift of advice provision ‘up the curve’ to wealthier clients given the increased costs which accompany RDR implementation and the time that would be required to complete the new ‘full’ advice process, estimated at circa 4 hours as a minimum. 23. It will be increasingly difficult for many less affluent customers, with straightforward saving and investment needs, to obtain cost effective advice. We believe that this will also adversely impact the potential success of the proposed ‘Junior ISA’.

1 FSA Discussion Paper 07/1 – A Review of Retail Distribution, Section 2.9 132

24. It is important that consumers are able to select from a range of advice and distribution solutions (and associated prices).

Simplified Advice 25. We believe that ‘Simplified Advice’ services have potential to fill the advice gap for less affluent consumers which we believe will result under the RDR. 26. This view is informed by the following features of Simplified Advice: • the service would satisfy straightforward savings and investment needs and deliver extended customer access with respect to these needs more cost effectively than full advice services; • average transaction size would be expected to be lower than that for full advice services given the target market;

• the service would be highly automated and comprise a safe process for delivery of suitable, personal recommendations of packaged retail investment, deposit or protection products to customers with acceptable risks and safeguards, including recourse to the Financial Ombudsman Service;

• service automation would help to keep costs down for customers and as a result enable wider distribution than we envisage under the new full advice model;

• Internet-based Simplified Advice offerings could be accompanied by face to face and telephone services, where staff would act as ‘facilitators’ and have no discretion to impact the personal recommendations generated by the model, ensuring that consumer protections would be built into the model;

• professional qualification and training and competence requirements for Simplified Advice facilitators should be appropriate to the nature of the role;

• service providers would ensure the appropriateness of the products recommended in line with the FSA’s guidance on the responsibilities of providers and distributors for the fair treatment of customers.

27. For clarity, Simplified Advice would provide regulated advice, where the firm will stand behind that advice - and that, where facilitated face to face or by telephone, when the customer asks if it is the right thing for them to do, the facilitator must be able to answer “yes”. 28. The BBA believes that such a service would be ‘fit for purpose’, deliver better outcomes than Basic Advice and be complementary to the aims of the RDR, given the intended customer base and the nature of the needs it will address. 29. Simplified Advice could deliver a wider range of straightforward products for consumers than the stakeholder range permitted under Basic Advice. 30. We, alongside our colleagues at the Association of British Insurers, have tabled detailed proposals with the FSA for Simplified Advice and we are keen to work with the authorities to support the introduction of these new services. 133

31. Finally, it is important that HM Treasury’s consultation on Simple Financial Products considers the ongoing discussion on Simplified Advice and the continuation of Basic Advice.

January 2011

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Written evidence submitted by David Haxby, Independent Financial Adviser

.Summary of the main points.

1. All IFA’s (Independent Financial Advisers) who have to be currently qualified (with the Financial Planning Certificate FPC1,2,3 - Level 3) have to have reached a new qualification known as Level 4 by the cut off date 31.12.2010. This is irrespective of the number of years that they may have been in the industry.

2. If this qualification (Level 4) has not been achieved by 31/12/2012 then the FSA will terminate the IFA’s authorisation. This means that without the additional qualification by the cut off date, all such IFA’s will be de-authorised and unable to trade within financial services or give financial advice.

3. In turn the Product providers will foreclose the respective IFA agencies. Without an agency agreement with the IFA, the IFA will be unable to earn his livelihood (restriction on trade).

4. With no agency agreement in place, all commissions due to the IFA from the Product Providers will cease, despite there being unpaid or contractual remuneration still to accrue. This will include existing commission due to the IFA through contractual commission agreed hitherto with the Product Provider.

5. All contractual fees agreed between the IFA and the client for ongoing financial advice will have to cease.

6. The FSA advise that CPD credits is not an acceptable route to bridge the gap between the existing Financial Planning Certificate – FPC1, 2, 3 and Level 4. A Brief Introduction

David Haxby joined Allied Dunbar Assurance (now Zurich) as a tied agent on the 17th of November 1986. He has been in this industry since that date. On 1st January 1995 David Haxby became an Independent Financial Adviser (IFA) trading as: David L Haxby & Co. On the 1st of April 2003, David L Haxby incorporated as South West Investment Consultant Ltd., trading as David L Haxby & Co., FSA Number: 501125 Currently the firm is a member of: Financial Ltd., Unit 1, Andoversford Business Park, Andoversford, Cheltenham, Gloucester, GL54 4BL which is authorised and regulated by the Financial Services Authority.

Factual Information I would like the committee to be aware of

Details of the current qualification require by the FSA FPC - Financial Planning Certificate – Referred to now as: Level 3 Originally developed for financial advisors, to provide a broad based knowledge of key topics for financial planning, this qualification has 3 component parts: 135

FPC 1 - Regulation and compliance The FPC1 exam is a 2-hour paper of 100 multiple choice questions and focuses on a variety of topics relating to regulation and compliance. FPC 2 - Protection, savings and investment products The FPC 2 is a 2-hour paper with 60 multiple choice questions and 40 true/false questions and aims to develop candidates' specific product knowledge and their ability to apply it when advising clients. FPC 3 - Identifying and satisfying client needs The FPC 3 exam is a 3-hour paper with 3 case study related questions, which tests a candidate’s ability to conduct a factual check of clients' needs, to assess those needs and to be able to recommend appropriate products, considering the regulatory framework and the various products and providers covered in FPC I and 2.

Background/History of authorisation By the end of 1995 those in the financial services industry and those joining were required by the then regulator; the Personal Investment Authority (PIA) to obtain a qualification which was: The Certificate in Financial Planning FPC1, 2, 3.

How to get from level 3 to the required level 4 by the end of 2012 Pay the Chartered Institute of Insurers (CII) the sum of £650.00 for their study material and exam fees. There are a series of exams and for those IFA’s with Financial Planning Certificate – FPC1, 2, 3; it would be a minimum of 4 concurrent exams. Alternatively, pay the Institute of Financial Studies(IFS) the sum of £595 for which there would be a rolling programme of study and exams over 1 year after which there would be a 3 hour final examination.

Any Recommendations that I would like the committee to consider in its report

Agree that IFA’s may fill the Gap between the existing Financial Planning Certificate – FPC1, 2, 3 and Level 4 through Continual Professional Development (CPD) between now and 2016.

January 2011 136

Written evidence submitted by Threesixty Services

We are well aware that you will have received many submissions around two of the core issues of RDR – Qualification benchmarks and the removal of commission. Both of these areas are important and each will have an impact on the availability of advice within the Financial Services sector. Compelling evidence has not been presented that either increased qualifications or the removal of commission will have a material effect on the standards of advice available for consumers or that alternatives – such as grandfathering with robust CPD or commission caps – would not be at least as effective as the FSA’s proposals.

That said, there is no compelling evidence that the FSA is wrong, it is even possible that the benefits they believe will arise from these changes will achieve the desired outcomes and that the loss of access to advice is a price worth paying. It should be noted, however, that an original desired outcome of the RDR was improved access to financial advice – that objective has since been, quietly, dropped and will certainly not be met by the core proposals.

The vast majority of responses you receive are likely to cover these two aspects in great depth and we would like to raise two other issues which we believe are key to the debate but which appear to be lost in the noise created around commission and qualifications.

A. Status of Adviser Firms

1. Definitions of Advice. The RDR proposes that there will be two main types of financial advice in the post-RDR world: Independent and Restricted. The term ‘Restricted’ is one which the FSA presented following research where they claim to have presented the non-independent options to consumers along with a series of different descriptors. Consumers found the term ‘restricted’ to be the one which reflected most accurately those alternatives. The FSA’s quarterly Consultation Paper – CP 10/22 – shows 6 main types of restricted advice with a further 3 possible models depending on the extent of any contractual relationship with one or more product providers. We believe that having 9 separate business models with just one descriptor is flawed and will cause consumer confusion. 2. Basis of the Definitions These definitions are supposedly definitions of ‘advice’. In fact, the most relevant difference between two key models is the range of products which an adviser is compelled to consider for his/her clients. It is important to emphasise the word ‘compelled’ at this point since all adviser models would be ‘able’ to consider the full range of products Our concern here is that many current IFAs will be forced to adopt a business model which would currently be described as ‘independent’ but which will fall within one of the new ‘restricted’ models post-RDR. The model in question is example E in the FSA’s draft disclosure statement from CP10/22 – enclosed as Appendix 1. We believe that this will cause consumer confusion and, through the inability of consumers to differentiate among the 9 models of ‘restricted’ will drive many of them to the much more restricted models offered by product providers and bancassurers. 137

3. Relevant Products This problem is caused by the FSA’s decision to amend the current definition of whole of market – requiring IFAs to consider the whole range of Packaged Products – to one which requires IFAs to consider the whole range of Retail Investment Products (RIPs). The additional products which an IFA would be required to ‘consider’ and ‘understand’ include, for example, Structured Investment Products and Unregulated Collective Investment Schemes. These investments, and others in the new definition introduce the potential for significantly more risk than Packaged Investments with the potential for very poor consumer outcomes. In the last 15 months the FSA has published reviews of the quality of advice around both Structured Investment Products (Quality of Advice on Structured Products – October 2009) and Unregulated Collective Investment Schemes (Unregulated Collective Investment Schemes: Good and Poor Practice Report and Unregulated Collective Investment Schemes: Project Findings – July 2010. In both instances the FSA’s findings were such that it would have been reasonable for them to propose the introduction of much stricter restrictions around advising on these products. Instead, of imposing additional restrictions around such products the FSA proposes rules which will compel IFAs to (a) consider them for use with their clients and (b) to understand how they work. (a) The FSA has confirmed that ‘consider’ in this context does not mean that an IFA must consider these products as part of every recommendation which he/she makes. Some sort of corporate consideration identifying client types which might be suitable for each investment would seem to suffice. However, it is not possible for a firm to decide that, following consideration, it does not operate with any clients for whom these investments would be suitable and thus elect not to use them and, for example, exclude them from their PI cover. Such an action, while fully informed and commercially sensible (the cost of PI cover for many of these investment types is expected to escalate following the RDR) would force a firm to adopt the ‘restricted’ descriptor – see e mail from FSA enclosed as Appendix B (b) The FSA has stated that it does not want a two-tier qualification system where ‘restricted’ advisers require a lower level of qualification than ‘independent’ advisers. Thus all advisers are required to obtain a level 4 qualification from a list approved by the FSA. The FSA has published learning outcomes it requires from a level 4 qualification and all the available exams are based on these. A knowledge of Unregulated Collective Investment Schemes, Structured Investment Products or others of the products added by the introduction of RIPs is not a requirement of any of the new qualifications approved by the FSA and it is thus difficult to see how an adviser is expected to demonstrate the competence required of him/her in order to be described as an ‘Independent’ adviser.

All of the evidence gathered by the FSA, including the anticipated introduction of European regulation around PRIPS suggests that, far from encouraging advisers to actively consider a range of investment types which the FSA recognises as higher risk, regulation should be introduced to control and restrict 138

advice in these areas. It is worth adding that a firm which is ‘restricted’ in the post- RDR world will not be restricted from considering these products for its clients, it will simply not be compelled to do so.

B. Grandfathering

The FSA has stated that it will not permit the ‘grandfathering’ of existing advisers, irrespective of their expertise and the length of their experience. While we have no strong views on this issue and are fully in favour of greater qualifications amongst advisers it is worth pointing out that this approach is contrary to that adopted when other professions have been created or remodelled with Nursing being the most recent example.

This refusal to permit grandfathering is not only contrary to examples in other professions, it is contrary to the FSA’s own practice and as such is inconsistent. Any industry or profession deserves to receive consistency from its ‘regulator’.

1. CP10/22

In CP10/22, the FSA proposed removing the transitional provisions which have allowed some individuals to rely on the T&C grandfathering provisions introduced at the time of ‘N2’ (30 November 2001).

2. Policy Statement 10/18

The FSA states in PS 10/18 that these transitional provisions will remain in force allowing those individuals who were grandfathered into the FSA T&C regime on 30 November 2001 to remain grandfathered in. Had the FSA been consistent in its approach these individuals would have needed to take an appropriate exam within 30 months.

An approach as inconsistent as this is clearly going to add to confusion and will not improve the reputation of the industry/profession.

Overall we believe that the original objectives of the RDR were positive and should have been welcomed. The detail which has emerged over the last two years is considerably less welcome.

There can be little doubt that the process will result in a reduction in adviser numbers (detailed evidence has been submitted to you by others on this point - Capital adequacy increases coupled with the change from commissions to fees will be a contributory factor in this process, it Is not simply related to the question of qualifications) and that the cost of compliance will lead to increased costs for clients wishing to receive advice.

We believe that many of these changes will result in fewer consumers having access to true independent advice and will force them to rely on advice from bank and insurance company sales forces where, statistically, a good outcome is less likely.

January 2011 139

Written evidence submitted by Peter Hamilton

Introduction 1. I am a barrister in practice at the above address. I have been involved in the regulation of the retail end of the financial services market since Professor Gower published his review in January 1984.1 At that time I was the company secretary and head of the legal department of Hambro Life Assurance plc.2 I returned to the Bar in the spring of 1991. Since then, issues arising from the regulation of financial services have formed a substantial part of my practice.3

2. In this memorandum I consider some of the merits of one of the three outcomes claimed by Hector Sants for the Retail Distribution Review (“RDR”) when he appeared before the Treasury Select Committee (“the Committee”) on 23 November 2010, namely:

That there would be a better qualification framework for advisers as a result of the implementation of the FSA’s RDR proposals.

Executive summary 3. I support the FSA’s aim of raising the standards of qualification for those new entrants seeking permission under the Financial Services and Markets Act 2000 (“FSMA”) to carry on business as a financial adviser.

4. But I oppose the proposal that all those advisers currently authorised and working satisfactorily must obtain the new proposed level 4 qualification (if not already so qualified) by 31st December 2012, or suffer the penalty of becoming disqualified if they do not. In other words, to adopt the expression frequently used in this context, the FSA will not permit the “grandfathering” of those advisers who are currently authorised and working if they do not have the new level of qualification by the end of 2012 and they will become disqualified from advising after that date.

5. In my respectful submission, the refusal to permit grandfathering is – (a) unfair; (b) retrospective in effect; (c) unnecessary; and (d) unlawful. For those reasons, the FSA should rethink its refusal to permit grandfathering.

6. Rather than forcing currently qualified advisers to acquire the proposed new level of qualification, it would be a better investment of time for those advisers to concentrate on keeping up to date in the areas in which they practise by

1 Review of Investor Protection, Cmnd 9125. 2 Later to become Allied Dunbar Assurance plc. 3 My full CV is available on request from the [email protected]. 140

appropriate continuous professional development.

7. I now turn to develop the above points, with the exception of the submission that the FSA’s position on grandfathering is unlawful. The argument on unlawfulness requires detailed exposition which is not possible in this memorandum. But I expect that the Committee will, in any event, be more concerned with the other points.

8. I deal with each issue briefly. But if it would be helpful to expand or explain any point further, I would be happy to do so.

Unfairness 9. For the purposes of developing this point, let us take as a group the significant number of experienced advisers who are individually authorised by the FSA to practise as such, who are working in their own practices satisfactorily, without complaint from clients or the FSA, and with unblemished compliance records.

10. Individuals in that group will be maintaining their skills and expertise by keeping abreast of developments in products available in the market, ideas and the relevant law and regulatory requirements. Currently they are accepted by the FSA as being fit and proper individuals to be authorised as financial advisers. In the absence of serious complaint or breach of the regulatory requirements applicable to each one of them, they will continue to be fit and proper to be authorised until the last moment of 31 December 2012.

11. But the FSA, by changing the technical requirements for qualification for such advisers, claims the right to declare that all of the above group will no longer be fit and proper to practise – unless they have the new level 4 qualification – from the first moment of 1 January 2013.

12. That is logical nonsense. If a man or woman is competent on one day, and there is no change in his or her health or personal, or professional, circumstances, how can it be said that that individual has suddenly ceased to be competent on the next day? It is not the competence of the individual that has changed, but the FSA’s requirements for qualification. As the group are all qualified and competent, the new requirements should not apply to them; but only to new entrants.

13. It is unfair to require advisers to attain new qualifications on pain of becoming disqualified. Each such adviser will suddenly be deprived of his or her livelihood and the value of the hard-earned and existing goodwill in his or her practice. That will be the consequence, not of anything he or she has done or omitted to do in relation to a client, but because of a change of mind by the regulator which is imposed on the advisers.

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14. If grandfathering were to be permitted for all currently authorised advisers it would not be unfair to impose new levels of qualification on those seeking to become advisers, because all such prospective advisers will have been given due notice of the fact that the levels of qualification will change on the day appointed in the future.

15. It is noteworthy that the governing bodies of several professions have in the past raised the requirements for entry for aspiring entrants, but have accepted that those current members should be grandfathered. The Bar is one example. I understand that when the nursing profession became a graduate profession, all nurses then already qualified were permitted to continue working as nurses.

Retrospective in effect 16. The effect of the FSA’s proposals (as they now stand) is to disqualify an adviser without him or her having done anything wrong. The effect on the individual adviser will be retrospective, because he or she is being told that that adviser’s current qualifications are no longer good enough, no matter how good or proficient that adviser might in fact be.

17. As a public body, the FSA should not be imposing new levels of qualification in this way.

Unnecessary 18. In any event, the proposal not to permit grandfathering is unnecessary in order to achieve higher standards of skill and knowledge for all advisers.

19. Under the general law applicable to all professions, including financial advisers, a professional person, when carrying out work involving matters of professional judgement for a client or patient, has a legal duty to act with reasonable skill, care and diligence. The standard of skill, care and diligence to be applied in order to satisfy the duty is that which would be exercised by a reasonably competent person in the relevant profession and in the same circumstances.4 A failure to reach that standard would mean that the professional would have been negligent.

20. After 1 January 2013, if a financial adviser were to be sued by a client for giving negligent advice, the essential question for the court would be whether the advice was advice which would have been given by a reasonably competent financial adviser in the circumstances. In such a case, the court will probably take a reasonably competent adviser to be someone who possesses the knowledge acquired in the course of obtaining the new higher qualification. It would follow that the adviser then before the court would be judged by the same standard. In other words, whether or not he or she in fact had the higher

4 See the direction to the jury of McNair J in Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582 at 586-7. This is commonly referred to as the Bolam test. See also, for example, Professional Negligence and Liability, (Informa, 2010) at para 1.133 et seq. 142

qualification would not affect the way in which the court would judge the case.

21. It follows, therefore, that every adviser is required by the law as it stands today, to keep up to date and abreast of developments – at least to the extent that a reasonably competent adviser would do. Thus it follows further that even if an adviser were to be permitted to continue in practice without attaining the higher qualification by 1 January 2013, the law would judge his or her competence against the standard of someone who did have that qualification.

22. It also follows that to raise the standards of knowledge and qualification amongst advisers, it is sufficient for the FSA to raise the levels for new entrants. It is not necessary to require currently authorised advisers to requalify. The fact that the level has gone up for new entrants, in any event imposes on existing advisers the need to keep abreast of that development and its implications, to the extent relevant in relation to the area in which those advisers practise.

Continuous professional development 23. If grandfathering were to be permitted, the emphasis of training would shift to where it ought to be, namely, to the need to maintain a relevant programme of continuous professional development (“CPD”). Most professionals tend to concentrate on certain areas of expertise. Very few, especially in the modern and increasingly complex world, remain up to date in relation to every aspect of that profession. Thus it makes more sense for a professional to keep up to date in the areas of particular relevance for him or her by means of a properly structured programme of CPD. There is little practical advantage to requiring a currently qualified professional to acquire, by means of a wholly new qualification, new levels of knowledge in areas of no relevance to the practice of that individual. The time would be better spent devoted to proper CPD.

January 2011

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Written evidence submitted by the IFA Defence Union (a group of Independent Financial Advisers (IFAs))

RDR – the Experiment

Qualifications:

In some areas of business it might be argued that an increase in qualifications may be necessary in order to try to prevent mistakes being made.

Pension Transfers would be a good example in Financial Services. Another area might be taxation, however most IFAs refer tax matters to an Accountant or some other specialist.

The fact is that the majority of small IFAs deal with more mundane matters on behalf of their local client base. Their need for more qualifications is questionable because most of it is covered in the current minimum level of qualifications required by the Regulator. After the requirement to pass the Financial Planning Certificate IFAs were assured that this would enhance their standing and would hopefully remove some of the more “unsavoury characters”. Unfortunately these characters were clever enough to pass the exams and carried on as before. With hindsight, this was futile attempt to clean up the sales culture, a culture which still exists in large institutions such as banks and direct sales forces both tied and independent.

We can’t see the further imposition of expensive and time consuming qualifications alone preventing bad advice. In our opinion the imposition of higher and higher qualifications over the last two decades has been an attempt to solve problems which are in fact created by unethical behaviour and poor regulatory supervision. The main issue is the Regulators’ inability to spot ‘trends’ and move quickly. Further and further requirements in the area of qualifications are not going to resolve these issues because both the unethical adviser and inefficient regulator will survive, come what may.

Commission:

Nobody will deny that commission has been instrumental in creating the sales cultures in banks (bonuses) and other firms such as the direct sales outfits who employ a system akin to pyramid selling where the ones at the top end up with the most money and are never brought to book when their businesses fall apart. However, banning commission as an option for consumers will not prevent these firms from doing exactly the same as they do now because the regulators will allow factoring by third parties for ‘future commission payments’ (the FSA’s own words!) which is not an option for small IFAs. It is also apparent that commission will still be allowed for ‘basic advice’ or ‘non-advised sales’ as the banks currently describe it, rather euphemistically to my mind.

I’m sure you will all be aware of the problems with Equitable Life, a direct sales life office which told the world that they didn’t pay commission. After pressure 144

from small IFAs it became ‘didn’t pay commission to third parties’, it should have said ‘we pay bonuses to our sales force from the with profit fund and not your policy’.

The banning of commission will not remove the main cause of consumer detriment which is this culture of selling in order to support the pyramid system; a prime example would be the misselling Payment Protection Insurance (PPI) by lenders.

When I asked the FSA why there was a disproportionate amount of resources being applied to the advice sector which generated a tiny fraction of the complaints despite having the lion’s share of the market (IFAs) there was no discernible reply. I also asked how many FSA supervisors were watching what the banks do and was told that they had six people supervising a big four bank with 70,000 employees. Many of these employees were selling products to their customers. Do you believe that was a risky strategy? Do you think banks can be trusted to provide suitable advice when the pressure to sell is applied to all front line staff?

RDR – the Conclusion

It misses the target in so many areas; for example it doesn’t cover insurance, mortgages, bank accounts or any other area of retail financial services apart from investments, this makes no sense. The RDR will not prevent misselling by the main sources of consumer detriment which are the large sales driven firms, in fact we believe it will encourage and embolden these firms.

It isn’t about restricted “advice”, it is all about restricted “products” and restricted “advisers” therefore it reduces consumer choice whether it is the products they need or the way in which they wish to pay for the advice.

Hector Sants has stated that if 20% of IFAs are removed by the effects of RDR this is acceptable. This will clearly reduce consumer access to what all would agree is the best advice-Independent advice where a consumers interests are represented impartially. Costs will increase for those businesses left and hence push Independent Advice further up market.

Is it legal and moral to remove a person’s permission to give fundamental financial advice which is independent simply because of failure to attain a retrospectively applied standard of qualifications which cover a much wider spread of business than the person is involved in? Is it fair to cast adrift yet more IFA clients and let them wander into unknown (for them) territory?

RDR – the Financial Services and Markets Acts 2000

When making or changing its rules, section 155 of the Financial Services and Markets Act 2000 requires the FSA to provide a cost/benefit analysis. It must “estimate costs together with an analysis of the benefits” and make “a comparison between the overall position if the rules are made and the overall position if they are not made”. 145

Time and again we have seen new regulations being imposed which are designed to solve problems we can’t identify and the end result is just more confused consumers, take depolarisation for example - while previously the industry was polarised - advisers were either the agent of the client (independent) or they were the agent of one provider (tied) - there is now a middle way, another layer called “multi-tied”. When the new regulations were introduced in November 2004, the FSA said they would "remove the artificial restrictions of the old system of polarisation". Is the RDR simply “son of depolarisation”? Or is it going to create even more confusion and consumer detriment? We won’t find out until it is too late for consumers and advisers alike.

RDR – the “Consumer Detriment”

The evidence of consumer detriment supplied by the FSA may not be correct, the figures may be too high and they may be too low, what matters is that this evidence does not support the assumption that the RDR will resolve any of these issues and we don’t know whether much more consumer detriment is possible, the law of unintended consequences has applied in the past – we fear for the future.

We firmly believe that consumer detriment caused by loss is a fact of life, whether they buy a new sofa, a secondhand car, a holiday or the latest fad in electronics. Unfortunately the financial services sector has been saddled with a compensation machine which encourages consumers to take more risk than they would normally contemplate simply because there is a ‘government backed’ scheme which ensures they can’t lose up to a set amount (FSCS advert on MTV this week). This has become a prison for all concerned and making more rules and regulations is not the solution.

January 2011 146

Written evidence submitted by Christopher Bolshaw

Introduction

1. I am a branch manager of a national firm of stockbrokers, operating in more than 30 offices nationwide. I am 53 years old and have been in the industry for 23 years since 1987. For 10 years, from 1998-2008, I was partner of an independent stockbroking firm, and was the firm’s Compliance Officer as well as advising on and managing investments.

2. I fully support the drive to increase professionalism in the industry and I see minimum professional qualifications as a perfectly satisfactory and indeed necessary part of this process, and entirely appropriate for new and recent entrants to the industry. However imposing the same requirement on senior and very experienced advisers will have a significant and detrimental impact, because it takes no account of current responsibilities or experience.

3. Stockbrokers, more widely known nowadays as investment advisers and managers, are affected by the same professional qualification requirements of RDR, in exactly the same way as the more numerous independent financial advisers. Out of four experienced investment advisers / managers in this one office, advising and managing approximately £120 million of customers’ investments, three will be required to take the new QCF level 4 exam or lose our livelihoods after 2012. We believe that this is a disproportionate and inappropriate means of validating existing standards of advice, and believe the FSA should reconsider its refusal to allow ‘grandfathering’ of experience.

Executive summary

4. The combined stockbroking experience of the three affected advisers in this office is in excess of 60 years. Our ages range from 43 to 53. Technically we are classed as being qualified at Level 3, but share a wealth of practical experience which is now being disregarded by the FSA under the RDR proposals. Historically ‘grandfathering’ into a new regime has been used by the FSA in the context of professional qualifications and to abandon this approach marks a significant shift. I fully support the drive to increase professionalism within the industry, but believe there are more practical ways to achieve this.

5. Exam qualifications are used in every profession to demonstrate a core ability to enable candidates to move onwards and upwards within their professional fields. New entrants to the industry, and those who have entered the industry in recent years, have the time and capacity to undertake lengthy study to achieve higher qualifications. This can be accommodated within firms for employees in junior roles and with relatively little responsibility. However, this is not a practical consideration for senior and very experienced advisers, who have substantial responsibilities already and little if any ‘spare’ time for lengthy study. The recommended study time for the Level 4 exam is 400 hours. This will involve 147

1200 hours in this one office, which will be significantly detrimental to running the business effectively and safely, advising clients, and mentoring junior colleagues.

6. The RDR Level 4 exam requirement for existing advisers is being used only to validate current roles, which are already being validated by other means. As far as I am aware no other profession expects its most senior practitioners to re- qualify when far advanced into their professional working lives. This is therefore without precedent, and as up to 30% of advisers are predicted to leave the industry after 2012, will be a huge and unnecessary social experiment. It is an inevitable result of losing a significant number of advisers that it will be harder for customers to obtain advice. This substantial disadvantage will far outweigh any marginal impact on the public’s perception of increased professionalism within the industry.

7. I believe that forcing experienced advisers to spend considerable time studying for an exam which will only qualify them to do exactly the same job, will detract considerably over the next two years from the important work of providing advice and guidance to our clients at a time when the financial world has never been more uncertain or more complex. For the FSA to convey the message that many experienced advisers are under-qualified is to undermine the public’s perception of the financial services industry at a time when public confidence has already been undermined substantially by the banks.

8. We are already subject to the ongoing Competency requirements of the FSA’s own Training & Competency regime as well as general oversight by my firm’s training department under the SYSC rules of the FSA's Handbook. My colleagues and I have been deemed by the FSA to be fully and appropriately qualified since the Authority took its full powers 10 years ago. Brokers are already required to complete a minimum of 35 hours of relevant Continuing Professional Development (CPD) each year. This is a rolling programme of focused training and development, including online testing by relevant topics. The CPD programme is provided and audited by our professional body, the Chartered Institute for Securities and Investment (CISI). In addition we spend many unlogged hours each month on professional reading and updating in order to maintain our knowledge and currency with the rapidly evolving financial world.

9. The FSA’s overriding objective of consumer protection is already adequately covered by existing rules, and the drive to increase professionalism should be seen as a longer term goal which should accommodate some greater level of recognition for those practitioners with substantial experience. The Financial Ombudsman Service already exists as a statutory organisation with responsibility for settling consumer complaints. It has all the information the FSA might require to identify those firms and individuals who are consistently falling below the standards it might expect, and can therefore focus its efforts on particular firms and advisers where standards might need to be raised.

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10. A practical alternative to a single exam requirement for experienced advisers would be ‘grandfathering’ to the new regime plus a structured programme of CPD. If the FSA feels that certain areas of advice are problematic, then focused CPD, provided either by firms or a professional training organisation, such as CISI, would help ensure ongoing competence rather than a one-time exam, the content of which might rapidly be overtaken by evolving industry and market developments.

11. Stockbroking and portfolio management accounted for just 1.5% of all new complaints considered by the Financial Ombudsman Service (FOS) in the year to 31 March 2010. My office has not had one single complaint adjudicated against us by the FOS since the service was created 10 years ago. This is not a high risk or problematic area for the FSA.

12. The ‘cliff edge’ deadline of 31 December 2012 for the entire industry has engendered considerable alarm and distress within many parts of the industry. At an individual level, the prospect of very experienced advisers being forced out of the industry en masse has considerably reduced morale. If ‘grandfathering’ as a concept is to be abandoned regardless of representations from the industry, then at the very least a materially longer transition period would help ensure that this issue can be properly managed so that retail customers are not disadvantaged by the RDR initiative.

Conclusion

13. The drive to achieve higher professional standards is a noble goal, rather like aspiring to have a better life. However the refusal by the FSA to recognise experience, valued by every other profession, and the refusal to allow ‘grandfathering’ to the new regime, will have at best a modest effect on the perception of professionalism within the financial services industry. However, this will be far outweighed by the negative effect of forcing very experienced advisers from the industry on a single end-date in less than two years’ time, to be replaced over a number of years by minimum qualified but vastly less experienced junior advisers. The experience ‘gap’ to help navigate clients through these challenging times cannot be viewed as being in the best interests of customers.

14. Imposing new exams on many of the most experienced in the industry will come at a significant cost in terms of time, which will undoubtedly divert myself and colleagues from our key task of being competent retail investment advisers and managers.

15. Reconsidering ‘grandfathering’ would provide recognition of the value of experience within the industry, and could be supplemented by structured CPD, and raising professional standards for new and recent entrants to the industry. This would be complementary with, not contrary to, the drive to raise standards within the industry.

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16. The FSA appears motivated that imposing a new qualification standard on not just new entrants but on experienced advisers will provide comfort to the investing public. Confidence is actually borne out of the quality and consistency of advice that an adviser provides, and this comes with experience. Many advisers are dismayed that after continuously performing a professional role to the satisfaction of the firm, the FSA and its predecessor regulators for many years, we are soon to be deemed to be ‘unqualified’, and would ask that urgent reconsideration be given to the issue of ‘grandfathering’ of experience.

January 2011

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Written evidence submitted by Zurich Financial Services Executive Summary

1 We welcome the Select Committee’s call for evidence. Zurich Financial Services Group (Zurich) is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia-Pacific, Latin America and other markets. Founded in 1872, the Group is headquartered in Zurich, Switzerland. It employs approximately 60,000 people serving customers in more than 170 countries.

2 We support the aims of the Retail Distribution Review, which were set out in 2006 as: • Improving the sustainability of the sector • Improving the impact of incentives • Improving the professionalism and reputation of the industry • Improving consumer access to financial products and services, and • Examining regulatory barriers and enablers.

3 Significant progress has been made against the second and third objectives. An increase in minimum standards for knowledge and transparency across the industry will ensure that the UK will continue to lead the world in the professionalism and expertise of its advice sector. Once the RDR is in place, we hope that the professionalism agenda can be furthered still, by giving the new professional bodies the power to deliver a regulatory dividend to well-run firms. This could provide ongoing incentives for firms to be run on a responsible basis, requiring a minimum of regulatory supervision.

4 Although the RDR has made progress against important objectives, this progress does come with risks. Last year, the FSA estimated that it would cost the industry £1.4 - £1.7 billion over the first five years. This estimates one-off and incremental compliance costs, but there are other impacts that are not captured in a single figure. Research for the FSA by Oxera has suggested that 25% of IFA firms are considering leaving the market. If these kind of figures materialise, there is obviously a high risk that product providers’ ability to maintain current employment levels will suffer. The FSA’s original aim of improving consumer access to financial services will also suffer greatly.

5 Given the size of the Retail Distribution Review’s impact, it is essential that the transition to the new regime is managed effectively. We are concerned that discourse over the review has become increasingly polarised between those who see no value in the reforms and those who think the reforms should be forced through without any reference to prevailing market and economic conditions.

6 We recommend two actions to improve the transition to the new regime: 1. The FSA should extend the deadline to reach new qualifications for advisers, where advisers can demonstrate that they have already made significant progress towards attaining the required qualifications. 151

2. The FSA should consider carefully the consequences of an increase in the use of ‘platforms’ in the investment market, since these services have lower prudential requirements than traditional product providers such as life insurance companies.

Timetable for the Distribution Review

7 When the current timetable for the Retail Distribution Review was set out in FSA Feedback Statement 08/6, the FSA gave three reasons for the Distribution Review deadline coming in at the end of 2012: • Auto enrolment was to be introduced in 2012, and the FSA felt that consumers would have a greater need for expert advice with the introduction of auto enrolment. • 2012 coincided with the introduction of Solvency II, and the FSA wanted to give firms time to consider the impact of potential changes to accounting standards before the RDR was implemented. • The FSA envisaged that the Money Guidance project would be up and running nationwide, and that this would ‘potentially bring more people into the regulated market’.

8 Overall, it is clear that the deadline of 2012 was set because the FSA wanted to guarantee a strong supply of expert advice during this crucial period.

9 However, as the Feedback Statement was being published, the banking crisis was breaking. IFA firms, like other small businesses, faced a dramatic reduction in their access to capital and at the same time faced increased demand from clients who needed information and advice about the state of the markets and the implications of market volatility on their investments.

10 The RDR makes demands both on advisers’ time and capital because they need to: • take time out of their business activities to prepare for examinations, • they need to meet new capital standards, • and they need to prepare for new business systems and practices around adviser charging.

11 In a normal business environment, the FSA’s timetable would have been reasonable. However, it is increasingly apparent that the demands of the banking crisis combined with the demands of complying with the RDR have imposed significant challenges on IFA firms, and may cause a significant number of advisers to leave the industry.

12 We are concerned that this could lead to an increase in the cost of advice, or in people making decisions without the benefit of expert financial advice because of a shortage of financial advisers.

13 We think that the aims of the Retail Distribution Review can be achieved without forcing an unnecessary number of advisers to leave the industry if the FSA exercises some flexibility over the 2012 deadline.

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14 The FSA has already extended the deadline for capital adequacy requirements from the end of 2012 to the end of 2013, and we welcome this move.

15 The FSA could take a similar approach to the deadline for qualifications. For example it could extend the qualifications deadline beyond 2012 for advisers that have already gone a long way to achieving the requirements. This would enable advisers that have almost achieved the required qualifications to continue practising for a limited time, while they take or retake the modules they need to finish the qualification process.

16 This approach would maintain the integrity of the Retail Distribution Review, whilst at the same time ensuring as much consumer access to expert advice as possible – which was the FSA’s original aim when setting the December 2012 deadline.

Switch from products to platforms

17 The tax treatment of investments under the new Retail Distribution Review rules means that in future far more investments will be sold through an investment ‘platform’ than through a traditional life insurance ‘wrapper’.

18 Capital adequacy standards for platforms are much lower than they are for life insurance companies. As a result, one unintended consequence of the review could be that consumers are less protected from the failure of a platform provider than they currently are from the failure of an insurance company. This could have significant consequences for customer service and wider confidence in the industry.

Conclusion

19 We support the FSA’s aims for the distribution review, but are concerned that these aims could be compromised if the transition to the new regime is not managed properly. Two issues that the FSA should consider carefully over the next two years are: • Whether the original aim of improving access to products and services is not being harmed by an inflexible deadline for qualifications • Whether all platform providers have the capital strength that is appropriate for the increased role that platforms will have in the new regime.

January 2011 153

Written evidence submitted by Sesame Bankhall Group

Our credentials 1. Sesame Bankhall Group is the UK's largest intermediary distributor and supports over 3,000 adviser practices encompassing more than 12,000 independent financial advisers (IFAs) and mortgage brokers. The group was formed in 2009 and has origins dating back over 20 years. We have three distinct distribution brands: • Sesame operates the UK's largest network of 1,400 appointed representative IFA firms. Sesame has headed the annual list of the 'Top 100 Adviser Firms', published by FT Business publication Financial Adviser, for the last six consecutive years. • Bankhall is the market-leading support services business for 1,900 IFA firms that are directly regulated by the FSA. • PMS operates the largest mortgage club for directly regulated mortgage brokers and has over 3,000 regular users of its services.

2. Services provided by Sesame Bankhall Group’s brands include compliance and regulatory support, access to a comprehensive training and development programme, in-depth product research, preferential professional indemnity terms and access to the latest technology to enable advisers to write business safely and efficiently.

3. Sesame Bankhall Group has a footprint that covers all areas of the UK advice market (mortgages, protection, general insurance, pensions and investments) and a business model that services both network appointed representatives and directly authorised IFA firms. Unencumbered by a narrow or one-sided view of the market, we believe we are ideally placed amongst distribution groups to give a balanced view of the challenges facing advisers and clients.

4. Our group has won a series of top industry awards that provide independent recognition of the high quality services and support delivered to IFAs and mortgage brokers across the UK. This includes ‘Best Network and Support Services’ provider and ‘Best Mortgage Network’ at the Money Marketing Financial Services Awards 2010, along with ‘Best IFA Network’ at the Professional Adviser Awards 2010. Sesame Bankhall Group is a wholly owned subsidiary of Friends Provident.

A trusted profession 5. The reputation of IFAs remains resolutely positive. Independent studies prove that people who receive professional financial advice recognise the benefits and trust their IFA. The FSA has acknowledged this.

6. The advice profession is dominated by small adviser practices that deliver a valuable role in local communities by enabling millions of people to benefit from professional financial advice. We believe it is imperative for consumers that we create an environment where that service can continue in the future.

7. The results of a 12-month independent research study in 2009, commissioned by Sesame and conducted by NMG Financial Services Consulting, demonstrated the value of professional advice and the high regard that clients have for IFAs, with 97 per cent of people happy to recommend their adviser to friends and family. This is reinforced by research by the Financial Services Research Forum that IFAs are the most trusted financial services institution. Furthermore, Ombudsman data consistently shows that IFAs have far fewer complaints than any other part of the industry. 154

8. We are currently rolling out an online client service assessment tool for advisers to use with their customers to help evidence quality of service through the use of a robust feedback mechanism. Based on the pilot conducted the average customer score based on a range of indicators was 8.30 out of 10, which is well above the benchmark of 7.50.

Our view of the FSA’s Retail Distribution Review (RDR) 9. As the UK’s largest distributor, Sesame Bankhall Group supports the drive towards higher professional standards and greater transparency, as these are the right foundations upon which to build consumer confidence. However, the success of the RDR hinges on the benefits to the British public outweighing the costs of delivery. Sesame Bankhall Group believes that the RDR has lost sight of some of its key original objectives and the net result threatens to be detrimental to consumers, the financial services industry and the wider UK economy.

10. Instead of the FSA delivering on its original objectives, including widening consumer access to financial advice, we have RDR proposals that will reduce access, reduce the number of advisers and cost the industry £1.7 billion. These are costs that will ultimately be passed on to customers.

11. The FSA’s own RDR cost benefit analysis predicts that we will lose 25 per cent of adviser firms. Importantly, over one in 10 people (11 per cent) who currently have access to financial advice will lose out in the new RDR world.

12. Indeed, the RDR is already having an impact. Whilst the overall number of adviser firms in Sesame’s network remained stable in 2010 taking into account joiners and leavers, it is noticeable that of the firms that did leave, 40 per cent said that it was a direct result of the RDR.

13. This anticipated future trend has been backed up by a series of independent studies. One study conducted in 2009 (Aviva 2011, using Deloitte unserved customer data 2008) estimated that the number of IFAs would fall from nearly 26,000 to c.23,400 by the end of 2015. Furthermore, the number of customers served through IFAs is estimated to drop from 5.38 million to under 2 million per annum in 2015. This is due to a combination of less overall firms, with each of those firms serving fewer customers on average than they do today due to the demands of the RDR.

14. People will still benefit from professional financial advice, and that is very important, but it will become the preserve of the wealthy. The mass market will find itself underserved, or even worse, not served at all. Nothing within the current RDR proposals leads us to believe this advice gap will be serviced by other means.

15. The RDR has evolved to become a set of proposals focused on minimising the risk of mis- selling. As a result, we face the unintended outcome where the only growth area will be regulation itself. An intrusive supervision regime designed to address the failure of regulation in the banking sector will have far-reaching and unintended consequences elsewhere.

We believe that by addressing the following areas the RDR will result in better outcomes for consumers:

Time for a more progressive regulatory agenda 16. The current trend of ever-decreasing circles – where fewer Independent Financial Advisers (IFAs) service fewer people – could still be reversed and the UK’s savings ratio improved if the 155

regulator was given a more progressive mandate by the coalition government. Britons need to save more, which is why the regulator should be handed a new statutory objective to improve the UK’s savings ratio. A more progressive and constructive approach would be entirely consistent with the shift away from the State towards private provision.

17. We need to stimulate and grow the UK’s regular savings market by making it easier for people to save. Product design is one important element, but it needs to be combined with a regulatory environment that provides tangible incentives, along with a strong advice profession that encourages and guides people. It could help to break the cycle of spiraling debt and benefit millions of people for generations to come.

18. This more progressive regulatory approach should also extend to the more straightforward regular savings products, so that the appropriate level of regulation is matched against the appropriate risk. An example of this is an Individual Savings Account (ISA), which currently requires the same level of fact find, suitability letter, research and Financial Ombudsman Service (FOS) liability as advising on a complex pension case for a company director.

19. This involves hours of work that in many cases will be uneconomical for an IFA to provide in a RDR world on terms that are acceptable to the client. For example, on a £10,000 investment involving four hours paperwork, an IFA would typically charge between £150 to £200 an hour. (It should also be noted that if this was on commission terms then it is the equivalent of 6 per cent to 8 per cent, which the FSA may consider excessive).

20. The key point is that reducing the regulatory burden on more simple, straightforward products would see sales and take up increase, thereby delivering a much-needed boost to the UK savings ratio.

Professional standards and qualifications 21. Higher professional standards offer an opportunity to build greater confidence in the advice profession, but to achieve that goal thousands of advisers have to balance the needs of their clients today, whilst undertaking additional work to not only meet the new higher standards, but also review their business models for the future. For many firms this involves a tremendous amount of work that should not be underestimated.

22. This task has been made more difficult as a result of the economic turbulence of recent years, which no one could have predicted when the RDR was first announced in 2006.

23. This has been compounded by a lack of detail from the FSA in a range of RDR related areas, including qualifications, which has made it difficult for advisers to undertake thorough planning. Despite the RDR first being announced in 2006 and the stated implementation date now less than two years away, we still await the final rules on professionalism, which have once again been delayed.

24. It is precisely due to this lack of meaningful detail from the FSA – at a time when the regulatory environment itself is becoming more intensive and intrusive - combined with the day to day commercial pressures on all businesses that have risen so sharply since 2006, that is at the root of so much understandable anxiety that exists within the advice profession in relation to the RDR.

25. Despite these significant challenges, progress has been made. Our group’s customer base is very broad and reflects the wider UK financial advice profession. Seventy-three per cent of our 156

members are either already at diploma level or are clearly working towards diploma qualifications, demonstrating the commitment being shown by our profession.

26. However, despite this progress, we remain concerned about qualification requirements that could see significant numbers of experienced and competent advisers leave the industry prematurely. This is happening already and it will have a detrimental impact on clients who benefit from the quality advice that IFAs provide. It would also mean that the RDR itself would fail to deliver one of its original key objectives.

27. What we need is for the FSA to work with us and show greater flexibility. Every experienced, competent adviser who successfully crosses the RDR finishing line benefits hundreds of people through continued access to impartial professional advice. Multiply that number and we are talking about millions of people who stand to benefit if we get it right, or lose out if we get it wrong.

28. Competent, experienced advisers who can clearly evidence that they are committed to a learning programme that will take them to QCF Level 4 should be allowed more time to complete their work. The FSA does not have to abandon its principles. Its aims and objectives can still be achieved, indeed strengthened, because it will deliver a more positive outcome for the British public.

29. Neither are we asking for the FSA to set a precedent, as it would be entirely consistent with the recent move to delay plans to extend the approved persons regime that forms part of the Mortgage Market Review.

Adviser charging and factoring 30. We support the separation of sales from advice and the removal of any perceived provider influence, but the reality is that whilst people seek out debt, they need to be persuaded to save.

31. During an era that has seen the UK savings ratio plunge from 12 per cent in 1992 to a little more than 2 per cent by the end of 2008, we now have a situation where the level of personal debts in the UK, including mortgages, currently stands at nearly £1.5 trillion.

32. We take issue with the FSA’s assertion that regular savings only constitutes a small proportion of the market and the impact of a ban on factoring will therefore be limited. Whilst some would have us believe regular savings are inconsequential, statistics suggest otherwise. According to figures from the Association of British Insurers, in Q3 2010, new regular premium investment savings and individual pensions together amounted to 14 per cent of the entire amount invested in investment savings and individual pensions. Indeed, for individual pensions business alone, there was an average of £820m invested in regular premium savings in each of the first three quarters of 2010. This represents an average of one fifth (21 per cent) of the total amount (regulars and singles) of new individual pensions business written in each quarter.

33. Furthermore, the fundamental point is that the regular savings market should be far larger than it is today. We need to encourage growth rather than restrict it further.

34. Removing factoring support by product providers will have a further detrimental impact on consumers and lead to large parts of the mass market becoming disenfranchised.

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35. The net result will be fewer people being able to access professional advice at the very time they need it most. We need to nurture and reinvigorate the UK’s regular savings culture, but if we continue down the current path then we foresee a market where the number of people who purchase financial products will fall.

36. This will be compounded by a greater proportion of people who purchase products on an unadvised and unprotected basis, which we do not believe will be a successful or healthy outcome for the British public.

FSA to deliver on regulatory dividends 37. The RDR represents an opportunity for our industry to enhance levels of professionalism across the board for the benefit of consumers, but this will only happen through the delivery of a robust package of measures. It is important that we have a joined up regulatory approach where new developments such as the RDR work in tandem with existing regulatory initiatives such as Treating Customers Fairly.

38. Using the more in-depth management information that the regulator now has at its disposal, we believe that the FSA should provide tangible incentives to those adviser firms that demonstrate the highest professional standards, in the form of a reduced regulatory burden and costs. These regulatory dividends would incentivise adviser firms and encourage the development and growth of quality financial advice, which in turn would improve peoples’ access to expert, impartial guidance.

A 15-year long stop to encourage growth 39. We fully support the FSA’s need to protect consumers, but we believe that the continuing open-ended liability from past business is an unfair and unacceptable burden on all professional firms. That is why Sesame Bankhall Group reiterates its call for the FSA to introduce a 15-year ‘long-stop’ time limit on complaints.

40. The introduction of a ‘long-stop’ time limit would strike the appropriate balance between safeguarding consumers’ interests, whilst also delivering much needed certainty to the advice sector and encouraging future investment, which importantly includes developing the next generation of IFAs. The carrying of indefinite liabilities undermines the sustainability of predominantly small businesses, which is the opposite of what the coalition government wants in these difficult times.

41. In summary our message is clear: • We are a trusted profession that delivers a valuable service to millions of people in local communities across the UK. Collectively we need to improve the UK’s savings ratio by encouraging people to look after their financial wellbeing. To achieve this goal we must recognise the pivotal role of a strong and sustainable advice profession. • The UK’s savings culture will be improved if the regulator has a more progressive agenda, such as a statutory objective to improve the UK’s savings ratio. • The FSA’s original RDR objectives have evolved to a point where the benefits no longer outweigh the costs, which means the net result will be detrimental to the British public and the financial services industry. However there is still time for improvements to be made. • The IFA profession will deliver higher professional standards and remove commission from investment products, but firms should be given more time to complete their work in light of economic turbulence that could not have been foreseen at the outset of the RDR in 2006, and which has had a deep impact on the financial services industry. 158

• Factoring should be allowed as a ban will stifle the growth of regular premium savings by making it uneconomical for IFAs to advise the majority of people, thereby restricting consumers’ access to impartial professional guidance. • The FSA should work with the financial services industry to design new, simpler advice models that improve access to advice for ordinary people. • As part of the move towards higher professional standards for IFAs, along with existing regulatory initiatives such as Treating Customers Fairly (TCF), there should be regulatory dividends to reward quality firms and encourage the development and growth of quality financial advice, which in turn would improve peoples’ access. • We also believe that the introduction of a 15-year long-stop time limit on complaints would bring further investment into the sector, whilst continuing to safeguard consumers’ interests, by delivering greater certainty for all parties.

January 2011

159

Written evidence submitted by Lyn Cooke, Independent Financial Adviser

Outcome 1 - Transparent and fairer charging system

1.1 Fairer to whom?

• IFA’s deal with all people ……..’’the financially deprived to the comfortable…’ • Many clients refer to pay by commission which is already clearly disclosed in personalized illustrations. • Publicity should be aimed towards consumers to look for the disclosure, • - not discard the method of commission which will prevent clients from getting advice. • Independent advice frequently given freely to deprived people. • Many IFA’s clients do not need ‘product’, just advice, so commission is not involved and charges are routine, BUT in discussion with the FSA this was NOT accepted as reality which means that the FSA aware of facts. • Charges are always discussed with each client as part of the regulation initial disclosure so why scrap commission? • Increasing Regulation means increasing costs compounding the issue of the public NOT affording Independent Advice. • New charging rules means many of your constituents are frightened away from Independent advice into the bancassurers and then SOLD product • The bancassurers offering tied products are assumed by the clients to be offering ‘free advice. This is misleading and results in most of the mis-selling claims:

Contracted –out pensions in the 90’s Endowment selling in the 80’s ‘Precipice bonds’ in 80’s and 90’s Key Data etc [currently]

• Bancassurer Employees sell product & are set personal ‘sales’ targets as the ‘branch’ is targeted on commission income.

This means that the client’s needs are NOT the criteria. RDR is not proposing to stop this practice.

1.2 Evidence

1.2.1 The most complaints and escalations to the Financial Ombudsman Service:

Numbers Percentages Banks 1,013,601 67.25% Financial advisers (inc IFAs) 17,160 1.14% Complaints about mis-leading advice – January-June 2009 - FSA Figures Complaints - Figures from the FOS Intermediaries Banks/B Soc’s/Stockbrokers 160

Mortgages 27% 73% Investments 12% 38% Pensions 28% 14%

These complaints must be assessed in terms of the distribution figures as confirmed within the FSA IFAs Banks Regular Premium Investments 16% 57% Single Premium Investments 49% 40% Regular Premium Pensions 79% 7% Single Premium Pensions 83% 5%

1.2.2 Research Extracts re Commission as a means of remuneration • Charles River Associates [CRA] 2002 for the FSA: when comparing unit trust v ISA advice o “The initial commission paid (3%) is the same as the equity ISA and thus again while the advice led to a loss of the slight tax advantage of ISAs, it does not appear to have been induced by commission.” o “The advice market is not riddled with bias”. o “There is no detectable bias on regular premium products.” o “The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation.” o ““…..….. tthehe RRIYIY iinn bbothoth pproductsroducts aappearsppears ttoo bbee vveryery ssimilar,imilar, ssuggestinguggesting tthathat aatt lleasteast oonn tthishis mmeasureeasure tthehe iimpactmpact oonn cconsumersonsumers iiss llimitedimited.” • A CRA report for the ABI in 2005 also considered the benefits of standardising commission: o “tthehe ddifferentifferent ccommissionommission sstructurestructures wwillill mmakeake aapparentlypparently ssimilarimilar pproductsroducts ddifficultifficult ttoo ccompare.ompare. o MModelsodels tthathat iincreasencrease tthehe aabilitybility ttoo ccompareompare tthehe rremunerationemuneration tthehe aadviserdviser rreceiveseceives fforor ddifferentifferent pproductsroducts tthathat mmeeteet tthehe ssameame cconsumeronsumer nneedeed aarere llikelyikely ttoo bbee bbeneficialeneficial.” • IItt iiss rrevealingevealing tthathat ttheyhey ddidid nnotot cconsideronsider tthehe rremovalemoval ooff ccommissionommission aass a vvalidalid ooption.ption.

• FSA: has no mandate to adjust commission rates but instead feels it appropriate to reduce consumer choice by abolishing commission. • October 2008 JP Morgan research: "….. fee-based options appear highly unpopular… only 3% of respondents wanting to pay a time-based fee and only 5% welcoming the idea of an ongoing monthly or annual fee. • Commission paid by the product provider proved at least three times more popular than either of these fee-based alternatives.” • “The capping of commission, e.g. “fees on mutual funds has been standard US regulatory practice for decades” – John Chapman, ex OFT. • N.B. FSA says commission-capping is not within its remit but it is within the Treasury remit, as shown by the stakeholder pension design. • FSA Director, Dan Waters, explained that, o “The restrictions we impose on the industry must be proportionate to the benefits that are expected to result from those restrictions.” 161

1.2.3 Consumer / Public / Constituent attitude

The 2003 Australian study, which the FSA holds in great esteem, states that the advice provided by advisers offering a choice of fees and commission was marked as higher than that from fee-only advisers. • FSA Consumer Research 65A by British Market Research Bureau in Feb. 2008; • “CConsumersonsumers ddoo nnotot ggenerallyenerally tthinkhink aaboutbout hhowow ppeopleeople aarere ppaidaid.” • “CConsumersonsumers wwereere nnotot aatt aallll cconcernedoncerned wwithith ddetailsetails aaboutbout hhowow tthehe aadviserdviser wwasas ppaidaid.” • “KPMG survey of over 3,000 consumers: o less than a third would be prepared to pay for one hour's professional financial advice, o of those who would pay over half only prepared to pay £50 or less o only one percent would be willing to pay over £200

1.2.4 FSA Confusion

• In September 2007 Amanda Bowe, who then headed the FSA’s RDR team, stated, “We don’t think we should be making the decisions for the industry”. • The RDR is reducing the consumers choice.

Outcome 2 - A better qualification framework for ‘advisers’

2.1 All Advisers?

• The requirement for qualifications should be appropriate to the area in which the adviser practices. • The requirement for qualifications should be applied to all advisers offering financial advice to the public, including: o Journalists o ALL Bancassurer employees who speak with clients about investment, protection or mortgage products. • Most Independent Financial Advisers are comfortable with being qualified and already conform to the CPD [Continuous Professional Development] requirements. • IFA’s know and understand that it is in their own interest to remain ‘up to speed’ with new legislation and products. • A major issue is the cost and time demands of examinations for the long term practicing, adviser as ‘Grand-fathering’ is being dis-allowed. • The FSA’s stricture that all INDEPENDENT financial advisers have to be newly qualified by 31st Dec 2012. o Their ‘licence’ to practice will be cancelled if they do not meet the deadline. o This is out of line with all other professions e.g. Lawyers, Accountants, Doctors who also follow CPD but are not required to be re-examined to be able to continue their career, profession and employment. 162

o This must be a Breach of an IFA’s Human Rights? • The FSA is making additional demands of the qualifications now [i.e. 2010 new demands added] which means that IFA’s are being subject to continual requirements which can be over and above the needs of their practice.

2.2 Evidence

2.2.1 Surveys whether examination results raises standards?

• The FSA claims as proof that higher qualifications equate to better advice, a 2003 Australian study but only 124 financial plans were examined which is too low a number on which to base this programme of major upheaval. • 2010 - Extensive research contacting 23 chartered bodies: o When asked whether they required existing practitioners to ‘requalify’ when entry- level standards were raised? No Yes’s o When asked what ongoing development programmes used all of the respondents, except teachers, confirmed members followed a focused CPD programme as do IFA’s. o New entrant Nurses have to achieve Degrees but not existing nurses who will be grandfathered across. • The FSA implies alleged consumer mistrust is linked to advisers not having attained QCF4 level. o No evidence exists for this. • FSA publication Firm-level Predictors of Consumer Loss Through Poor Financial Advice – April 2008 states:: “Surprisingly, we find no relationship between the share of advisers who passed the qualification exam or the share of competent advisers”.

2.2.2 The effect upon the public availability of Independent Financial Advice

o A figure of between 20% and 50% of many older advisers with over twenty-years experience will leave the industry [numerous independent surveys] o FSA accepts 20% loss o “The RDR will remove millions of consumers from the advice process thereby exacerbating the current pensions gap of £318bn “(estimate by Aviva, September 2010) o Research by Oxera, on behalf of the FSA: o indicates many orphan consumers will not seek any further advice o others will be dealt with by the remaining advisers or by the banks o This will discourage consumers to seek advice and save. Many will not save at all. o December 2008 - Financial Services Consumer Panel told the TSC that financial advice would be less widely available in the post-RDR world. o In September 201 a study by CoreData Research revealed: o “……..hard-up investors [are] either unwilling or unable to pay fees” o During February 2010, Fitch Ratings: 163

o RDR would result in fewer consumers exercising the open market option for annuities. o During June 2009 the FSA’s Annual Report: o net loss of 985 firms and 5,675 registered individuals -April 2008-March 2009 o In July 2009 NMG Financial Services Consultancy: 20% adviser exodus

2.2.3 Consumer / Public / Constituent attitude:

• FSA - Consumer Research 65a in 2008 - BMRB. C o Conclusions were the following; o “Consumers saw advisers as being above average in terms of being a trustworthy profession.” • FSA (Consumer Research 76) by the Personal Financial Research Centre: o discovered that 75% of consumers trusted their adviser regarding pensions, o 71% of consumers trusted their adviser regarding investment. o 84% of pension purchasers and 87% of investment purchasers expressed high or medium financial confidence. • FSA annual consumer confidence paper September 2010: o 98% of IFA clients expressed confidence that the advice provided was appropriate to their circumstances o 83% of bank customers. expressed confidence that the advice provided was appropriate to their circumstances o confirmed that consumer confidence in their adviser had risen by 17% over the year. • October 2008 a JP Morgan Asset Management survey: “In the recent Retail Distribution Review, strong emphasis was placed on raising the perceived professionalism of financial advisers by among other things, raising their level of qualifications, strengthening the role and membership requirements for professional bodies and correlating prudential requirements to a firm's professionalism and resources. • Among the consumers surveyed, these considerations play a minor role when selecting an adviser. • Only 19% of respondents say evidence of professional qualifications and experience would encourage them to use financial advisers more • only 10% say they are concerned about an adviser's lack of knowledge or expertise.”

2.2.4 FSA Confusion?

o In September 2007 Amanda Bowe, who then headed the FSA’s RDR team, stated, “We don’t think we should be making the decisions for the industry”. o Hector Sants considers a 20% adviser exodus to be a price worth paying - for what? o December 2008 the Financial Services Consumer Panel told the TSC that financial advice would be less widely available in the post-RDR world.

164

Outcome 3 - Greater clarity around the type of advice being offered

3.1 Names of ‘Advisers’ – Salesmen - Tied or whole of market

• People who are employed to sell should be called Salesmen, o i.e. if they are given a target in that they have to produce or sell e.g. X number of specific products X number of a number of varied products £x worth of sales by a measurement of commission £x worth of sales by a measurement of internal calculation, e.g. annual & / or single premium • It should be made clear that they are not ‘giving advice’ even if they are comparing 2/3 products from within those available.

3.2 Tied or Independent / Whole of Market

o This should be clarified and clarification made mandatory

3.3 Consumers View

o Consumers understand the words ‘Salesman’ and ‘Independent’ and ‘Advisor’ o If these words are clearly laid out in all mail, e-mails, literature, business cards etc. there would be no confusion.

January 2011 165

Written evidence submitted by Warwick Butchart Associates Ltd 1. EXECUTIVE SUMMARY

1. We strongly welcomed the Review in light of a low level of saving and a high level of personal debt which works against saving – particularly amongst the young.

2. Changing economic and market conditions coupled with many changes to the RDR since its launch demand a review to the approach and the original timetable.

3. The cost of the RDR and the consumer detriment caused by a reduction in access to independent advice is unacceptable. Several steps are needed in order to allow the objectives to be delivered, namely:

a) In seeking that existing advisers re-qualify at, in some cases, latter stages of their careers requires the FSA to provide clearer guidance on how records of the existing compulsory relevant Continuous Professional Development (CPD) will be accepted. We would call for an extension to the deadline to ensure all existing advisers can complete this exercise because there is too much confusion in matching CPD/study to the learning outcomes of a new Level 4 qualification. Retrospective matching of “learning outcomes” by gap- filling is not an exact science. At best it is a complex exercise which has beaten some of the industry’s “technology tools” due to individuals having exam success with more than one Institute coupled with the task of scanning existing CPD records for attachment to gap-filling programmes. An independent party has to “sign off” the claims. Who and when and against what guidance?

b) The FSA needs to re-consider its current position regarding factoring as a ban will cause limited access to advice on protection and savings made via small regular premium plans. We cannot reconcile a ban on factoring with the Government’s wish to improve the savings ratio.

c) FSA to ensure ‘regulatory dividends’ where advisory firms have invested in their business and people to deliver RDR outcomes.

d) Action re the singling out financial services as an exception to the Statute of Limitations with regard to liability long-stop for advisory firms.

e) The FSA has had several attempts at the RDR, fielded several teams of changing staff, and now given too little time for firms to deal with systems changes, “clean contracts”, capital adequacy (will not be decided until July), and gap-filling. They are under attack from the industry and MPs. It seems to us that a further period of consultation is required in which the emphasis is on working together on implementation so we not end up with a marked reduction in good advisers.

2. THE FACTORS PROMPTING THE RETAIL DISTRIBUTION REVIEW

Sir Callum McCarthy’s Speech in Gleneagles four years ago addressed structural problems in the distribution of savings and investment products and a need to improve confidence. The then Government was concerned about low levels of saving and skewed distribution.

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3. INDEPENDENT FINANCIAL ADVISERS

The RDR was, from inception, formed against a backcloth of impressions of the whole financial services industry. The requirement under the RDR for IFAs to put their house in order appears to be disproportionate to any ills in our particular sector of the industry. IFAs are responsible for circa 60-70% of distribution but approximately 2% of complaints. It should be recorded that IFAs, big and small, are diverse in what they do:

a) Generalists as sole traders and as part of bigger companies. b) Specialists as sole traders and as part of bigger specialist companies. c) Specialists within companies who provide all types of advice. d) Advisers who are employees. e) Advisers who are self-employed. f) Advisers who are also owners of their business. g) Owners who are providing management expertise but who are not advisers.

4. WHY ARE WE DISAPPOINTED WITH THE FSA’s PROPOSALS

1. Nothing in the RDR is about increasing consumer access as such - albeit there is a hope that raising professional standards for all advisers, independent and tied, improving the way advice is paid for, and improving clarity will generate more consumer confidence in the industry. IFAs, of course, are not responsible for any lack of confidence emanating from the global banking crisis, the Equitable debacle, the loss of jobs and homes amid increasing personal debt.

2. Criticisms of the past, made without regard to what has already been put in place, ignore the considerable progress in training of financial advisers. The current Training & Competence requirements to be deemed competent are a benchmark knowledge test, on-the-job training and assessment, and the recording of Continuous Professional Development (CPD) activity. These requirements were put in place by the FSA’s predecessor the Securities and Investments Board, on advice from their Training & Competence Panel which I chaired (1992-1994), where previously there had been no requirements. It will be seen that the knowledge test is just one component in assessing “competence”.

3. Many advisers will have completed literally thousands of hours of CPD over the years. For such committed individuals the FSA cannot be right to say that an estimated 20% drop in the number of IFAs as a result of the RDR is acceptable. The causes of this estimated reduction and the effects on access to independent financial advice are worthy of more than casual acceptance.

4. A recent article in “Money Marketing” stated “Harriett Baldwin has criticised the evidence used by the FSA to justify its decision to require advisers to achieve QCF level four as part of the RDR. Reacting to a letter from FSA chief executive Hector Sants to Treasury Select Committee Chairman Andrew Tyrie, which set out why the regulator remains committed to the RDR……………Sants’ letter cites two pieces of research, ………… ……………………………The second is an Australian piece of research involving 53 volunteers approaching three financial planners with the 124 resulting plans being assessed by a panel of industry figures. Plans provided by certified practising accountants scored 60 points out of 100, certified financial planners scored 58 and unqualified advisers scored 53.” 167

5. If this “Money Marketing” article is accurate we wonder why the FSA are using a comparison citing Australian “unqualified advisers”. Financial advisers in the UK are not unqualified (see 4.2). We are puzzled at quoting Australian experience to justify a UK project. There were just three Australian financial planners approached. Hardly a suitable sample. More information is needed about this sample and why it is considered relevant.

6. Given the complexity of financial services many financial advisers have chosen to specialise. Those specialising in the investment of capital, for example, may not justify additional and irrelevant examination modules. They may operate in firms where there are several different specialists and clients benefit from being advised by more than one adviser. We do not think, in this context, enough emphasis has been placed on the firms.

7. Specialism, which should be disclosed, should not render an adviser more unable to satisfy the re-qualification requirements of the RDR.

8. Are fewer IFAs undesirable? Yes in these ways:

(a) Consumers who have dealt with a long standing trusted independent adviser will have their confidence affected by authorisation being revoked. Some advisers have studied for and taken exams long before it was compulsory, and are getting insufficient credit for having done so because of the retrospective introduction of new learning outcomes.

(b) The Financial Services Compensation Scheme passes the hat round after the event to fund compensation for losses consumers incur from dealing with a defaulting firm. This means that remaining firms pay for the faults of defaulting firms. The RDR forcing the retirement of IFAs, ahead of their otherwise wishes, will result in extra financial pressure on surviving firms and will de-stabilise the FSCS. A great example of “unintended consequences.”

(d) A bar to the retained registration at an appropriate level of existing, experienced, and ethical advisers reduces the “pool” of advisers and, importantly, mentors to New Entrants.

9. IFAs wish to work with Government, Regulators, the professional and trade bodies, to play their part in raising their standards but it is destructive to IFAs, their staff, and their clients to have uncertainty about continuing livelihoods. Since the announcement of the RDR the FSA has changed tack several times and created confusion through its lack of clarity regarding, for example, Capital Adequacy (definition of fixed costs) and Gap Filling.

10. We are less than two years from the implementation date. The FSA has recently indicated it will be July before they clarify the capital adequacy requirements. This is no way to be running our businesses.

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5. GRANDFATHERING

1. Grandfathering has been urged by some advisers. “Grandfathering” seems to mean different things to different people. It does appear that the FSA’s definition of grandfathering would deem someone of a lower qualification level to be at a higher level without any demonstration of competence. It is no wonder that the FSA concludes that such “grandfathering” should be rejected but, of course, the CPD initiated 17 years ago renders such a debate unnecessary providing appropriate recognition is given to the history of CPD.

2. CPD activity for existing advisers has taken them well beyond their initial benchmark knowledge test. Additionally they will have many years of practical experience in dealing with people and real-life situations, which a newly qualified adviser will not have had.

3. We do not support “experience”, on its own, justifying concessions but with experience goes many more years of relevant CPD. If you became an adviser in 2008 you will have less than three years CPD records but if it was 1998 you will have 13 years. In our opinion more weight has to be given to CPD and on the job training and assessment neither of which impact to the same degree on a new recruit.

4. Competent up to 31st December 2012 and not competent from 1st January 2013 whatever your experience, CPD, and disciplinary record is simply not right.

5. The barrister, Peter Hamilton, said in "Money Marketing" (25/06/09) "There are good arguments for saying that is not lawful. The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be...... It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified."

6. STILL TO BE RESOLVED

1. Adviser Charging

a. The FSA will need to be absolutely clear and public about how it will ensure a level playing field between IFAs and banks.

b. The perception of commission has a negative image. Adviser Charging puts advisers in the position of determining their own remuneration and explaining it clearly to clients. It means they will have to show what they are offering represents value for money. We agree with that.

c. We are concerned about the FSA’s decision to ban the practice of ‘provider factoring’. It represents for consumers the choice of an easy payment method for the up-front costs of advisers in advising on and arranging regular premium insurances and saving plans. For those firms offering such a service a ban would be catastrophic. Those advisers are right to emphasise the damaging effect of a reduction in access to regular premium products. Encouragement to save will be further jeopardised.

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2. Capital Adequacy

Even at this late stage, where phased requirements are supposed to be in place, it will be July before there is clarification in regard to the definition of “fixed costs”.

3. Re-qualification of existing advisers

a. For existing advisers with existing qualifications on the FSA’s Transition List the proposal is that they can attempt to gap-fill using their existing Continuous Professional Development records to match each and every “learning outcome” of a Level 4 qualification. They may then find they need to undertake additional study in some areas. Some may choose to do additional examinations. Those who currently only have a Level 3 qualification (the current minimum standard) will be obliged to undertake more examinations. The FSA is permitting Work Based Assessment but at the time of writing there are no details of how this will work.

b. The results of gap-filling or Work Based Assessment will be independently assessed.

7. FINALLY

To fulfil its responsibility the Treasury Select Committee is right to seek evidence. No one should resist the raising of standards as it should be a goal for everyone. Jettisoning good advisers by 31st December 2012 is not our idea of progress and increasing access to advice. More time is needed.

January 2011

170

Written evidence submitted by Stephen Henry, E M Gray & Co

1. I am a Senior Partner in E M Gray & Co which is well established firm of financial advisers. I have been a practicing Financial Adviser for almost 31 years. The Retail Distribution Review being implemented by the FSA will have potentially irrevocable and disastrous implications for financial advice in the UK. In connection with the proposed discussion by the Treasury Committee I want to make the following submission.

2. Mr Hector Sants FSA told the Committee that the RDR had three specific outcomes: a) A transparent and fairer charging system b) Abetter qualification framework for advisers c) Greater clarity around the type of advice being offered It is my personal opinion that some aspects of the regulatory change are positive i.e. raising professional standards and competence, but the first point a) above I believe will be disastrous for the average UK citizen.

3. The Proposal to abolish commission as a means of remuneration will disenfranchise the largest section of the community from receiving advice as they will not and cannot afford to pay fees for advice that they will need.

4. Having had conversations with my clients on the proposals, my average client who I have looked after for many years and built a relationship as his trusted adviser giving face to face advice will not be willing or able to continue with our relationship on a regular fee paying basis. That part of the UK market place (High Net Worth clients) used to paying fees is very much the thin end of the wedge.

5. The FSA’s rationale for fee charging because of product and provider bias is flawed. The FSA’s own research courtesy of Charles River Associates, which found limited bias and commented that it is more a case of perception. Charles River Associates also confirmed that there was no evidence that fee- based advice provided better outcomes.

6. I feel very strongly in making my point that the consumer should have the choice of paying for their advice by commission, which under the current system is quite clearly shown. Any of my own clients I have spoken to do not have a problem with commission based advice, but will not pay fees.

7. The abolition of commission as a method of remuneration for financial advice will see a large reduction in the number of decent, qualified financial advisers when government statistics already show the shortcomings in the nations savings and pensions.

171

January 2011 172

Written evidence submitted by Bharat Sisodia, Financial Planning Consultant

1. I would like to respectfully make the following submission to the Treasury Committee with regards to the Retail Distribution Review (RDR) discussion.

2. I am a Financial Planning Consultant working in the financial industry for the past 17 years. I am submitting my thoughts to assist the individuals responsible for reviewing the impending implications of RDR.

3. My submission is based purely on my own experience in the financial industry and feedback from my clients.

4. I believe it is always good to broaden one’s knowledge in one’s own profession in order to enhance the quality of service provided to clients. However, I do not consider necessary the high level of qualifications that are proposed in order to remain in this profession.

5. My objection is based on the evidence that I have received from my meetings with clients in order to provide them with sound advice and recommendations.

6. My client bank consists of people on low incomes (even unemployed and on benefits) to fairly rich business people. None of my clients have ever asked me to explain to them some of the technical issues that we are required to learn, for example, “sharp ratio”, “narrow money”, “broad money”, “systems risk”, “correlation”, “standard deviation”, “capital asset”, “pricing model”, “gearing ratio”, etc.

7. All clients across my client bank are of sound mind with a basic understanding of the financial field. This leads me to question how the Financial Services Authority (FSA) have assumed that clients do not understand anything at all of the financial subject. Due to this false assumption on the part of the FSA, Financial Advisers have to write an extremely lengthy recommendations letter, consisting (sometimes) of more than 10 pages, to cover every aspect of their advice.

8. When asked, the majority of my clients have expressed that they would prefer to have a recommendations letter consisting of no more than 2 pages.

9. I firmly believe that health and wealth are the two most important issues facing individuals. Health care is taken care of by NHS, whilst wealth care is taken care of by an ever diminishing number of Financial Advisers. People need only basic advice and a financial review by an adviser who can point out in simple language the short falls in protection cover, retirement planning or their savings, so that they do not need to be taken care of by the State.

10. It is important to understand that the Financial Advisers are playing an important role in reducing burdens on the State, by helping individuals to remain sound in their financial state of affairs.

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11. When asked regarding fee charging for advice, as proposed by RDR, most of my clients have expressed that they would not be willing to pay any such fees. A negligible number (from the high net worth clients) have said they would be happy to go along that route.

12. This obviously means that most of my clients will suffer as I will not be able to provide them with free advice. The consequences of this proposal will be devastating, long lasting and irreversible.

13. Due to the proposed requirement of achieving more advanced qualifications, many advisers have decided to leave the industry.

14. With the implication of fee charging structure, most of the clients will leave the Advisers, affecting the remuneration of Advisers and eventually making them redundant. Hence the RDR process will have been counterproductive. This will increase the list of unemployed people in the country.

15. Judging from the recorded number of complaints in the financial industry compared to ten years ago, I believe this industry is indeed in a good sound state of trust and responsibility. With this view in mind it is questionable why anyone would want to disturb the model that is working extremely well. Based on this I would urge you to “scrap” the RDR with immediate effect.

16. RDR will increase the cost of advice across the board. RDR will fall short of its objective of achieving good consumer outcome if not enough advisers remain in the industry.

17. I firmly believe that the RDR process has totally ignored the needs of the clients.

18. Judging from past experience, no matter how much people protest, whatever has been proposed is carried out. Hence it will be no surprise to me that the RDR will eventually come into force.

19. For this reason and in anticipation of the disastrous future, I have already signed contracts to sell off my financial practice and am currently in an interim period before everything is finalised.

January 2011 174

Written evidence submitted by Principal Investment Management

Principal is a private client discretionary investment management firm and a member of the Association of Private Client Investment Managers & Stockbrokers (APCIMS). Principal has offices in the City of London, Sevenoaks and Bath in Parliamentary constituencies represented by Mark Field, Michael Fallon and Don Foster, respectively.

Further to APCIMS’ written briefing of 26th November to the Treasury Select Committee 2010, we wish to endorse the APCIMS response. In particular, we would reiterate that the RDR has drawn our sector into a regulatory regime which is, at best, of little benefit and confusing to our clients and difficult for investment management firms to implement. At worst, the RDR may encourage further mis-selling by advisers who do not have the expertise to advise on higher risk Retail Investment Products and will restrict some clients’ access to our services because we will no longer be able to identify ourselves as giving “independent advice”.

January 2011 175

Written evidence submitted by Consumer Focus

Executive summary

Introduction 1 Consumer Focus is the statutory organisation campaigning for a fair deal for consumers in England, Wales, Scotland and for postal services in Northern Ireland. We are the voice of the consumer and work to secure a fair deal on their behalf. 2 This evidence addresses the Committee’s questions only on the sales of personal pensions. This is a subject Consumer Focus has been investigating since autumn 2010. 3 Consumer Focus agrees with the move from provider determined charges to customer agreed remuneration. However, the long duration of the Retail Distribution Review (RDR) development has allowed some companies and IFAs to profit from writing new business using on-going trail commission charges shortly before this practice is banned. The on-going nature of trail commission means that such unfair charges will continue to be levied on customers many years into the future. We think FSA needs to address this. 4 We support IFAs having the appropriate level of qualifications for the types of client they serve. The costs of advising clients on pensions using prevailing industry norms in terms of time and hourly charges make this unaffordable for the majority of people. This is something the RDR does not appear to have fully taken on board.

Transparent and fair charging system 5 We welcome RDR’s change to a system of customer agreed remuneration of advisors and the banning of provider determined commissions in the personal pension market. 6 Individual personal pensions are a widely held savings product. According to research undertaken for us around 15% of adults below retirement age have at least one individual personal pension1. Advisers are largely remunerated through commissions paid by providers. This creates an incentive to avoid products that do not pay commission (exchange traded funds, investment trusts) or low commission (stakeholder products) and to churn pensions even when this is not in the best interests of the client. The decision about whether to use an individual personal pension, and whether to consolidate existing pensions into one is very complex. The majority of customers rely on IFAs to help them navigate their way through the thicket of issues. Around two-thirds of sales of personal pensions are on an advised basis; IFAs (as opposed to tied agents or banks) account for around 70 per cent of the advice market. IFAs have to offer customers the option of paying fees instead of commission.

1 TNS face-to-face survey for Consumer Focus undertaken October 2010, 1400 adults between 18 and 65 surveyed 176

Only around a sixth of customers do so. The sums that customers are prepared to pay for advice (around £100) is far lower than the sums the typical IFA recovers through commission. 7 The existing charging structure for advice is poorly understood. Most (56%) personal pension holders who took last personal pension with an advisor have heard of trail commission. Of these, only 46% are aware of whether their adviser received trail commission2. 8 Charges consist of a mixture of up front and on-going charges. The formula for remuneration is selected by the IFA from a menu of commission options offered by the pension provider. We have heard from a number of people that the IFA makes this choice according to his or her desire for up-front cash or long term cash-flow. Many IFAs are leaving the industry in the near future and they will often want to develop an on-going stream of income, which adds value to their business before it is sold. 9 The initial commission might be 30% to 50% of the first year’s premium for a regular pension plan, or 4% to 6% of a one-off transfer. Trail commission is typically 0.5% of the fund value. (Some pension providers pay IFAs renewal commission based on regular payments into the pension instead of trail commission.) 10 Trail commission is paid on the fund value until the policy is either transferred to another provider or used to purchase an annuity/drawn down. The purpose of trail commission is far from clear. Many IFAs see it as compensation for the on-going servicing of their clients. This sentiment is echoed on the trade association’s own website3. It says: “there may be annual commission payments to cover ongoing advice from your adviser over the lifetime of your products.” Others see it solely as deferred initial commission. A number of pension providers require IFAs to continue to act on behalf of their client to receive trail commission and will cease to pay trail commission if they believe the IFA is no longer servicing the client. 11 The use of trail commission has grown over recent years and the on-going nature of the commission on all business written before RDR means that the effect will persist. Consumer Focus agrees with the FSA that on-going payment of trail commission without service should cease. We further argue it should cease on existing policies if the IFA has lost touch with their client. 12 We believe there has been growth in the payments of trail commission by some providers, to some IFAs in advance of RDR coming into force. Consumer Focus has used its information gathering powers to require pension providers to disclose how much trail, renewal and initial commission they pay IFAs for personal pension sales. In one case the company’s payment of trail

2 YouGov plc internet questionnaire for Consumer Focus undertaken 23-29 December 2010 Total sample size 1001 adults aged 18-65 who have taken out a personal pension. The survey was carried out online.

3 http://www.aifa.net/consumer-area/paying-for-financial-advice.php 177

commission has grown by 80 per cent between 2007 and 2009. This amounted to almost £250 per client. In other words customers have been locked into paying trail commission a few years before this practice is banned. The other company that provided us separate data for trail and renewal commission paid out between £11 million and £13 million in trail commission and £5 million in renewal commission over the last three years. This company has a large back book of policies, but has written relatively little new business over the last decade. This shows the long persistence of trail commission. Consumer Focus believes the FSA needs to investigate how trail commission has been used by some IFAs and pension companies in the period of time between consultation on RDR began (in 2006) and when it comes into force at end of 2012.

Better qualification framework for IFAs 13 IFAs need to be appropriately qualified to provide advice on the products they sell. But a balance needs to be struck to ensure that appropriate and independent financial advice is affordable to those who need it. The advice needed by mass-affluent and high net worth people is quite different to those on low income or average savings. The ABI has commissioned research suggesting it takes IFAs between 9 and 12 hours to provide advice on pensions. For many people retirement planning will be unaffordable unless a more streamlined and belt and braces approach is taken to the skills and depth of information gathered and analysed by the adviser.

January 2011 178

Written evidence submitted by Royal Bank Scotland

Executive Summary

RBS Group (RBS) continues to be in broad agreement with the intended outcomes of the FSA’s Retail Distribution Review (RDR) where these will secure demonstrably better outcomes for customers in terms of providing greater clarity on the nature of services they are accessing, the quality of the advice they receive and the way they pay for such services.

For our advisers who are yet to attain the required qualification level, RBS is fully committed to supporting them on their journey to securing the necessary level of professionalism by 31 December 2012.

We support the RDR objective to end commission-based investment advice and an end to product provider influence on adviser remuneration.

We however continue to have significant concerns over an unintended consequence of the RDR, namely an adverse impact on customer access to advice. We believe this will stem from two primary sources: an anticipated reduction in the number of advisers in the industry and the costs firms will incur in delivering advice, which will ultimately be passed on to customers, potentially moving advice “up market”. This will in turn reduce access for less affluent customers who will continue to need such financial advice.

These concerns have already been raised by RBS during the formal consultation process with the FSA. RBS has met with the FSA and the Financial Services Consumer Panel (FSCP) several times to discuss our proposal for creating a Simplified Advice model designed to meet the simpler needs of less affluent customers for protection, retirement, savings and investments solutions. We propose that the FSA should consult specifically on the issue of Simplified Advice, how it can be delivered, the appropriate product sets it should encompass and the professionalism requirements with a view to changing the rules to allow for the development of a commercially viable advice service.

As the FSA’s consultation on particular aspects of the RDR will continue well into 2011, the implementation period for firms is also becoming increasingly challenging. The FSA’s announcement on 16 December 2010 that they have delayed publication of the Professionalism Policy Statement has reinforced our concerns. RBS would welcome consideration to be given to extending the implementation timescales for certain requirements, such as transactional sales data and Continuous Professional Development (CPD).

1 Introduction

1.1 RBS Group (RBS) welcomes the opportunity to provide written evidence to the Treasury Select Committee on the RDR.

1.2 Our NatWest and RBS brands serve more than 13 million current account, savings and mortgage customers in the UK. There are a significant number of 179

customers who may turn to us for financial advice and nearly half a million customers did so in 2010. We recognise we have a responsibility to our customers to ensure we behave in a helpful, transparent and fair way when they do seek advice from us.

1.3 We have been an active participant in the FSA’s RDR discussion and consultation process since its launch in June 2006. We worked closely and constructively with the relevant trade bodies, the FSCP and the FSA themselves in delivering changes to the advice sector which would achieve the intended outcomes.

1.4 RBS supports the intended outcomes of the FSA’s RDR where these will secure better outcomes for customers and provide greater clarity on the nature of services they are accessing, the quality of the advice they receive and the way they pay for such services. 1.5 Whilst our comments here focus on paid for advice which is the focus of the RDR, we also recognise that some customers depend on access to free money advice to help them deal with financial difficulty. We are the largest funder of the money advice sector and the largest funder of the Money Advice Trust. This funding trickles down to many advice agencies that are helping people on the frontline. For example, we fund the Wiseradviser training which 90% of all debt advisers go through.

2 The RDR will reduce access to advice

2.1 The RDR was meant to encourage greater savings and investment and increase consumer access to advice. The FSA, in Discussion Paper 07/1, articulated six main outcomes they wished to achieve from the RDR including, “a market which allows more consumers to have their needs and wants addressed.”

2.2 However, since the start of discussion and consultation on the RDR, we have raised significant concerns about the indirect implications of the FSA’s proposals. As they stand, market research* indicates that the proposals will have a detrimental impact on access to advice for a significant proportion of the population, in particular the less affluent with relatively straightforward financial planning needs.

2.3 This reduction in access will be caused by an anticipated reduction in the number of advisers in the industry together with the increased cost of delivering advice which will have to be paid for by customers, which will in turn reduce access for less affluent customers or those who are unwilling to pay.

2.4 Our internal research has highlighted that customers are happy to research and analyse their financial situation online but prefer to seek the services of a financial adviser when making a decision due to the complexity of issues they face.

2.5 Our proposed Simplified Advice model uses a combination of face to face and on-line solutions to deliver advice cost effectively, focusing on the more straightforward needs of the mass market and covering the majority of our consumer base. It limits the solutions that can be offered, to include products that 180

protect against events such as death or serious illness and investment products that meet the needs of the customer without putting capital at undue risk.

2.6 Simplified Advice would still align with the principles of the RDR in relation to the definition of advice but, given its focus on simpler needs, financial situations and solutions, we believe that Simplified Advice could be delivered with a proportionate qualification without the risk of detriment to the consumer.

2.7 Whilst RBS fully supports the increased professional requirement proposed by the FSA as we believe this is appropriate for full and holistic financial planning, we suggest that specific, proportionate qualification standards for Simplified Advice should be developed. These should be set at higher levels than current and retain core elements of the higher level qualification where appropriate, for example on regulation and ethics, but reflect the need to provide advice on a more straight-forward set of solutions.

2.8 We would encourage the Treasury Select Committee to explore the need for the FSA to distinguish between the qualification requirements for advisers offering different types of advice. .

2.9 We also note the HM Treasury’s consultation on “Simple Financial Products” which commenced in December. We particularly note the request for views on whether the new regime of simple financial products should be linked to regulated advice. In order to deliver a cohesive proposal to retail consumers, the HM Treasury consultation needs to reflect the need for Simplified Advice.

3 A transparent and fairer charging system

3.1 We believe that the introduction of Adviser Charging will deliver the FSA’s stated outcome of delivering a transparent and fairer charging system for customers seeking financial advice.

3.2 Adviser Charging will remove the risk of product bias stemming from the payment of product commission to Independent Financial Advisers which will deliver better outcomes for customers.

3.3 By moving to an environment where the cost of advice is more transparent, advice will become a commodity in its own right which will, in turn, require advisers to deliver advisory services that are valued by customers.

3.4 We are, however, mindful of the industry-wide market research* which has identified that a material proportion of customers, particularly the less affluent, may not accept or be willing to pay an up-front fee for professional financial advice. Therefore, the introduction of Adviser Charging may, indirectly, have an adverse impact on the number of customers accessing financial advice. The choice faced by these customers will either be to address their financial needs unsupported or do nothing; neither is a desirable outcome.

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4 A better qualification framework for advisers

4.1 We support the FSA’s drive to implement a step change in professional standards across the investment advice industry. This will be a key aspect in restoring customer trust and faith.

4.2 The proposed framework of appropriate examinations and CPD, combined with a requirement for investment advisers to hold a Statement of Professional Standing, will deliver a better qualification framework. These components are enhanced further by the focus placed on the understanding and demonstration of ethical behaviour by investment advisers.

4.3 On the basis that the FSA wishes to evidence a step change in the professionalism of investment advisers, this can be achieved through the attainment of higher professional standards through the appropriate examination route permitted under the RDR. We believe that this route will deliver the desired outcome of delivering a better qualification framework for advisers without the need for further interventions such as grandfathering.

4.4 Higher qualifications do not in themselves equate to increased professionalism and must be seen in a wider context of measures that will inspire consumer confidence and trust. RBS would like to see a consumer education programme involving the industry, consumer groups, trade bodies, professional bodies to promote this step change.

4.5 There is an increasingly important role for educational bodies, such as colleges and universities, Financial Services Skills Council, professional bodies and the FSA, to play in promoting awareness of the better qualification framework and standards of professionalism that will exist, and the range of career opportunities available, in order to encourage new advisers into the industry. We would see this as essential in mitigating the numbers of advisers anticipated to leave the industry and the potentially adverse impact on access to advice for customers.

4.6 We have a robust learning programme for our existing advisers specifically designed to support them in gaining the required qualifications by December 2012.

4.7 However, there are other ongoing challenges to the December 2012 deadline. There continues to be uncertainty on firms’ ability to use existing examinations, and a lack of clarity on roles and responsibilities of the regulator, Accredited Bodies, employers and advisers in the post RDR landscape, the costs of which firms cannot currently accurately quantify. Uncertainty will continue further with the FSA’s announcement to defer publication of the Professionalism Policy Statement until January 2011. The FSA also continue to consult on the notification requirements that will be placed on firms should their advisers breach the requirements of their role. Firms will require adequate time to adapt their reporting systems in response.

4.8 As the FSA’s consultation on particular aspects of the RDR will continue well into 2011, the implementation period for firms will become increasingly challenging. With the Professionalism Policy Statement deferred to January and sales data requirements due to be consulted on throughout the first half of 2011, the 182

implementation period for the industry is growing ever more demanding. RBS would welcome consideration being given to extending the implementation timescales for certain requirements, such as transactional sales data and CPD arrangements.

5 Greater clarity around the type of advice being offered

5.1 We are in agreement with the FSA that it is important that customers understand the nature of the advisory services being provided, be that Restricted or Independent.

5.2 As with the outcome regarding the qualification framework, this is another aspect where we believe that a consumer education programme involving the industry, consumer groups, trade bodies, professional bodies and the regulator will be essential in fully achieving this outcome.

5.3 We believe however that the labels applied to the advisory services are secondary to the need to ensure that customers have access to professional financial advice.

6 Conclusion

As we have stated within this response RBS believes that the RDR will largely achieve its intended outcomes albeit at a significant cost. We also however believe that there will be unintended consequences for the industry and consumers, primarily a detrimental impact on access to financial advice to the less affluent. Simplified Advice may present a solution. However, in order for the financial services industry to deliver a commercially viable simplified advice model, revision to existing RDR rules and proposals are needed. Specific consultation on this issue is therefore required.

January 2011

183

Written evidence submitted by the Association of Private Client Investment Managers & Stockbrokers

Executive summary

1. APCIMS1 does not disagree with the headline objectives of the RDR as outlined by Hector Sants. We do, however, have serious concerns about the timing of RDR implementation, the practicalities and costs involved and the potential for reduced choice and confusion for consumers. Consequently, we are not optimistic about the RDR achieving its objectives.

2. As regards the identified outcomes : • a better qualification framework for advisers – APCIMS considers the RDR requirements inflexible and bureaucratic, driving experienced advisers out of the industry and requiring extensive professional education regardless of its relevance to individual roles. • a transparent and fairer charging system – APCIMS considers the RDR requirements unnecessarily detailed (e.g. multiple layers of disclosure for consumers) and potentially open to abuse by product providers. • greater clarity around the type of advice being offered – APCIMS believes that the RDR will result in the vast majority of advisers only being able to offer “restricted advice” and consumers being unable to differentiate between the many different types of business captured by that description.

Context

3. Over the last four years, APCIMS has frequently expressed concern about how the RDR regime would – (i) impact the provision of on-going investment services which are not product-focussed; and (ii) align with European Commission work aimed at instituting a Europe-wide regime for pre- contractual product disclosure for “packaged retail investment products” (PRIPs) and at further harmonising the overall delivery of investment services (MiFID Review).

4. As regards (i), the RDR’s exclusive focus on “retail investment products” (RIPs) and on the activities of the provider/distributor firms whose business is wholly concerned with such products means that the FSA has failed to consider how its requirements impact the business of firms whose services to private individuals arre not primarily product-based. A regime designed to address the abuses which characterise mass market sales of products to small- scale, financially-unaware savers is not appropriate for the relationship-based, portfolio services which our members provide across a wide range of different investment types.

5. In scenarios where a consumer commits a significant proportion of his savings to a single product which is long-term and illiquid and where adviser remuneration is prone to product/provider bias, (e.g. a pension or a life policy), the RDR’s headline requirements make sense. However, the investors that deal with APCIMS firms are typically looking for a range of market-traded and market-related investments. So, while they may be advised on products

1 The Association of Private Client Investment Managers & Stockbrokers represents firms offering investment services to private investors, with services ranging from execution-only stockbroking to full discretionary management and covering a wide variety of investments including equities, bonds, gilts, derivatives, collectives and cash. At the end of 2009, firms in the sector controlled assets of £402bn, operated 4.86m client accounts, employed 29,250 staff and had executed 22.4 million trades during the year. (Source : Compeer) 184

such as unit trusts and investment trusts, these generally form only a small proportion of their portfolios and, being readily-tradable, are used for investment purposes (e.g. risk diversification or gaining exposure to overseas markets) rather than as savings vehicles. In this context, regulation aimed at ensuring that the overall service is provided in such a way as to meet the client’s best interests seems far more appropriate than a regime aimed at one-off product sales – APCIMS contends that its firms are already subject to this more “holistic” regulatory approach by virtue of MiFID and CRD requirements and that many elements of the RDR are excessive. In addition, when APCIMS firms trade collectives for their clients, they are subject to market-orientated regulation (e.g. transaction reporting and client money rules) which do not apply in mass-market product distribution scenarios.

6. As regards (ii), APCIMS believes that the FSA has effectively “front-run” European work on PRIPs. Although the FSA made frequent references to this work in support of its RDR proposals, the fact remains that the FSA has already finalised the rules that will take effect in 2013 while the European Commission continues to develop and consult on its PRIPs and MiFID Review work. Until very recently, the material which the European Commission had issued on PRIPs was at a very high level – nevertheless, the FSA appeared to adopt it as a minimum upon which it could build extra layers of UK-only regulation (e.g. the concept of “independent” or “restricted” advice) with the result that many UK firms are likely to be saddled with a super-equivalent regime (as occurred following MiFID-1 implementation).

7. The European Commission’s current consultation on PRIPs seeks views on the scope of the PRIPs regime, the investments that should be covered by the PRIPs definition and the details of new product disclosure documents. The current MiFID Review consultation seeks views on amending the requirements that cover selling/advising on investments and extending the application of MiFID sales/advice rules to PRIPs not currently within MiFID scope.

8. If the results of the PRIPs/MiFID work turn out to be significantly different from the RDR’s requirements, UK firms will have expended considerable resources for no purpose and UK consumers will face another raft of new disclosure documents and alternative service descriptions. It is also worth noting that the MiFID Review consults on possible abolition of Article 4, a provision which the FSA has used to retain various requirements super-equivalent to MiFID (including elements of the RDR) – if this were to happen, the UK might be required to dismantle those elements of its domestic regulation that went beyond MiFID with the result that the resources put into their original implementation would be wasted.

APCIMS recommendation

10. Given that these major European projects are still at a consultative stage, may be subject to significant amendment and are based on timetables that extend beyond the RDR implementation date, we believe that the RDR implementation timetable should be deferred so as to allow for maximum possible alignment with eventual European requirements.

11. In the paragraphs that follow, we address the main RDR outcomes in order of their impact upon and importance to firms within the APCIMS constituency.

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Type of advice

12. The RDR has re-defined “independent advice”. At present, most APCIMS firms provide independent, whole-of-market advice in relation to collective investment schemes but do not advise on other types of “packaged products” such as life policies and pensions which are not relevant to their market-orientated services. Under the RDR, a firm only offers “independent advice” if it advises on all types of RIPs - consequently, the fact that APCIMS firms advise only on those RIPs which have a market access/risk diversification role in investment portfolios but not on long-term savings products means that they will automatically be deemed to be offering “restricted advice”. So - • even though APCIMS firms have not changed the services they offer or the range of investments upon which they advise, the RDR will automatically result in the status of their product-related business moving from “independent” to “restricted” – a firm that currently provides independent advice on unit trusts from multiple providers across the market may continue to operate in exactly the same way but, in future, the fact that it does not also advise on pensions will mean that its advice is “restricted”. • because independence is only relevant in the context of RIPs, APCIMS firms advising across a wide range of investments including securities and bonds will be forced to describe themselves as “restricted” while IFAs advising on all types of RIPs could describe themselves as “independent”, notwithstanding that they do not advise on direct investments. • even though their services will be unchanged, APCIMS firms stand to lose significant sources of new business, e.g. referrals from solicitors and accountants who are required by their own professional bodies to only introduce clients to investment advisers who provide “independent” advice. • if the vast majority of advisers end up offering “restricted advice” because they are unable/unwilling to advise on all forms of RIP, consumers are likely to be confused by the many resulting “shades of grey”. If “restricted advice” describes both an APCIMS firm advising on unit trusts from across the whole market and another firm advising on unit trusts offered by a single product provider, how does that label help the consumer to differentiate between their services?

APCIMS recommendation

13. European work in this area does not recognise the concept of “independence” and has not yet determined which products are within the PRIPs definition – as outlined above, we believe that the FSA should not be implementing super-equivalent requirements which European developments may subsequently render void.

Charging system

14. The RDR objective of aligning adviser and client interests by ensuring that an adviser is paid by the client to whom advice is provided rather than by the product provider whose product is sold is sound – this is how APCIMS firms have long operated, agreeing their tariffs with clients ahead of service provision and having their charges paid directly by the client. However – 186

• there is clear potential for “adviser charging” to be abused as a result of product providers being able to “facilitate” the collection of adviser charges and provide various forms of non-monetary benefits to advisers. • the RDR rules for how adviser charges must be disclosed are impossibly detailed, requiring multiple layers of disclosure at different times and requiring firms to disclose not only the costs arising directly from the RIP in question but also on-going charges that may result from a RIP being included in a client portfolio to which annual management fees are applied. • the FSA’s prescriptive approach to disclosure of adviser charging is contrary to MiFID – although the FSA was forced in 2007 to jettison its pro-forma charges disclosure document, it is attempting to achieve the same end by specifying disclosure content in extreme detail. • the adviser charging rules, having only just been made, are already being amended – as well as making already complex rules even more convoluted, this means that firms are unable to accurately plan for their implementation.

APCIMS recommendation

15. We believe that the charging rules should be simplified as consumers are unlikely to benefit from multiple layers of detailed disclosure. Professionalism

16. While APCIMS believes that the drive to raise professional standards amongst advisers is reasonable, we have significant reservations about the FSA’s approach. Specifically– • FSA opposition to any form of “grandfathering” for older staff without relevant qualifications effectively means that the experience/expertise that these individuals have acquired over decades of looking after clients count for nothing and may, in many cases, be lost to the industry as advisers choose to retire rather than having to “re-qualify”. • detailed requirements for “gap filling” between existing qualifications and new examination standards will result in many advisers having to learn material which has no relevance to their day-to-day roles or to the advice that they give to clients – the more specialised an adviser’s role is, the more unnecessary material he will have to learn. Also, even though a majority of advisers in APCIMS firms have qualifications far above the minimum level the RDR requires, they will still have to go through the “gap fill” exercise. • the RDR will require advisers and their firms to complete and record on-going CPD, to make regular professionalism data reports to the FSA and to provide formal confirmations to the professional bodies that will issue the annual Statements of Professional Standing that advisers must have to continue in their roles – these requirements are extremely detailed, will be bureaucratic and costly for firms to comply with and fail to take proper account of in-house training programmes that firms have expended significant resources on developing. In addition, there are concerns about some professional bodies’ ability to handle the operational burdens the new regime places upon them.

APCIMS recommendation

17. We believe that the FSA’s “big bang” approach to professionalism should be softened by, for example - 187

• allowing a longer “run-off” period with older staff continuing in their roles for an extra year for every seven already worked, thus recognising experience; • phasing in CPD requirements gradually, perhaps 20 hours in the first year, increasing thereafter; and • reducing the administrative burden on professional bodies by having a two year assessment process, covering 50% of the adviser population in alternate years rather than 100% each year.

January 2011

188

Written evidence submitted by Ian Brough, Independent Financial Adviser

The areas I wish to highlight are mainly about quality of data, statistics and surveys.

(i) Surveys utilised (ii) Affordability of advice and bringing financial services to a wider audience DP07 (iii) Cross subsidy (iv) Commission and bias (v) Qualifications (vi) Summary and suggestions

Ian Brough Financial is a small IFA firm operating in the North East of England based near Durham City. Ian Brough has previously worked in national tied and IFA firms before starting his own practise.

It should be remembered:

The RDR from January 2013 will, if implemented, change the way every consumer can pay for investments and savings in the UK.

Opening Statement

I believe that major flaws in the RDR started with poor data and research issues, then got worse, effectively building on poor foundations, there are inconsistencies, no counter arguments for trends or statistics, information shortfalls from the initial intentions of the RDR to the present day, my letter demonstrates in around 2000 words, very limited time, with no budget or consultants that the data the RDR was based upon does not stand up well to scrutiny.

(i) The surveys within reports commissioned by the FSA often state that sample rates of those surveyed are not sufficient percentages/numbers to be considered a true reflection of the sector/group, yet they still constitute part of these reports and conclusions. I can only conclude other evidence was in short supply to justify using this material. Why not seek further information in these situations?

If this were evidence in a court case, it would probably be inadmissible, the opposition would shout ‘object’, there appears to be no similar system here to filter poor data or statistics.

This is most telling in the firms commissioned to provide reports, these firms have to protect their professional reputations.

(ii) The FSA listed a problem at the start of the RDR when Amanda Bowe (head of RDR) was in office, I quote: 189

‘Many consumers who have the means to save are simply unable to afford advice relating to their financial situation. Moreover, some consumers may not be able to access advice because the costs of regulatory requirements, and the ways in which many firms apply these requirements, limit the number of firms willing to serve certain types of consumer.’

Amanda Bowe also stated the RDR was intended ‘to bring financial services to a wider audience’

However the Oxera report 2009 (for the FSA) states:

(1)‘In the longer term, there may be some unwinding of cross-subsidies, which will result in higher fees for ‘low-value’ clients. Consequently, some will no longer have a realistic option of receiving independent advice. Some may switch to non-independent advice, others to bancassurance, while some may not purchase at all. The result will be a loss of choice for these customers, which may be perceived as harming competition.’

The statement ‘while some may not purchase at all’ indicates a loss of financial service clients and does not mention in the report the possibility of a whole new wider audience or even replacement of those lost clients.

These main aims have been lost:

• When did this major change occur? • Without this how is the £1.7bn (approx) and huge job loss justified?

(iii) This statement (1) above gives the impression a small number of people will be negatively affected by removal of the cross subsidy between wealthier clients and those less affluent clients, however, if we look at the table below only 15% of households- I stress households not individuals, have over £20,000 of total savings, and of these 15% of households who hold over £20,000 of savings many will be on deposit in National savings, banks and building societies not in investments. Furthermore, if we allowed emergency funds for each individual we could be looking at 85% or more of the population falling in to the two lower bands mentioned.

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Table 5.27 Household savings: by household type and amount, 2001/02 Great Britain Percentages

£1,500 £10,000 All but less but less households No Less than than than £20,000 (=100%) savings £1,500 £10,000 £20,000 or more (millions) One adult over pensionable age, no children 28 19 27 10 16 3.7 Two adults, one or both over pensionable age, no children 17 14 25 14 30 4.0

Two adults under pensionable age No children 19 22 30 12 17 4.5 One or more children 30 26 26 8 9 5.3 One adult under pensionable age No children 37 22 26 8 8 3.6 One or more children 67 23 7 1 2 1.9

Other households 21 23 29 12 15 2.3 All households 28 21 26 10 15 25.3 Source: Family Resources Survey, Department for Work and Pensions

• The untangling of this ‘cross subsidy’ is going to benefit how many clients? • How does this ‘bring financial services to a wider audience’? • If this cost and action only benefits the very wealthiest in society, where was this intention listed in the initial intended outcomes of the RDR?

(iv) Commission

Oxera also report:

(2)2.5.12 Commission bias ‘In markets involving commission payments to an intermediary, there are incentives for the intermediary to recommend either an individual product that offers the highest commission rates, or products from a particular provider offering high commission rates in general. The former may be termed product bias, the latter provider bias. In the case of retail financial services, there is a perception that both product and provider bias has existed in the past, although actual evidence to support this perception has often been hard to identify. In a 2002 study for the FSA, evidence was found of provider bias, but only for single premium products, while there was no evidence of such bias for regular premium products. With regard to product bias, the study found evidence of this in certain products, such as ISAs and investment bonds, but it was not widespread.38 Since then further research has reached similar conclusions.39’ 38 CRA International (2002), ‘Polarisation: research into the effect of commission based remuneration on advice’, a report for the FSA, January. 191

39 See, for example, CRA (2005), ‘Financial Advice: How should we pay for it?’, a report for ABI, February.

Considering this is a report by a private firm paid for by the FSA, there are some weak statements in here to justify changing the face of retail financial services in the UK and spending up to £1.7bn, such as: ‘although actual evidence to support this perception has often been hard to identify’ and ‘but it was not widespread.’

• Again this leads me to wonder how short of supporting data where the FSA to include these sources? • What does the rest of the data look like?

One must conclude from this suggestion of negativity surrounding bias, that bias must be detrimental to the consumer. In fact, one of the reports calculates estimated losses in monetary terms if this potential IFA bias existed throughout the whole industry,

Oxera report:

‘Consequently, some will no longer have a realistic option of receiving independent advice. *Some may switch to non-independent advice, others to bancassurance, while some may not purchase at all’

Where is the equivalent data showing the potential consumer cost of *driving the client to the ultimate bias of a tied provider? Some clients must be driven to the same provider and product through the tied proposition as the ones highlighted IFA bias issue?

• How does the overall cost of tied/multi tied compare to the cost of independent product? • Do those detrimental providers and products still exist today in 2011?

The commission reports are from 2002 and 2005 the data within those reports may go back in to the 1990s, large home service operations were in existence, Royal London, CIS agencies etc and before Resolution consolidated many life companies, before other amalgamations, before many funds closed, additionally many national IFAs have gone, BBNFP etc.

• How does the FSA ensure this data is still relevant today? • What are the trends in research, IFAs use of product research tools and other systems of working from the 1990s to the present date? • An Oxera report clearly shows a recent trend of downward initial commission, which indicates a pattern, is this reflected in other behavioural shifts?

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(v) Qualifications-existing advisers

Other professions in similar environments of constant change have adopted structured CPD and training as their solution to keep up with changes and improve competency within their professions.

The medical profession has issued many reports on this subject (which can be viewed online) these have been scrutinised by experts such as universities.

Could the FSA explain:

• What is wrong with the medical profession’s conclusion? • Why the FSA’s solution is favourable?

In addition on a basic educational level, if an industry needs to raise ‘competence and behaviour’ as listed in the FSA’s DP07;

• Why is academic qualification the correct solution above other types of study? • Please could they supply the supporting information for academic preference from some existing well referenced independent studies, as well as similar studies to show why CPD and training or vocational training is the wrong solution ‘to raise competence and behaviour’? • How did the panel/other groups working for the FSA end up with an academic solution and is there any academic bias in this panel?

(vi) Summary

I am confident the treasury and MPs will hear the industry challenge much of the information the RDR was based upon.

In my opinion it is this foundation of reports, information and panel conclusions before discussion papers where the main faults lie.

In my opinion the Retail Distribution review should be scrapped or shelved, the information the RDR is based upon is not robust enough to justify this cost or magnitude of change in an industry.

Suggestions:

The new replacement regulator should be allowed to take office before any further assessment of major change within the industry.

An information dept should be established

A new dept independent of the regulator should be established, this should be used to gather information, statistics and reports. This dept could: 193

• Compile referendums and produce reports in the style of the ‘Forum of Private business’ seeking openly and honestly the views of the industry, clearly defining them from any other surveys • Hold any regulator reports and all of the supporting documentation for industry scrutiny, comment and challenge, before it is used for any particular purpose

Hold other general useful data: • RPI • CPI • Various National Statistic wealth of the nation reports etc • Industry trends • Industry numbers • Average Commission/fee levels • Any private industry data which may be saved • Anything else the industry thinks is important and relevant to store here.

This would allow the industry to operate more on fact, be aware of reality, reduce debate, argument and stop fiction being repeated and included in so many discussions. Ultimately introduce more hard fact and reduce soft fact.

I would like to see the integrity of the FSA panels tested regularly, it has been noticed • an inexplicable leaning toward academic study which appears to go against the tide of thought in other professions • sometimes: ‘missing the obvious’ when it comes down to independent financial advice subject matter.

Is this a bias or problem in that panel system?

I do not see academic qualifications as the answer for existing advisers due to:

• evidence provided by other professions as an overwhelming support for structured CPD and training, • we operate in a profession which changes even more quickly than medical advances with legislation as well as the economic climate it seems logical that an ongoing adaptable system is adopted in favour of ‘one moment in time’ academic study/testing. • Systems such as the CII’s online CPD system with testing is already in place, content only requires adding/amending

In short I would like to see the competence and behaviour issue addressed once and properly.

Thank you for the opportunity to contribute to this debate.

January 2011 194

Written evidence submitted by Charles Stuart Financial Services Ltd

CSFS was delighted that following the RDR Backbench debate in the Houses of Parliament on 29th November 2010, at which he was one of the spectators in the Visitor’s Gallery, Andrew Tyrie M.P. called for a further review to take place and has asked for evidence for TSC to consider and possibly take up with the FSA.

We believe that whilst there are many areas in which successive regulators, and the FSA in particular, have provided valuable changes in the world of financial services the imposition of the RDR will do irreparable damage to both the industry as we know it but more importantly to the financial wellbeing of the UK as a whole. We consider that the potential future problems will bring a heavy burden to the economy and once the industry has been decimated it will be impossible to bring it back to its former state.

In short once wrecked we shall live with the consequences for ever more.

We have read Hector Sants (HS) open letter to Andrew Tyrie dated 13th December 2010 and would make the following comments.

HS makes reference to the mis-selling scandals which have severely damaged customer trust. This is very true and is certainly a great regret for many within the industry but HS fails to point out the reality of the situation in that the vast majority of complaints emanate from advice given by other elements of the industry than IFA’s.

It has been well documented that IFA’s account for a tiny proportion of complaints every year and yet the potential outcome of the RDR is that up to 30% of IFA’s will leave the industry altogether as a direct result of the impact of the RDR. Both HS and Lord Turner have been quoted as saying that this is an acceptable figure and that they consider this will benefit consumers. We question how that assumption can be justified.

If we take an estimate of 21,000 IFA’s, which we believe is a reasonable figure, then 30% of this figure is 6,300 individuals out of work.

If we take CSFS as an example where one IFA has three support staff then we are looking at over 25,200 people losing their livelihoods and having to find alternative employment.

At a time when the economy is already stretched to the limit does the government feel this is an acceptable situation?

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On top of this, and possibly more important, in the UK we have a massive mountain to climb to persuade the population as a whole that they need to make provision for their own future financial wellbeing.

The appalling savings gap in the UK has been well documented and it makes no sense for the government through its appointed regulators to be setting in motion a situation which will see the main providers of quality advice decimated. That is the reality of losing 30% of IFA’s.

Literally millions of clients could be left without their trusted advisor and have no alternative but to be left top the mercy of the banks whose reputation has never been worse and whose historic performance is woefully inadequate as the complaints statistics make so clear.

We would also comment that in 2008 the FSA with BMRB produced Consumer Research 65a. This confirmed that accountants, solicitors and bank managers were the most trustworthy occupations with financial advisers not being far behind.

Consumer Research 76, also from 2008, established that between 67% and 92% of consumers considered advisers as worthy of high or medium trust. Then, in September 2010, the FSA published its annual research on consumer confidence. This disclosed that 98% of those questioned believed their adviser had treated them fairly, banks scored 83%.

Once more this all points towards IFA’s being the source of the most trusted and one would suggest most suitable advice.

So why are IFA’s thinking of leaving the industry?

Initially because of the whole area of qualifications, secondly the fear of being the last one left funding the spiraling costs of FOS and FSCS!

No one would argue against knowledge being continuously updated and renewed. It would be sheer lunacy to suggest that once someone has been given a license to offer advice that they stop learning or keeping their knowledge up to date. However why is that someone who has been working diligently within an industry for many years, meeting all the regulatory demands placed on them, is fit and proper one day and then the next is not deemed suitable to be able give advice?

Why are solicitors, accountants, doctors, vets, accountants, barristers and many others not made to take the latest qualifications to retain their status within their chosen sphere? Once they have reached the required standard to be authorised by their chosen professional bodies they retain that authorisation for the rest of their lives.

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Of course they carry out continuous professional development (CPD) to ensure their skills are up to date but they do not have to re-qualify.

The latest group of individuals to be given higher levels of entry qualification is those within nursing. Yet those who are already practicing have been given approval to continue to practice whilst new entrants have to meet the higher standards.

This seems eminently fair in that the experienced existing nurses will continue to offer care and assistance whilst continuing with their CPD, and new recruits will be qualified to the new standards. They will still need to learn from their peers who of course have the benefit of experience – something which cannot be learnt from exam study. It only comes from doing the job over a number of years.

Why is someone who has the potential to be involved with life threatening situations treated in this way when an IFA, whose risk to the client is nowhere near as potentially dangerous, is told that they cannot continue however excellent their past record is?

Surely it is plainly irrational to throw out so many experienced individuals who have many years of genuine experience. If the FSA believes that these people will not be fit and proper on 1st January 2013 why do they consider they are acceptable now?

If the FSA are unable to see this point and decide to continue with the requirement for all IFA’s to reach QCA level 4 then surely it is unreasonable for them to provide such a short period of time in which to undertake the qualifications.

HS quotes the OfQual guidelines which suggest that it takes the average learner 370 hours to complete the diploma. That is equivalent to over 46 working days – over 2 months of working days. There has been a period of just 2 years left since the FSA has finally agreed the actual level of qualifying examinations which are acceptable and to now ask hard pressed IFA’s to put aside almost 10% of their available working time to gain such qualifications is frankly unrealistic.

It is interesting to note that HS makes reference to lawyers and accountants in para 3 on page 3 of his letter and yet those very individuals who he refers to as more professional do not need to requalify.

Surely where they have existing authorised individuals who have good compliant records they should be offering a more realistic timeframe in which to meet these standards.

If on the other hand the justification for this situation is the level of mis-selling which has happened as per page 1 of HS letter then one has to question the efficacy of the FSA to date!

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The sad fact is that the FSA have been in office for a long time and to date they have totally failed, most clearly demonstrated by the near collapse of the UK banking system while under their watch.

Examination of the problems in the past will clearly show that IFA’s are the least problematic area of advice giving and to now pile yet more regulation onto them is undeserved.

The reality of a contraction of the IFA sector is that the annual levy’s pilled on by the requirements of FSA, FOS and FSCS will become intolerable and IFA firms will become unable to support the burden as their numbers dwindle. Whose benefit will this serve?

As the number of IFA’s goes down, more and more customers will be herded into the banks who will continue to provide target related sales as opposed to advice. The result will be continuing complaints and mis-selling – we ask what benefit is there in that?

The next major concern we have regarding the RDR is the outlawing of commission as a vehicle for the cost of advice.

It might be sensible to remind ourselves that FSA Occasional Paper series 32, in April 2009, confirmed "Charles River Associates (2004) finds limited evidence of commission bias in the market for UK retail investment products."

The 65a research mentioned above was particularly pertinent as it actually asked consumers what they considered important when purchasing a product. The three areas highlighted were product information, whether the adviser is independent or not and whether the adviser meets regulatory requirements.

The least important was how fees or commission is calculated.

Charles River Associates carried out further FSA research in January 2009 and this included the following statement. "It is often argued that providers offering higher commission will 'buy' market share. We did not find evidence to support this."

The provision of advice is an expensive procedure with the heavy compliance requirements. One only has to look at the abject failure of the Stakeholder pension regime to realise that unless there is an adequate facility for advisers to be remunerated for the advice provided then the great British public will simply not purchase the much needed products to provide and protect themselves.

In reality most of the Stakeholder pensions which this company has sold have been to wealthy individuals for the benefit of their grandchildren or early retired clients who want to avail themselves of the generous tax relief on offer providing a highly efficient Inheritance tax avoidance vehicle. 198

We have been able to offer advice on these products because we have other earnings on top of the minimal amounts of commission available on the Stakeholder plans.

As detailed earlier we have just one individual client who has opted for the fee route as opposed to the commission route.

Interestingly just last week we had a discussion with an accountant contact of this company who confirmed that he had recently been concerned about his levels of protection and so consulted his IFA for advice.

As part of the research for this submission we specifically asked him how he had remunerated his IFA. His answer was that he had chosen commission. When we enquired why he had not chosen the fee route he explained that whilst he was aware of the option he was happier using the commission route as he did not want to write a personal cheque out to his adviser.

An accountant who chooses commission not fees – this is typical of so many of the people we come across day in and day out in the real world.

This accountant was also concerned about the impact of fees with regard to VAT and of course confirmed that once fees are imposed then VAT will effectively increase the cost of advice for the public. Once more we have to ask how this will help the UK reduce the savings gap we already have?

In reality there are many people who want advice and are perfectly happy that there is a way of funding the advice which does not impact their bank account initially. As we have stated earlier in this submission as a company we do not take indemnity commission, we are paid as each payment is made by the client to the provider.

If commission is banned there is a danger that clients could in future stop payments to their IFA once the advice has been taken but retain the contract in force with the provider.

The IFA will have no other choice but to take the client to court to receive what is rightfully theirs or stop taking the income for the advice by way of ongoing fees and will have to charge for the advice initially by way of a lump sum.

Whatever way it is done the customer ends up having to defend their actions in court or has to fund the advice up front and the evidence is that in the vast majority of cases clients do not like this route. The evidence of this company is that they prefer commission.

The result is less choice for customers and inevitably an increasing savings and protection gap with the result that the Government of the day will be left having to 199

cope with more and more people ending up reliant on the State benefit system. What Government will wish for this outcome?

There is a simple solution to this situation. Set maximum commission levels for the available contracts and outlaw enhancements. If the maximum level of commission on Investment Bonds was 3% - equal to that on collectives – then we would no longer see any commission bias and therefore we would stop seeing any continued mis-selling of such products.

When you consider that the hard pressed bank advisers are driven by ever increasing sales targets it is little surprise that there is a preference for some of those advisers to sell an investment bond with commission of anything up to 8% rather than a unit trust where they would earn 3%.

Once more we would suggest investigation of the sales practices used in relation to the many complaints which HS refers to on page 1 of his letter. We are sure that the vast majority of the unsuitable sales will come from areas other than IFA’s.

The issue of commission or fees should really be for the consumer and not the regulator to dictate. In reality we have been happily using Customer Agreed Remuneration since the 1990’s. All clients are offered the choice and there is always a discussion regarding the options so it is clear to any customer that believes they are getting free advice (HS letter para 5 page 5) that in fact there is a cost to that advice. Consumers are not as stupid as maybe the FSA think they are.

The final area of concern within this submission relates to the costs of implementing the RDR.

HS recently suggested that annual consumer detriment due to mis-selling is running at between £250m/£500m, a guess that has since been uplifted to £400,/£600m in his letter to the TSC. In reply to a recent FOIA request the FSA advised, "The figure given to the Treasury Select Committee was 'around £250m'. The precise figure is £223m". Notwithstanding that the figure provided to the Treasury Select Committee was overstated by 12.1%, or 124.2% if we look at the £500m suggestion, we question the validity of the figures being provided.

Within PS10/6 suggested consumer detriment is broken down into four sections. According to Alan Lakey, another IFA who we are sure will have presented substantial evidence to the TSC, these assumptions have never been scrutinised yet they veer towards the absurd and must be challenged.

One of the accusations levelled by Charles River Associates is that advisers place investors into unit trusts instead of equity ISA's and suggested £70m as the resulting detriment due to losing tax efficiency. 200

A true equity ISA only benefits from CGT relief over and above the basic unit trust and most investors do not exceed their annual CGT allowance so the detriment figure appears implausible. Notwithstanding I fail to see why any adviser would fail to make use of the full ISA allowance before using an OEIC or unit trust. Does this sound a likely scenario? There is no commission differential so the only reasons would be stupidity or laziness.

Another area related to advisers recommending distribution or with profit bonds instead of equity ISA's. The Charles Rivers research in 2002 allocated £49.5m p.a. of consumer detriment to this on the basis that each sale lost the consumer up to 0.50% p.a.

In June 2009 Oxera calculated that the commission on bonds has been reducing year on year, falling from 5.25% in 2005 to 4.32% in 2007. Additionally, back in 2002, the total sales of such bonds was 433,000 a figure which fell to 71,439 for the year ending September 2010. IFAs were only responsible for 45.6% of these sales.

All other things being equal the detriment figure should be zero if we also take into account Charles Rivers observation that the RIY on bonds is sufficiently lower than ISA's that after 10 years the detriment disappears.

We feel that these points bring the FSA’s assumptions into question.

So in summary we would like to say that the RDR, despite many good points, could have the unintended consequence of "disenfranchising" the majority of consumers from financial advice and has therefore justifiably come in for much criticism within the industry for this. There is no doubting that it is a great opportunity for a number of interested parties, some who will no doubt be ready to capitalise on the opportunity presented to those that can best afford it, by that we mean the large Wealth Management firms, consolidators and long established fee based only IFA firms.

It is clear that the regulator has chosen to ignore the very clear, wise advice given by many leading industry figures who have seen the effect of badly thought out regulatory changes of direction before, remember NASDIM, FIMBRA, PIA?

We sincerely hope that the TSC will continue to press the FSA on these and the no doubt many more points which are bound to be raised by people such as ourselves who are proud of what we do and how we do it.

Thank you for your time and for investigating this matter.

January 2011

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Written evidence submitted by Patricia Hutchinson, Independent Financial Adviser

I understand the Treasury Select Committee are asking for evidence that the RDR will or will not achieve its stated consumer outcomes.

It is difficult for me as a sole practioner IFA to argue against the might of the FSA with their massive budgets to commission research in support of their views. With my limited resources I have no alternative but to rely on published reports and to relate my own personal experience and those of my contemporaries. I don’t know if this will count for anything but I feel passionate enough to state my case.

The Savings Gap I presume there can be no dispute that in the UK we have a massive savings gap which needs urgently to be addressed if people are not to fall on the state for support.

Twenty five years ago there were 200,000 advisers and now around 33,000. The savings gap has grown over this period.

The IFA is in the front line to give advice to local people but IFA numbers have already been decimated. Over the last five years I personally have received many calls from people looking for a new IFA since theirs has gone out of business.

Most IFAs advise ordinary people with relatively simple needs and limited funds.

Aifa's paper ‘Restoring Trust in Financial Services’ published reports: ‘86% of adults surveyed by YouGov in July 2008 on behalf of AIFA, who had dealings with IFAs in the past 3 years, rated their services fairly good or extremely good. 98% of consumers who already have an IFA state that it is their IFA who they trust most to offer financial advice. The YouGov research also showed that of the respondents who have had dealings with different FSis in the past 3 years, 78% of those questioned trusted IFAs to treat them fairly’ http://www.aifa.net/_assets/documents/Consumer%20Trust.pdf

In September 2010, the FSA’s annual consumer confidence research found 98% of those questioned believed their adviser had treated them fairly.

Many IFAs are approaching retirement. Talking to other IFAs my overwhelming impression is that most IFAs, like me, believe that post RDR they will struggle to get their clients to pay fees and therefore see no point in spending large amounts of time and money meeting the new standards as their business may become unviable.

‘A report by Ernst & Young in February 2009 suggests that the combined effect of the RDR proposals will be to reduce the number of IFA firms from 16,000 to 10,000 (35– 40%) by 2013.75’ http://www.fsa.gov.uk/pubs/other/oxera_rdr.pdf

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Those who survive will inevitably focus on more profitable (higher net worth) clients who are more able to pay fees thus leaving the vast majority of ordinary people without an adviser.

The FSA has not calculated any possible detriment caused by a decline in adviser numbers although The Association of Independent Financial Advisers (AIFA) published a Manifesto for Regulation on 16th Nov 2010 which suggested a 10 per cent drop in adviser numbers would lead to a £650m drop in long term business in one year, a £1.76bn drop in sales of Oeics and unit trusts and two million less policies resulting in a reduction in pension benefits of £4.4bn.

Conclusion: IFAs are the most trusted of all financial services institutions and maintaining IFA numbers is crucial to help address the savings gap.

Mis-selling The FSA has recently stated that mis-selling is costing consumers around £500m a year although this figure has not been quantified. Common sense would suggest that target driven sales teams are under the most pressure to sell inappropriate products as they risk losing their job if they fail to hit their targets but RDR will not affect this culture in bancassurers. The Financial Ombudsman Service (FOS) complaints data shows the large bancassurers have the largest number of complaints and the largest proportion of complaints upheld by FOS. They operate a target driven sales culture. Anonymous postings on the Money Marketing website from bank employees paint this picture:

‘I am currently working in a branch for HSBC The pressure to sell fee paying accounts along with Mortgages, Credit Cards, Home and Motor Insurance is VERY stressfull…….We have resorted to quoting family and friends to try and boost our branch performance’ ‘I started my banking career in Natwest and the pressure to sell to unrealistic targets was unreal. I looked forward to end of day conference calls with the senior manager each day where individuals who had not performed to target were humiliated and bullied in front of other staff. Half the sellers were off with stress. I moved to Barclays hoping they would treat customers more fairly and they are no better. The bullying to sell is not quite as harsh as Natwest but there are new challenges with Barclays such as cross sales ratios...if you sell one product to a customer they are not content with that, they want you to sell 3 products in one hit’ ‘I hope something is done to stop bank sales culture, it is not fair on customers and it is not fair on staff’ http://www.moneymarketing.co.uk/story.aspx?storycode=1007487&PageNo=5&SortOr der=dateadded&PageSize=10

Gill Kirk, a former HSBC employee stated during Which?’s Future of Banking Commission in London on 25th February 2010:

‘You had to sell, whether it was for the customer or not. You’d like to think that if you knew the customer you could sell them the right product but some people didn’t do that because they were trying to reach a target and they sold whatever they could’ 203

Customers are today well aware of the opportunity to complain if they feel they have been mis-sold a product courtesy of the burgeoning complaints management industry and high profile advertising by the FSA of consumer’s right to complain. Surely the complaints data published by the Financial Ombudsman Service (FOS) must give a reliable picture of where this mis-selling is occurring. The FOS data shows that in 2010 IFAs attracted just 2% of complaints received by the Financial Ombudsman Service. At the same time Standard & Poors reported that for 2010 IFAs held 67% of personal finance business yet it is the IFA numbers which will be decimated by RDR.

Conclusion: Mis-selling occurs overwhelmingly in organisations with a target driven sales culture but RDR will allow this to continue.

Qualifications The FSA believe that better qualifications will result in better advice yet:

The Legal Complaints Service (LCS)investigates complaints about solicitors handling over 300 complaints a day: http://www.legalcomplaints.org.uk and solicitors are highly qualified. The Solicitors Disciplinary Tribunal’s (SDT - a division of the High Court) Annual Report to April 2007 revealed that up to 17,000 Solicitors per years were reported to the Law Society for action.

Research by the FSA showed:

‘We find no statistically significant correlation between consumer losses and either the qualifications of advisers or their competence’ ‘Surprisingly, we find no relationship between the share of advisers who passed the qualification exam or the share of competent advisers and either the amount or the incidence of consumer loss attributable to the PIF. None of these variables is statistically significant in any of our estimations. This implies that we cannot find a relationship between adviser competence and consumer loss, though given the data limitations this can in no way be construed as conclusive evidence that such a relationship does not exist — rather, it should be interpreted as indicative of the weakness of our data’ This is from http://www.fsa.gov.uk/pubs/other/report_predictors.pdf Firm-level Predictors of Consumer Loss Through Poor Financial Advice: Independent research for the FSA by Europe Economics 29 April 2008

The FSA says a study conducted in Australia seven years ago provides the 'most relevant' evidence of a link between higher qualifications and better financial advice. Yet some of the highest qualified planners made the poorest recommendations. http://www.ifaonline.co.uk/professional-adviser/news/1934608/revealed-flaws-oz-study- justify-rdr#ixzz1BHueQhpX

To my knowledge no other profession requires existing qualified staff to undertake an additional regime of examinations and Peter Hamilton, barrister, has said Financial Services and Markets Act does not give the FSA power to ask an IFA to requalify: http://www.4pumpcourt.com/?page=barrister&id=44

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Conclusion: There is no strong evidence to prove that better qualification = better advice. IFAs are being treated unfairly compared to other professions in being disqualified by new qualification requirements.

Bias During 2002, the FSA commissioned Charles River Associates to undertake a major piece of research to determine whether advisers were biased towards certain products or providers by commission. The research reached a number of conclusions as shown below;

“The advice market is not riddled with bias.” “There is no detectable bias on regular premium products.” “The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation, because many customers and potential customers are thought to make insufficient savings.” “Despite anecdotal evidence that some IFAs and IFA networks do take advantage of their position to recommend product that yield them the greatest commission, there is little sign that this is happening on a large scale.”

During 2004, Charles River Associates undertook a further survey on behalf of the ABI. This research found;

“No evidence of bias being prevalent across the advice market.” “No evidence of bias to oversell.” “No evidence of provider bias on regular premium products.” “We therefore conclude that the problems of perception are greater than the reality.” One particularly interesting comment related to the potential for moving from commission-based advice to fee-based advice “One of the models tested was a fee based model – we concluded that there was no evidence that artificially moving to such a regime, to the exclusion of commission, would lead to benefits since consumers choosing to pay on a fee basis do not receive better advice than those opting for a commission basis.”

Charles River carried out further FSA research in January 2009 and this included the statement. “It is often argued that providers offering higher commission will buy a market share. We did not find evidence to support this”

Conclusion: Major research supports the current regime as providing the best outcomes for consumers.

Adviser Charging Currently IFAs are required to offer their clients the option of paying by fee or commission or a combination. We disclose the amount of commission we receive to our clients. The vast majority of my clients choose commission. Under RDR fees will have to be discussed, agreed and arranged which will lessen the consumer’s appetite to engage. I have personally spoken to several dozen of my clients about the new regime and without exception they all stated they were perfectly happy 205

with things as they are ie that I am paid by commission but give them an option to pay a fee. The FSA Australian study suggests those planners paid a combination of fees and commission gave the best advice. Read more: http://www.ifaonline.co.uk/professional-adviser/news/1934608/revealed- flaws-oz-study-justify-rdr#ixzz1BHueQhpX

Conclusion: The FSA’s own research confirms confirms fees and commission give the best outcomes.

RDR – Industry views Paul Selly HBOS: ‘Bancassurers set to benefit’ Robert Kerr, head of retail distribution development at Scottish Widows says: ‘The RDR could have the unintended consequence of "disenfranchising" the majority of consumers from financial advice’ David Hazelton of Tax Incentivised Savings Association (TISA) 30/10/09: ‘The RDR could be detrimental to consumers both in terms of higher product charges and an increase in the cost of advice’ He also states Implementation costs for the RDR are being "seriously underestimated" and product charges will consequently have to be raised.

Datamonitor research finds: ‘The implementation of upfront fees will widen the advice gap, as some consumers will be underserved IFAs who focus on high net worth individuals will leave the lower end of the market underserved Consumers are reluctant to pay upfront fees for advice Bancassurers can acquire consumers underserved by other distribution channels, but they must identify an appropriate advice pricing strategy’ http://www.datamonitor.com/store/product/toc.aspx?productId=CM00010-004

Conclusion: RDR’s unintended consequences will provide poor consumer outcomes.

January 2011

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Written evidence submitted by James Brearley & Sons Ltd

Summary

1. James Brearley & Sons Limited is an investment manager and stockbroker. We are not an “IFA” but may provide advice on certain products which fall within the scope of the retail distribution review.

2. Broadly, we agree with the stated aims of the RDR.

3. However, in respect of FSA’s adviser charging and the revised disclosure regime, we believe there are unintended consequences which will lead to consumer detriment and a distorted market for financial advice.

4. We endorse and support the work of our trade body (The Association of Private Client Investment Managers and Stockbrokers – APCIMS) in respect of the retail distribution review.

About James Brearley & Sons Limited

5. James Brearley & Sons Limited is an investment manager and stockbroker. The firm deals in stocks and shares and other financial instruments (including retail investment products) for private clients (individuals, trusts / pension schemes, charities). The firm offers a range of services from execution-only trading (no advice) to portfolio management. The firm also has an internet-based execution facility.

6. The firm has 100 staff, 16 of which are involved in advising clients on their investments.

7. Our head and registered office is based in Blackpool (Fylde Constituency) and we have branch offices across six other constituencies in the northwest of England (Westmoreland and Lonsdale, Ribble Valley, Burnley, Leeds North East, Stockport, Southport). The firm currently has 13,000 ‘active’ clients from across the UK and abroad.

8. James Brearley & Sons Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority (FSA).

9. James Brearley & Sons Limited a Member of the Association of Private Client Investment Managers and Stockbrokers (APCIMS) and supports and endorses the work of this trade body in respect of the retail distribution review.

Introduction

10 This submission is made in response to the Treasury Select Committee’s call for evidence in respect of the three specific outcomes stated by Hector Sants, Chief Executive of the Financial Services Authority at the 23rd November 2010 hearing. The three outcomes are: • A transparent and fairer charging system • A better qualification framework for advisers 207

• Greater clarity around the type of advice being offered

11. In the following sections, we state our views on whether the RDR will achieve the stated outcomes and where relevant, give our views on whether the outcomes could be achieved in other, potentially better ways.

12. This submission is made after consideration of Hector Sants’ letter to Andrew Tyrie MP dated 13th December 2010 (the “FSA Letter”) in which “fundamental flaws” in the market are noted.

RDR Objective: Transparent and fairer charging system

The “fundamental flaw” identified by FSA

13. The FSA letter states that customers believe they are getting free advice (when the charges for advice have been added to the cost of the product with the product provider paying the adviser commission). Advisers may be biased towards products which provide them with the greatest commission.

The RDR solution

14. FSA aims to remove the influence of commission from advice by banning product providers from setting commissions. Advisers will have to set their own charges for advised sales, which should reflect the services being provided to a client.

15. Advisers can agree charging on:

• A fixed charge • An hourly rate reflecting the time taken by the adviser to pay for the service • A percentage of the amount invested • A combination of the above.

Our observations:

16. The RDR objective of a transparent and fairer charging system is not achieved for the following reasons.

17. Consumers may not be able to compare the cost of advice from different firms due to the way in which different firms set and present their own charges (e.g. fixed, hourly, percentage or combination).

18. The RDR adviser charging requirements, as drafted, do not adequately reflect the way in which advice which may be given by a business whose advice on financial instruments is not wholly based on retail investment products. Such firms may be required to make a number of disclosures in respect of retail investment product advice which are not necessary for other investments (e.g. shares, bonds, etc.).

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19. Even with advisers setting their own charges, conflicts of interest will exist – e.g. an adviser with a fixed charge could still be biased to certain products such as those involving the least administration during the investment process.

Potentially better ways to achieve the stated outcome of the RDR

20. In terms of addressing any “bias”, there are regimes within the FSA Handbook which could be used to achieve the outcomes desired by FSA – (for example, by extending the rules on conflicts of interest and inducements).

21. An increase in consumer understanding in respect of how the adviser is remunerated could minimise the scope for commission bias. For example, by clear disclosures in respect of the percentages received from product providers (and if applicable, ensuring the customer is aware that there are other products of the same type where the adviser would have received a lower remuneration amount) would ensure that customers are aware there is a cost for the advice they receive.

RDR Objective: A better qualification framework for advisers

The “fundamental flaw” identified by FSA

22. In the FSA letter, it is stated that poor quality advice is due to incompetent advisers or unethical practices

The RDR solution

23. A reform of the qualifications regime which raises the minimum standard of qualification for advisers giving investment advice to retail customers regardless of the type of firm they work for.

Our observations:

24. We are broadly supportive of FSA’s proposals and believe the proposed qualification standard of QCA level 4 is about right. However, to address the “fundamental flaw” there must be appropriate cultures within firms together with robust systems and controls designed to ensure suitable advice.

RDR Objective: Greater clarity around the type of advice being offered

The “fundamental flaw” identified by FSA

25. In the FSA letter, it is stated that consumers are not getting products and services suited to their needs.

The RDR solution

26. FSA is aiming to improve the clarity with which firms describe their services to customers so that they know whether they are getting advice which covers the full range of possible retail investment products or is restricted in some way (for example advising on a particular range of retail investment products or on retail investment 209

products from one or a limited range of product providers). The RDR divides retail investment product related advice into “independent” advice and “restricted” advice.

Our observations

27. The RDR objective of a greater clarity around the type of advice being offered is not achieved for the following reasons.

28. The terms “independent” and “restricted” have historical and cultural references which conflict with the RDR definitions of the terms. Lengthy explanation of the terms is necessary. If such explanation will be required then it is better not to use the terms “independent” and “restricted”.

29. Using the terms “independent” and “restricted” will lead to a distortion of the market for retail financial advice. Consumers and professional intermediaries will naturally interpret the term “independent” more favourably than “restricted”.

30. The RDR disclosure requirements, as drafted, do not adequately reflect the advice which may be given a business whose advice on financial instruments is not wholly based on retail investment products. Firms advising on investments which are not retail investment products may have to label themselves “restricted” despite advising on a wider range of investments than some “retail investment product only” advisers who may label themselves “independent”.

Potentially better ways to achieve the stated outcome of the RDR

31. An example of an alternative approach to achieving this RDR objective is attached in appendix 1. Consumers would be able to compare the scope of the advisory services of different firms without the confusion arising from the terms “independent” or “restricted”.

Appendix 1 – An example of how firms could describe the advisory services provided to consumers in a services and costs disclosure document provided to consumers before they receive the firm’s advice.

Product Advice

The range of retail investment products Scope of our advice – For the product type on which we can provide advice: indicated we will provide advice on: Product Type When Products Products Products advising from one from a from across you we Company limited the whole can (as specified) number of market consider: companies (as specified) Life policies

Units in regulated collective 9 9 210

investment schemes Units in unregulated 9 9 collective investment schemes Personal Pension schemes

Interests in investment trust 9 9 savings schemes Investment trust securities 9 9

Structured Capital At Risk 9 9 Products

Advice on other financial Instruments

In addition to the above, we will also consider:

(a) Shares in British or foreign companies. (b) Debenture Stock, loan stock, bonds, notes, certificates of deposit, commercial paper or other debt instruments, including government, public agency, municipal and corporate issues. (c) Warrants to subscribe for investments falling within (a) or (b) above. (d) Options on any investment in this list. (f) Derivatives on investments falling within (a), (b) or (c) above and contracts on certain indices e.g. FTSE 100. (g) Depository receipts or other type of investment relating to investments falling within (a), (b) or (c) above. (h) Investments which are similar or related to any of the aforementioned.

January 2011 211

Written evidence submitted by Phil Mines, Chartered Financial Planner

I have been in the financial planning sector since leaving school in 1977 and am passionate about financial services as a profession.

In that time there has been a number of problems (some may say scandals) which are loosely termed together as “mis-selling”. All of which have been a result of one of two weaknesses in the UK financial planning arena. These being

1. The general low standard of investment/financial planning knowledge required to give advice. Problems caused by well intentioned financial advisers who simply do not understand some fundamentals and often actively mislead by provider representatives . 2. The high level of commissions payable that by definition must negate the benefit of any advice. Problems caused by greedy financial advisers who simply do not care.

For around 20 years various levels of regulation have been imposed on the profession which have had various levels success & failure. The removal of the two main problem areas suggested by the RDR will probably be more effective than doubling the resources of the FSA.

The RDR should not be watered down. The level of qualification that it will introduce will still be lower than the level required for most professions and is arguably still too low. Higher level exams have been available for over 15 years now and there frankly is no excuse for any adviser (with a history) to be only certificate standard. It is not a matter of too short a period to achieve this standard but what have they been doing for the last 15 years!

As for commission this misconception harboured that advice is free needs to be corrected. Equitable Life masqueraded under this banner as well as many IFA’s “it is all included in the policy charges” has been the rogues explanation for too long.

The RDR is the first sensible bit of action a regulator has taken. It would be a shame for vested interest to destroy what should be a defining point in UK financial planning Kind regards,

January 2011 212

Written evidence submitted by Ralph Whittaker

I am training and compliance supervisor with a national firm of IFAs, the sub firm that I work for has 32 registered advisers. Like many people who work in a technical or support role within the industry rather than a sales role, I am qualified in excess of level 4 and in my case significantly higher (Chartered).

I wish to make the following points in support of and in connection with the RDR:-

The FSA’s approach has already has an impact in improving standards and consumer trust in the sector. The future implementation of the RDR is a necessary part of the unfolding of this programme.

I see a significant difference between those advisers who are at or approaching level 4 and the ‘old school’ advisers who have not shaped up to (spent their own time and money on!) taking the exams, despite many years notice. These differences are in their ability to advise clients competently, compliantly and in their attitude to the new (much higher) recent FSA standards (treating customers fairly, etc).

A large section of the market (customers of clients) will not pay fees and the industry generally is therefore dependent product sales for remuneration. However the products available that pay commission (e.g. with profits; collectives; structured products) are not customer friendly and poorly regulated. For example, most OEIC funds do not do what it says on the label (e.g. absolute return, cautious managed). For the bulk of the advice market therefore adviser remuneration is a key problem.

The FSA has historically not been able to create a level playing field by policing the industry sufficiently extensively. Many of their good initiatives have petered out as they got bogged down in the amount of work arising. I don’t see this changing due to the FSA’s limited resources.

January 2010 213

Written evidence submitted by Jon Lowson, IFA Research and Reports Ltd

I was dismayed, reading this article on the “Moneymarketing” website, that IFAs in favour of RDR have not approached you to make their case: http://www.moneymarketing.co.uk/adviser-news/garnier-plea-fails-to-bring-out-pro- rdr-ifas/1024423.article

However, this perhaps confirms rather than refutes Stephen Gay’s (AIFA) assertion that the Anti RDR lobby is a vocal minority. The fact that those who are NOT opposed to RDR stand silent, does not mean that the Anti-RDR campaigners are in the right or even has popular support. People are always more ready to complain than they are to stand up just to say they are happy or content.

I am not an IFA myself, but I provide services to many firms of IFAs and get to see a wide cross section of the community. My personal experience (which seems consistent various surveys I have seen) is that there is a reasonable sized minority of IFAs (around 15% to 25%) who have no plans to pass the higher level qualifications and are utterly opposed to the idea of RDR. There is probably a similar minority of (so called New Model) advisers who will be glad to see these RDR changes come into force, as it reinforces the decisions they have already made about how they run their business (i.e. Higher Qualifications and Fee Charging rather than commission).

This leaves a larger number of IFAs (probably 50% to 60%) in the middle ground, who have either got the required qualifications already or who are quietly preparing to make the necessary changes to meet RDR requirements.

If some of those in the middle ground were given an easier option (grandfathering), human nature means that they would probably take it, but they are not necessarily going to leave the industry if RDR proposals remain unchanged. Those who are prepared to go along with the RDR changes (either begrudgingly or wholeheartedly) are in the majority (probably 70% to 80%). The whole RDR process should not be de-railed for the sake of 20% to 30% of advisers who are holding out for a free pass.

If you want some pro-RDR opinions, I am happy to give you mine:

1. Qualifications are not necessarily a substitute for experience, but do demonstrate that someone has a certain level of knowledge and understanding of the subjects they profess to be experts in. The RDR allows for alternative methods of assessment, for those who don’t want examinations, but the marketplace has not found sufficient demand to launch alternatives. In any case, there is a race on between Examining bodies to depreciate examination standards and get as many advisers through their syllabus as possible. In the past the Diploma exam was made up entirely of written examinations (usually three or four were required). The IFS Diploma now has one multiple choice, one written and some coursework. The CII have also introduced a collection of gap filling multiple choice exams. Clients of mine, whom I originally thought would have no chance of achieving the old Diploma standards have sailed through the IFS scheme. Most competent adviser should be able to pass these qualifications, those that won’t are either incompetent or are refusing to try out of pure stubbornness.

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2. Experience is not necessarily a substitute for knowledge. I know plenty of advisers who have been in the industry for 20 to 25 years and still don’t have a decent level understanding of Financial Planning, Pensions or Investments. It depends on what someone takes from their experiences and how relevant that is to what that person does today. Fifteen years ago more than 80% of IFAs were probably selling, almost exclusively, Endowment Mortgages, With Profits Bonds and With Profits Pensions. This required little understanding of any investment principles, merely the ability to compare simple tables of the products that were on offer. The last ten years has seen a dramatic change in the investment advice that advisers are required to give. A sophisticate understanding of more complex investment ideas is required, not to mention Inheritance Tax and long term care planning. I honestly believe that are large number of advisers who set out in the industry selling general insurance door to door, are just not up to the job. To illustrate the point, I know an adviser who has been in the insurance industry for nearly 40 years. His previous jobs before joining the industry were, window cleaner and “selling towels out of the back of a van at the market”. He recently bemoaned to me the fact that Insurance Companies don’t send consultants round any more to see him and tell him what he should be selling. This might be an extreme example, but it is representative of an element in the IFA community, who rely on Product Providers, not just for their remuneration, but also for what advice they should give to clients. This has been a major cause of miss-selling scandals in the past. The idea for Mortgage Endowments, Occupational Pension Transfers and Opt Outs originally came from product providers, filtered down through Tied Agents and IFAs, who were unable to decide for themselves whether it was actually a good idea or suitable for their clients. Advisers with 25 years experience, working in the industry today, are unlikely to have more “relevant” experience than an adviser who has been in the industry for five to ten years.

3. When it comes to remuneration, the sooner commission is banned, the better. Factored commission was originally introduced for small regular premium business. The insurance company would foot all of the initial costs (including advice) and this would be paid for through higher charges over the whole term of the policy. This was a reasonable solution, where the client could only save a small amount and could not afford to pay all the up front costs. This factoring should never have been translated to large lump sum investment business. It allowed advisers to pretend that the large commission they were receiving were actually just part of the normal contract charges, so it cost the client no more for advice. To illustrate my point, I came across an adviser a couple of years ago who had convinced a client to allow him to take commission of nearly £35,000 from the investments he was arranging. Now it appeared that all the clients money was invested, so they felt that this was costing them nothing. In reality, the adviser could have taken £5,000 commission and the client would have been £30,000 better off immediately. There is no work that a financial adviser can do for one client, which is worth £35,000. This is the wages of a full time employee for a year! This is an extreme example again, but I routinely come across cases with commission of between £7,000 and £15,000. To put this into perspective, charging £100 per hour, I think most of the jobs IFAs do could be done for less than £2,000. I have seen survey results about commission and even discussed it with friends of mine (not in the industry). The fact is that the majority of retail 215

clients do not understand the connection between what the adviser receives as commission and what they are paying for their products. This lack of transparency enables unscrupulous IFAs (as demonstrated above) to dupe clients out of thousands of pounds of their own money, because they think they are getting something for free. The RDR proposals will force product providers to clearly deduct any adviser remuneration as a separate charge from a clients product. This can only be a good thing.

4. On a related topic, the Anti RDR brigade continue to pedal the lie that moving to a fee charging structure will mean VAT on adviser remuneration and therefore higher costs for consumers. Whether adviser remuneration is exempt from VAT or not has nothing to do with whether the adviser charges a fee or is paid commission. Commission is exempt, because the IFA gives “free” advice and gets paid for arranging the product (intermediation, which is exempt). If the same adviser took the same commission, but told the client they were taking it as payment for “advice” then that would be VATable. Commission is only exempt if advisers keep up the pretence that they give free advice. If a Fee charging IFA charges only for arranging a product, then it will be exempt too. Personally, it appals me that IFAs give away free advice (their most valuable service) and charge for arranging a product (which requires no special skill whatsoever), even if it does makes the charge VAT exempt. In any case, VAT on fees does not necessarily mean higher overall cost. For example, if an IFA charges £100 per hour plus VAT, that would work out far, far less overall than our friend above who takes £35,000 commission.

I think this must give you a taste of the frustration those in the pro RDR camp feel towards the aims of the Anti RDR camp, which will just perpetuate the low expectations that consumers already have of financial advisers as poorly qualified, over-paid salesmen. I would like the FSA to have gone further and completely banned any payment from product providers to advisers, with a fixed timescale for raising qualification standards not just to level 4 but to level 6 (degree level), say by 2020.

Perhaps some of these points will change your mind but, if not, I sincerely hope that MPs attempts to change RDR fail. Just so you know, I am a lifelong Conservative Party voter, so I am not just taking the opportunity to knock MPs from a party I disagree with in general. I honestly believe that RDR has the potential to change our industry for the better and ensure that clients can be more confident of receiving good quality advice from an impartial source, at a reasonable cost.

January 2011

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Written evidence submitted by Mark Loydall, Cambourne Financial Planning Ltd

I read recently that you were looking for pro RDR IFAs to contact you. Thank you for interest in the subject. It is reassuring to know that politicians are taking an interest in the RDR as it is certainly something that has the potential to affect the livelihood of so many people. I would not describe myself as pro RDR but I believe I am relatively knowledgeable and objective about the subject I will try and to add some balance to the debate.

• Much of the vocal criticism of RDR has centred on examinations. It is actually very hard to defend the current position with regard to exams and the need for a higher professional standard cannot be disputed. However, among my own clients I have some Doctors and I have heard them criticising other older Doctors who do not have the current qualifications as they were grandfathered – if Doctors have been grandfathered why is it wrong for IFAs. Indeed I have allowed one such Doctor to inject me into my spine as a result of a sports injury – he is an expert in his field and although in today’s terms he is not considered qualified I had no problems with using him. Why is it proposed to be different for IFAs?

• There are question marks over the legality of changing the qualification regime through the RDR. Not only are their questions within UK law but there are also questions within European law – I can see this causing a major dispute in the future.

• The CII and other are hardly an unbiased bystanders in all of this debate - they make a great deal of money from people taking their exams and it is in their interests to get more people to take their exams. It is no coincidence that since RDR came along that the CII, the main exam body, has seen increased revenues.

• The most major aspect of the RDR is how it affects the relationship between advisers and clients. This is where the biggest changes are likely to occur and where the largest cost for IfA firms is likely to be. The training that is needed and then the changes to business practices will add to the immediate costs of IFAs. Much of this cost is likely to be one –off however some of it will be ongoing. For example my own firm is currently seeking to appoint and operations manager and a good part of that role will involve ensuring our systems are RDR compliant. This is excellent for the general economy as it is a new job however it is not so good for our cost base.

• It is difficult to see that everything within RDR is being done has the best interests of the client at heart. For example most RDR quotes for investment business based on explicit charges where all costs are taken on an initial basis (as per RDR instructions) actually offer worse outcomes for the client than non RDR quotations based on the same charges but where those charges come out over the first 3 or 5 years of the investment plan. The charges are still explicit but not “clean” as the charges continue to be taken over the first period of the contract. I would be happy to provide you with some example of this if required.

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• Some of the aspects of the RDR – the Ronseal aspect – that everyone must have a clear offering, say what they are going to do and then actually do it are good. However, the problem here is in the detail. In my experience the FSA are not very good at telling us exactly what they are seeking at an early stage. A typical case in point would be the Treating Customers Fairly requirements. It is now very clear what is required and I believe IFAs are working very hard to achieve these. Unfortunately that clarity was not there at the start and the FSA did not make it easy for people to understand the detail of what they were looking for. We are seeing a similar pattern of events now with RDR so whilst the clarity that RDR will create for clients is to be applauded the lack of specific guidance is a concern.

I hope this is helpful and gives a balanced view of RDR. DO feel free to contact me if you wish to discuss further any of the points that raised.

January 2011

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Written evidence submitted by Which?

Introduction

Which?, the UK’s largest consumer organisation, is strongly supportive of the measures contained within the Retail Distribution review (RDR). Consumers need access to good quality financial advice and Which? firmly believes that the Independent Financial Adviser (IFA) industry is best placed to offer this advice.

However it is clear that the current model does not deliver for consumers and we would argue that change is essential. We believe the RDR contains necessary and commendable proposals that will deliver benefits for those seeking access to good quality financial advice and we hope MPs will give it their support.

The impact of receiving poor advice can be financially disastrous, but consumers face a minefield in their attempts to find good quality financial advice. Our investigations have revealed worryingly poor performance by advisers (although IFAs do perform better than banks). In September 2006, 74 per cent advisers failed to pass all our benchmarks for good advice, (66% of IFAs and 84% of bank advisers) while in October 2007, 60 per cent of advisers failed to pass (52% of IFAs and 68% of bank advisers). In our April 2010 investigation into bank advice, 89% of bank advisers failed to pass.

We note that the succession of mis-selling scandals and poor advice has cost consumers (and the industry) a significant amount more. To give some examples, the FSA’s pensions review had by 2002 resulted in 1.7 million consumers receiving compensation totalling £11.8 billion while by 2006 the industry had considered over 1.8 million endowment complaints and paid compensation in excess of £2.7 billion. These cases of course resulted from mis-selling on a systemic scale but significant mis-selling persists and is costing consumers hundreds of millions of pounds each year - the FSA's cost benefit analysis estimated that the detriment to consumers from four of the most recent cases of inappropriate advice concerning pensions, equity ISAs and investment bonds was £223 million per annum. If the RDR can tackle this mis-selling it will be money well spent, and could actually save the industry money by cutting the amount they pay in compensation and associated administrative costs.

We are aware that a small, but extremely vocal, minority of IFAs oppose the measures contained in the RDR. However many IFAs, including their trade association, the Association of Independent Financial Advisors (AIFA), accept the need for change and are increasingly embracing the proposals as a means by which they can restore their reputation with consumers and expand their businesses.

It is only proper that the FSA is using the RDR to ensure their regulations support the type of business model that delivers for consumers, rather than acting to protect the current flawed business models of the industry.

However, we believe that further action is necessary in the run up to the implementation of the RDR to tackle poor investment advice given by banks, to 219 ensure that the services provided by banks are appropriately labelled and to educate consumers about the changes and to help them feel comfortable engaging with advisers about the cost of advice. We are also concerned that ‘structured deposits’ remain outside the scope of the RDR.

A transparent and fairer charging structure

Which? welcomes the proposals in the RDR to separate out the cost of advice from the cost of products. We believe that remuneration and charging structures have been one of the root causes of consumer detriment and mis-selling scandals in the pensions and investment sector. Commission creates a conflict of interest between the consumer and the adviser. It creates bias away from courses of action, such as debt repayment, that are right for the consumer but do not generate commission.1 It creates bias towards higher cost products to allow for the costs of commission and towards certain types of products such as investment bonds which pay higher levels of commission. It also creates bias towards product providers which are offering the highest levels of commission and away from those offering the best value products.

The potential impact of commission on consumers

A recent case received by our money helpline concerned a couple who were about to pay commission of over 8%, or around £34,000 for advice to invest in three investment bonds.

Mr and Mrs H, a couple in their late seventies were contacted by an adviser at their bank who suggested they might be able to recommend a better place for their money. Prior to this meeting most of Mr and Mrs H’s savings were held in cash ISAs and bank deposits. The adviser recommended that they invest £40,000 each into a Portfolio Bond. Mr and Mrs H were both in their late seventies at the time of the sale and made it very clear to the adviser that they did not want to take any risk with their money. The adviser reassured them that the investments were ‘virtually risk-free’ and that some of the money would be invested into property, which ‘never goes down’. When the couple contacted us, both investments had been reduced to £29,767.72 each. This gave Mr and Mrs H a total loss of £20,464.56 in under three years – hardly a ‘virtually risk-free’ investment.

In one of our mystery shopping exercises, an IFA recommended that all of a consumer’s portfolio of £32,000 should be invested in an investment bond which paid the adviser £1,600 commission. The factfind took just 10 minutes with little examination of the consumer’s attitude to risk or financial circumstances. The whole advice process took just 40 minutes.

1 Our October 2007 mystery shopping found clear evidence of a substantial proportion of advisers recommending investment rather than debt repayment. Our researchers were novice and cautious investors but only 47% of advisers recommended paying off a personal loan before investing and only 38% recommended paying off the mortgage before investing. 220

We also believe, over time, the RDR will result in a more efficient market and will bring costs down for consumers. There is clear evidence of commission bias in the market, where an increase in commission results in an increase in sales.2 This not only leads to unsuitable advice, but also increases the overall costs borne by consumers as product providers compete for business by increasing commission and increasing the charges levied on the final customer.3 If a product provider wants to gain market share in the current environment is to increase product charges and to increase commission payments to advisers. A move away from commission should help ensure that product providers compete by offering better value for money and lower cost products for consumers. Even a small decrease in the overall charges for consumers on the £109 billion4 of annual new business would represent a significant saving. There would also be a further benefit from the reduction in ongoing charges.

Many consumers do not understand how they pay for financial advice at present, and it is therefore difficult for them to assess whether they are getting value for money. Consumer understanding is not aided by the way in which the industry discusses, or fails to discuss, the cost of their services. In our research into investment advice in October 2007, 82% of all advisers failed to explain the Keyfacts of Costs document or have a meaningful discussion about how the advice would be paid for. One IFA said “Now if you agree to take out my recommendation, then I’ll get paid by whichever … investment company it is. So, as far as you’re concerned you’re not really paying for advice.” One Bank adviser said “If you went to an IFA they would charge you £100 an hour for advice, but its all free here.”

Consumers’ attitudes to adviser remuneration

Our focus group research5 showed that consumers are clearly concerned about the impact of commission on the quality of advice they receive. At best they believe it will encourage the adviser to give good advice but bias the recommendation, and at worst may result in inappropriate advice.

“Is that product the best thing for you or the best commission for them.”

“Even if they say they’ve got your best interests at heart they haven’t because it is what they will get paid at the end of the day.”

“It does make you distrust them a little, are they going to go for that because they are going to get more commission?”

2 Study of Intermediary Remuneration, Charles Rivers Associates, February 2005 3 An empirical investigation into the effects of the menu, Charles Rivers Associates, May 2007 found that when the charge cap on stakeholder pensions had increased from 1% to 1.5% providers had increased the amount of commission which they were paying for pensions 4 FSA, PS10/6 Distribution of retail investments, page A1:2 5 In 2009, Which? undertook a series of focus groups on consumer’s attitudes to financial advice and the Retail Distribution Review. The details of this research were included in our 2009 publication: The Money Maze which we have provided to the Committee alongside our submission. 221

Currently, financial advisers are not viewed as having a high professional standing but our research suggests these changes to the remuneration structures would overcome some of the suspicion associated with the advice process and make the service appear more professional and customer focused.

“It is taking away the choice of going to the company which gives them the biggest commission, they are actually focusing on the product which is best for you which takes that element of the whole commission away. You should get better advice.”

“The adviser is making it physical to you up front. At the moment it’s all hidden.”

“By doing that it becomes more professional. It takes away the sales element. If you went to a solicitor you expect to pay for their service.

“They are obviously cleaning up the house, they are going to be more accountable.”

While consumers widely welcome the move away from commission, it is clear that many consumers will not know what a fair price to pay for the advice they are receiving or how to negotiate with financial advisers. More needs to be done in the run up to the end of 2012, both on a general level to increase awareness of the changes and specifically to help consumers feel comfortable with engaging with the adviser about the cost of the advice and to help them understand what a reasonable price would be for the advice provided.

A better qualification framework for advisers

The current minimum qualification a financial adviser is required to hold before they can give advice is set at Qualifications & Credit Framework (QCF) Level 3. This is equivalent to an A-Level examination. We cannot see how this is remotely appropriate as a minimum standard for an individual whose advice has such an enormous impact on people’s lives. When you compare the level of training necessary with that of an accountant or a solicitor it is hardly surprising the current qualification standards do nothing to support consumer confidence in the industry and the quality of the advice they receive.

As a result we welcome the moves in the RDR to improve the professionalism of those offering financial advice and selling financial products. Many advisors are already qualified at a level above the level required by the new proposals so will not be affected by the change. Many others are taking action to increase their level of qualification and the FSA has taken steps to ensure there are a range of options available so that those advisors who do not wish to sit written exams can take an alternative route.

We appreciate the fact that any regulatory change on this scale can be difficult for some of those already in the industry to handle. However it is clear that the current service offered by the industry as a whole is simply not good enough and we would strongly oppose any proposals to introduce grandfathering rights. 222

While in many cases experience does bring wisdom it simply cannot be said that, just because someone has been in the industry for a long time, they provide a good service to consumers. Widespread grandfathering would also result in a significant number of bank advisers and IFAs being automatically upgraded to the required level, which would mean that it would take a generation for the higher standards of professionalism to implement. This would be totally unfair on the significant number of IFAs who have already put significant effort into gaining the new qualification. According to research carried out in March 2010, 49% of all individual investment advisers were already appropriately qualified and a further 40% expected to have completed the qualification before the end of 2012.6 Furthermore we would argue that for good quality, experienced IFAs the cost of gaining the qualification will be lower than the maximum assumed by the FSA as they will be able to draw on their substantial experience when completing the examination.

The future of the independent advice industry will not be decided in the next two years, but in the next 10 years. It is important that the industry has a level of ‘professionalism’ and a reputation which makes it attractive to graduates and also ensuring that more apprenticeships are available so that more young people see it as a viable career option.

Greater clarity around the type of advice being offered

Which? has consistently argued that there must be a clear distinction in the market between those offering independent, unbiased advice which is in the best interests of the consumer and those simply trying to sell one of a limited range of products (such as those advisers who work in banks). The labels attached to the proposed services will be important and must give the desired clarity for consumers. We are not convinced that “Restricted adviser” is an appropriate label, preferring “Sales Representative” as it removes the illusion of impartial advice being given.

In addition to ensuring clear labels, the FSA must monitor how the services offered are described to consumers. In our mystery shopping research, 37% of tied advisers gave misleading disclosures about the service they were offering – implying that they could provide a larger degree of choice than was actually the case. This bad practice must not be tolerated under the new regime.

Given our consistent finding of poor advice from bank based advisers in our mystery shopping, we believe the FSA should commence a project examining the quality of this advice and take enforcement action against any bank found to be offering poor advice to consumers. This project should also examine how banks are planning to implement the move away from commission towards a more transparent and fairer charging system to ensure that in circumstances where the bank is both the product provider and the organisation providing the advice there is no potential to distort the cost of the advice or to reintroduce bias into the system.

6 The cost of implementing the Retail Distribution Review professionalism policy changes, A report by NMG consulting for the FSA, June 2010 223

Structured deposits

Structured deposits are products where the return received by the consumer are typically linked to the performance of a stock market index such as the FTSE 100. They have a variety of names, including ‘Protected equity bond’ or ‘Protected Capital Account’ and although these products can be complex, the regulatory regime classifies them as deposits which means that they are exempt from the requirements of the Retail Distribution Review. We have attached our recent article from Which? money7 on these products. We are concerned that unless this loophole is dealt with by the FSA, more firms may move to selling ‘structured deposits’ so they can continue to receive commission.

January 2011

7 Structured products, Which? Money, December 2010 224

Written evidence submitted by the Building Societies Association

Introduction 1. The Building Societies Association (BSA) welcomes the opportunity to contribute evidence to the Treasury Select Committee on the Retail Distribution Review.

2. The BSA represents mutual lenders and deposit takers in the UK including all 49 UK building societies. Mutual lenders and deposit takers have total assets of over £365 billion and, together with their subsidiaries, hold residential mortgages of almost £235 billion, 19% of the total outstanding in the UK. They hold more than £245 billion of retail deposits, accounting for 21% of all such deposits in the UK. Mutual deposit takers account for about 36% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

Executive Summary 3. The BSA supports the aims of the Retail Distribution Review. However, the BSA is concerned that some of the specific proposals may not be the most effective way of achieving the RDR’s objectives and will provide feedback relating to:

• The impact of RDR on access to financial advice – particularly for those saving on a regular basis. • Creating a fair market for distributors and product providers. • Achieving a proportionate system of adviser CPD.

Increasing Access to Financial Planning 4. The original objectives of RDR, as outlined in Discussion and Consultation Papers, are subtly different from those set out more recently by the FSA, particularly by Mr Sants in his recent evidence to the Treasury Select Committee1. The BSA is concerned that the FSA has dropped references to the RDR “delivering a market where more customers have their needs and wants addressed”.

Discussion & Consultation Papers Hector Sants o An industry that engages with consumers in a way that o A transparent and delivers more clarity for them on products and services fairer charging system o A market which allows more consumers to have their o A better qualification needs and wants addressed framework for advisers o Standards of professionalism that inspire consumer o Greater clarity around confidence and trust the type of advice o Remuneration arrangements that allow competitive forces being offered to work in favour of consumers o An industry where firms are sufficiently viable to deliver on their longer term commitments and where they treat their customers fairly; and o A regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers.

1 In evidence to the Treasury Select Committee on 23 November 2010, in answer to question 738 – http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/uc430-x/uc43001.htm 5. The BSA is concerned that the FSA’s225 proposals may reduce access to financial advice. The BSA is particularly concerned that those seeking to invest on a regular basis may find it difficult to obtain financial advice. Firms providing advice to these customers will either have to levy an up-front fee (making the advice expensive relative to the amount being invested) or will spread their advice charges over time, meaning they will carry a loss in the short term. In one scenario the demand for advice will fall, in the other, supply. Given the increasing need for individuals to make private provision for their retirement, the BSA believes that any proposals which reduce access to financial advice will be to the detriment of the UK consumer generally.

6. The FSA has raised the possibility of a ‘Simplified Advice’ process and the BSA believes that a simple and efficient sales process, under a system of commission, could provide an effective way of delivering advice to the mass market. We know of at least one building society that has made representations to the FSA on what could constitute Simplified Advice but the sector will require greater clarity before it will devote the resources required to make this a commercially viable concept.

Creating a fair market 7. Generally, the arrangements proposed under the RDR should provide greater transparency of charges. However, ‘vertically integrated firms’, that is those firms that are both product manufacturers and distributors, may have a potential competitive advantage over firms that act only as distributors. If advice charges become a genuine point of competition, vertically integrated firms may be able to subsidise the costs of advice in their product charges and advertise low advice charges. The FSA has stated that ‘any cross subsidisation [should not be] significant in the long-term‘2; however the basis on which costs are apportioned between manufacture and distribution is not clear cut. Vigilance will be needed to ensure that the disclosures by vertically integrated firms are made on an equivalent basis to others.

A better qualification framework? 8. The BSA supports the FSA’s plans for greater professionalism among advisers, supported by higher qualifications. Feedback from our members indicates that arrangements are well in hand for ensuring their investment advisers meet the new QCF Level 4 standard in time for the introduction of the RDR regime at the end of 2012.

9. While the BSA welcomes the requirement for a system of Continuous Professional Development (CPD), it is concerned that the FSA’s specific proposals are an unnecessarily costly and complex way of delivering the solution, in a landscape where these additional costs will be reflected in the advice charge levied on the consumer.

10. The FSA’s current proposals are for a system of individual adviser accreditation. The BSA believes that a system which gives larger adviser firms the option of taking delegated responsibility for adviser accreditation (such as the system employed by the Association of Chartered Certified Accountants - ACCA) would be more efficient. This approach allows for Chartered Certified Accountants to meet their CPD requirements through their Approved Employer programme, which is free to join and which is based on a number of ‘best practice’ learning and development statements to which firms have to subscribe.

2 FSA, PS10/6, Distribution of retail investments: Delivering the RDR – feedback to CP09/18 and final rules, March 2010, p35 11. The BSA believes that this approach226 would offer an equally robust and less expensive solution to the issue of CPD accreditation compared to the FSA’s current proposals for individual adviser accreditation. For organisations such as our members, the underlying value of the ‘brand’ is a sufficiently strong driver to guarantee that they take responsibility for advisers’ CPD due to the brand risk of retaining ‘incompetent’ advisers.

Greater clarity around the type of advice being offered? 12. It is important that consumers have a clear understanding about the basis of any advice they receive. The “independent” advice label is reasonably well understood and it is appropriate that it is to be retained under RDR as a differentiator of independent and non-independent advice.

13. We have some difficulty with the term “restricted” advice, however; as it is not clear that this will be understood by consumers. It will cover a very wide range of advisory services. In order to provide clarity to consumers about the nature of the restricted advice they are being offered, additional disclosure will be required. Accordingly, the value of such a catch-all term has to be questioned.

14. More important than labelling is consumer access to investment advice and as we state above, we fear that will be considerably diminished under the RDR.

Summary

15. The BSA fully supports the objectives of the RDR, but does have some concerns about some of the specific proposals. In that light the BSA would make the following observations: • The BSA’s most significant concern regarding the RDR is that it risks limiting access to financial advice at a time when this advice is critically needed by many who need to make private provision for their retirement. The BSA is concerned that the FSA seems to have removed references to one of the original (and important) objectives of RDR to extend the availability of financial advice. The BSA would urge the Committee to investigate the likely impact of the RDR on access to financial advice and to make recommendations as to how it can be protected and extended. • The BSA is keen for the RDR to deliver a fair market for consumers, distributors and product providers and for the disclosures by vertically integrated firms to be made on an equivalent basis to firms that only provide advice. • The initiative to increase professional standards is a positive development for the industry and many of our members have taken early steps to ensure their advisers meet the new qualification requirements. • The BSA has received feedback from among its members that the proposals regarding adviser CPD will be unnecessarily complex and costly to administer in a situation where these costs will ultimately be passed on to the consumer.

January 2011

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Written evidence submitted by Arnott Guy & Co Ltd

With regard to the proposals of RDR I would like to express my concerns over the total lack of options being offered under the current proposals to those advisers who have been practicing for many years in our industry. If things go ahead as they stand I will have to make two of my most mature and trusted independent financial advisers redundant. How am I going to explain this to the clients that they have looked after for over three decades because although they have already taken the examinations back in the early 90s come 2012 they will then be considered unqualified and therefore unable to practice any further as IFAs. Those client relationships will have to cease and my business will lose out financially.

I would add that I am not against qualifications for improving professional standards but to throw out individuals who have demonstrated for years and years and years that they have been able to give good advice to customers and to sever those relationships seems to show a total disregard for the experience and expertise that these individuals already have and disrespect for the years of helpful and constructive service that they have been to our country in encouraging individuals to save and get their capital working as well as it can.

I am fully aware that there are hidden agendas motivating those in favour of the imposition of a blanket “across the board” new level of qualifications. However this is to suggest that qualifications are the only route to good advice. Although I am well qualified beyond the proposed RDR requirements my 20 years in practice tells me this is nonsense.

Please could you therefore give consideration to incorporating some means of grandfathering advisers to whom this is relevant, either via an age limit or for those with over a certain number of years experience in practice.

I trust you will be able to put these views to the Treasury Select Committee.

January 2011 228

Written evidence submitted by the Financial Services Practitioner Panel

Introduction

1. This evidence is from the Practitioner Panel, a body set up under FSMA 2000 as an independent Panel to represent the interests of practitioners to the FSA. Details of the role and remit of the Practitioner Panel are at Appendix 1.

2. The Committee has asked for evidence on the basis of whether the RDR will achieve the stated outcomes from Hector Sants on 23 November, and whether the outcomes could be achieved in other, potentially better, ways.

3. Soon after Callum McCarthy initiated the RDR, the FSA announced five priorities for the RDR in November 2006, as follows: • The sustainability of the sector • The impact of incentives • Professionalism and reputation • Consumer access to products and services • Regulatory barriers and enablers We are concerned that Hector Sants dropped the principles of sustainability of the sector and consumer access to products and services when he stated the priorities to the Treasury Committee. These two priorities should be seen as crucial elements in the mix if the aim is to achieve an advice system that works for consumers and firms in the future.

4. The Practitioner Panel has been supportive of the original aims of the RDR, and has worked with the FSA and the other independent Panels to try to shape the RDR in a way which will be achieve all of the original priorities – including the first original objective to maintain the sustainability of the sector.

5. We wholeheartedly support aims in the RDR to achieve a better qualifications framework, transparent and fairer charging, and the raising the quality of advice. An increase in the savings culture, with better access for more consumers, will be to the benefit of consumers and firms alike.

6. However, we have expressed increasing concern at the way that the original aims of the RDR are being implemented. We believe that, although there was much debate in the early stages of the RDR, there needs to be further consideration of the wider impact of these changes now that the detailed proposals have been developed. Just as the FSA has now agreed to undertake a wider cost benefit analysis (CBA) on the Mortgage Market Review (MMR), we believe a similar CBA should be undertaken for the RDR to look at the wider impact of the RDR. Such a CBA should investigate the cost of a fundamental gap emerging for lower income consumers who cannot afford to pay for advice. Our view is that unless a clear system for simplified products and advice is developed, the RDR could end up leaving a large proportion of people worse off, with less access to advice and so saving less and ultimately costing the government and society more to support as they reach retirement.

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7. We are pleased the Government is committed to seeing “ a thriving and trusted financial services marketplace, where consumers can buy the products they need with confidence.”1 However, the RDR may well undermine that ambition by destroying large parts of the current advice network.

8. Our evidence will focus on the three key questions which we believe the Treasury Committee need to ask the FSA in relation to the plans for implementation of the RDR.

Question 1 – will there be significant consumer detriment?

9. The reduction in access to advice with the FSA’s “one size fits all” approach is something which the FSA seems to have dismissed as a necessary and affordable cost. However, we believe that the wider economic and social implications are significant: Hector Sants talked of a loss of 20% of the 25,000 advisers. If each adviser serves an average of 200 clients, that is one million people who will potentially lose their existing adviser. There are also indications from the experience of other countries, that there could be a second wave of losses of advisers, as a proportion of advisers make the necessary changes and then find a year or so down the line, that their business is not able to survive.

10. If you add to this that the FSA’s Deloitte2 research showed that those advisers which are left will serve fewer clients on a fee basis than commission basis (on a ratio of 80:230) there is a potential for massive diminution in the savings culture in the UK. The following quote from the Deloitte report emphasises this point: “The business model for the fee-based firms tends to involve fewer, more lucrative customer relationships than commission-based firms. The business model for the commission-based firms involves a larger number of customers, typically with lower incomes than the customers of fee-based firms.”

11. It is particularly the case that middle and lower income consumers will lose out, and this is likely to be for a wider basis of products than just investments. Financial services firms such as banks and building societies may currently offer access to commission based advisers for their customers. The RDR, in stopping access to commission based advice on investments, may well make it not viable to provide such advisers for customers, as the business model becomes too complicated for low premium investment products. This may also have a knock on effect to advice on life cover or critical illness cover which is currently offered through the same advisers, but may not be economically viable without the investment sales at the same time. The FSA’s Deloitte report highlights the cross-subsidy role: “Commission-based firms appear to be more willing to cross-subsidise within the business. In particular, they are more likely to take on and maintain relationships with clients they consider to be unprofitable, partly in the hope that they will become profitable in the future. Compared with a typical fee-based firm, a typical commission-based model appears to build a larger number of relatively low-value

1 “Simple financial products: a consultation” HM Treasury December 2010 2 “Costing Intermediary Services - Financial Assessment of Investment Intermediaries” Deloitte report for the FSA, November 2008 - http://www.fsa.gov.uk/pubs/other/deloitte_research.pdf 230

relationships on a speculative basis, in the expectation that some will go on to become profitable in the future.”

12. We believe that there must be a stronger lead from the FSA, and ultimately the CPMA, in setting the regulatory context for simplified advice. Simplified advice is the means by which consumers may be able to access financial advice at a basic and cheaper level – which may well be more suited to the consumer’s interest and ability to pay than the full level of independent financial advice. The Government has recognised the need for simple financial products in its recent consultation. It also acknowledges that “marketing and branding will be critical in ensuring sufficient demand from consumers for simple products.”3

13. The FSA and Government have said that the industry should develop its own means of providing simplified products and advice, but there is a need for a regulatory lead for a number of significant reasons: • It is not appropriate for the industry to develop its own solutions in the present regulatory environment – the current rules are too onerous and complicated to be able to deliver low cost simplified advice. It would be a waste of time, and a huge drain on FSA resources, to cope with hundreds of individual firms coming to it with their own ideas of simplified advice, and asking for regulatory discussions. We need leadership from the FSA, or a possible delay until the CPMA can provide that leadership; • It is the regulator that needs to set out the track along which firms developing simple products or giving simplified advice must travel. Product providers need to have some outline guidelines before being able to develop simple products. In particular, there needs to be regulatory certainty that if products are developed within agreed criteria, there will be no retrospective regulation to take previously “simple” products out of that range. For advisers, there needs to be an agreed outline of questions within a decision tree that would allow a simplified advice facilitator to advise on the purchase of a product, or to direct the customer to a more qualified adviser if it turned out to be a more complex case. • Urgent parallel action is required for the development of simplified advice to minimise the consumer advice gap and to cut off a route for some advisers to specialise in one area of simplified advice rather than take the more complex whole of market option under the RDR. We remain in constructive dialogue with the FSA on simplified advice. We are optimistic in the light of recent feedback from the FSA, and will continue to encourage them to undertake further work in this area.

14. The FSA needs to develop a clear regulatory regime to allow simplified advice to be given within agreed criteria, which if followed, will not risk a future change in the regulator’s interpretation of the rules leading to a systemic review. Simplified advice should enable many more people to access financial advice, and many more advisors to remain in business – specialising in certain aspects of the market.

3 Paragraph 3.15 of “Simple financial products: a consultation” HM Treasury December 2010 231

Question 2 – will the RDR cause a disproportionate increase in cost and bureaucracy?

15. At the moment, it seems that the RDR is in danger of increasing the cost and bureaucracy of giving financial advice without any commensurate benefits.

16. Firstly, in the area of professional standards we have particular concerns: • The strict cut off timescale will cause many advisers to have to leave the market. However, those advisers who do not want to qualify to Level 4 might be able to stay in the industry if the FSA was willing to develop simplified rules for simplified advice, which should require a lower level of qualification. This would enable a simplified advice “facilitator” with a lower minimum qualification level to provide simplified advice in certain restricted areas at a lower cost; • The proposed CPD (continuing professional development) requirements are inflexible and inflict overly burdensome requirements on larger firms which have a strong internal training culture. The FSA seems to be applying new requirements across the industry with no flexibility to reflect the range of different firms covered by the requirements. We would like the FSA to consider granting permission for relationship managed firms at least, to oversee their advisers’ individual CPD as part of an accredited scheme, as is the case in legal and accountancy professions. The current proposals refer to accredited bodies checking the CPD of 10% of advisers, but in firms which have a strong internal training culture and have built their reputation on quality of service, they will already be monitoring 100% of CPD. This re-checking of firms which can prove their training and CPD is at the required standards should not be necessary if firms can be monitored through the ARROW process.

17. We are also increasingly of the view that the rises in capital requirements are unnecessary at this time of change and could make advisory firms more unsustainable as they have to keep larger amounts of capital in reserves. We do not believe that anyone has made the case adequately for why the capital requirements need to be increased for advisory firms, who are not in the same position as deposit takers who hold systemically significant levels of client money. We have not seen a convincing cost benefit analysis for this change. Whilst the Panel is supportive of ensuring firms have robust capital positions, we believe that , in the light of the proposed changes to business models and working capital arrangements under the RDR, as well as current economic conditions, these changes in capital requirements may be too much pressure on advisory firms at this time.

18. The biggest regulatory cost for industry is regulatory change. It is only recently that the FSA’s initiative on Treating Customers Fairly has become fully embedded in the industry, at huge cost to firms. Many of the concerns that the FSA is seeking to address in the RDR, in terms of fairness of charging and clarity of advice, could well be tackled with full application of TCF.

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Question 3 – how will success be measured?

19. The FSA has assured us that criteria have been set for a post-implementation review of the RDR after 2 years. However we have challenged the FSA that there does not seem to be a clear definition of success baseline from which success will be measured, nor any analysis of the risks involved. The FSA has said4 that the costs to the industry could be up to £1.7bn over 5 years, and we have said that there need to be more quantifiable success measures from the FSA. We have said that success measures such as “less unsuitable sales” are unclear and could well be misleading.

20. It seems also, that the FSA is adopting an “all or nothing” approach to the RDR. Current estimates range from a loss of 8% to 40% of advisers, and yet the FSA does not have a formal means of monitoring the level of departures caused by the RDR as it is implemented. In addition, the FSA does not seem to have developed any contingency plans for changes to the RDR, should the highest level of destruction start to take place.

21. We have also expressed concern about whether the means of implementing the RDR is being measured against the criteria of the CPMA as well as the FSA. This is necessary to ensure that accountability will be maintained in the new regulatory body, and it will not be subject to significant changes once the CPMA is in charge – with the industry expected, yet again to bear the cost.

Conclusion

22. We believe that the overall aims of the RDR are to be applauded, and we have supported the development of this programme. However, it is the detail and the timing of implementation which is problematic.

23. In the RDR, the FSA is continuing to propose significant structural change in the retail market when the CPMA will shortly take over control. It would seem more cost effective for all to wait at least until the chief executive of the CPMA is appointed and the objectives of the CPMA are clarified by the Government. This is particularly as there are also changes currently being implemented in the European regulatory structure, and there is a background of an uncertain economic environment.

24. We recommend that sustainability of the sector be given greater priority in the further development of the RDR, and that a system for the regulation of simplified advice be developed as an integral part of the RDR. A wider cost benefit analysis (CBA) of the whole of the RDR at this stage – similar to the CBA being undertaken for the FSA’s Mortgage Market Review – would highlight the need for these aspects to be taken into account.

4 FSA PS 10/6 - Distribution of retail investments: Delivering the RDR - feedback to CP09/18 and final rules. March 2010

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25. We recommend that there are issues which should be urgently addressed before the implementation of the RDR. A delay in implementation would also allow the RDR to be aligned with the new UK regulatory structure, the European changes to be fully implemented, and firms to have more time to plan for the changes required to the shape of their business and the qualifications required.

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APPENDIX 1

ROLE AND REMIT OF THE PRACTITIONER PANEL

1. The role of the Practitioner Panel is to advise the Financial Services Authority on its policies and practices from the point of view of the regulated community. It has statutory status under the Financial Services and Markets Act 2000 (FSMA). As such, the Practitioner Panel is given access to the FSA’s plans for new regulatory policies, and so is able to provide an important sounding board for the FSA before the ideas have been made public.

2. Members of the Practitioner Panel are drawn from the most senior levels of the industry, with the appointment of the Chairman being formally approved by the Treasury, to ensure independence from the FSA. The members are chosen to represent the main sectors of the financial services industry as regulated by the FSA. The Panel currently has senior practitioners from the retail and investment banks, building societies, insurance companies, investment managers, financial services markets, custodians and administrators.

3. The Chairman of the FSA’s Smaller Businesses Practitioner Panel (SBPP) sits ex officio on the Practitioner Panel to ensure co-ordination, but debate on issues specifically affecting smaller firms are covered by that Panel. The SBPP is submitting separate evidence to this Inquiry.

4. The names of the members of the Practitioner Panel as at 10th January 2011 are as follows.

Panel Member Position

Iain Cornish (Chairman) Chief Executive, Yorkshire Building Society Richard Berliand Head of Global Cash Equities & Prime Services, JP Morgan Securities Ltd Russell Collins Head of Deloitte UK Financial Services Practice Mark Hodges Chief Executive, Aviva UK Simon Hogan Managing director, Institutional Equity Division, Morgan Stanley Garry Jones Group Executive Vice President & Head of Global Derivatives, NYSE Euronext Roger Liddell Chief Executive, LCH.Clearnet Group Limited Guy Matthews Chief Executive, Sarasin Investment Funds Helena Morrissey Chief Executive Officer, Newton Investment Management Andrew Ross Chief Executive, Cazenove Capital Management Limited Malcolm Streatfield Chief Executive, Lighthouse Group plc Paul Swann President and Chief Operating Officer, ICE Clear Europe Doug Webb Chief Financial Officer, London Stock Exchange Group Helen Weir Group Executive Director Retail, Lloyds Banking Group plc

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Written evidence submitted by the Smaller Businesses Practitioner Panel

INTRODUCTION

1. The Smaller Businesses Practitioner Panel was set up by the Financial Services Authority in recognition of the need to have a specific Panel to represent the interests of smaller firms to work alongside the Practitioner Panel and Consumer Panel. More details of our role and membership are at Appendix 1.

2. We have supported the principles of the RDR overall, but soon after the RDR was launched, in November 2006, the FSA set out five themes for the RDR1 as follows:

• the sustainability of the distribution sector;

• the impact of incentives;

• professionalism and reputation;

• consumer access to financial products and services; and

• regulatory barriers and enablers.

3. We are increasingly concerned that Hector Sants narrowed these objectives down to three in his previous evidence to the Treasury Committee. This effectively excludes the objectives of sustainability of the sector and consumer access to products and services. We believe that all these objectives must be taken into account. The detail of how the RDR is implemented is vital for the small firms sector – around 6,100 small firms hold permission to conduct RDR related activities within the retail sector (approximately 42 % of the small firms population); around 4,900 of these are Financial Advisers. (These figures are indicative only, and are used to illustrate the significance of the RDR to small firms within the industry.) 4. There is much evidence to show that people tend to be reluctant to save significantly for the future, so the majority of investment products need to be sold rather than bought. This means that if access to financial advice is reduced, many people will have even less provision for their own financial affairs going forward than they currently have.

5. The key is for the RDR to be used as an opportunity to improve the system of providing advice in a way which is sustainable for the industry. We believe that this means providing greater clarity, transparency and accessibility for consumers, whilst ensuring that firms have clear regulatory boundaries to provide different levels of financial advice. However, the RDR, whilst addressing some flaws in the current system of financial advice is also likely to introduce real consumer detriment with some sections of society. We have asked for the FSA to articulate their vision of consumer access to financial advice in the UK. To date the FSA has not provided this. Neither have they quantified the specific success measures from the current position. If this is not possible, the FSA should at least undertake a cost benefit

1 “Retail distribution review: scope, priorities and approach” Speech by Clive Briault, Managing Director, Retail Markets, FSA. 2 November 2006

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analysis of the impact of the proposals as a whole to see the overall impact, not just on the financial services system, but on the wider community and people’s access to advice and decisions to save.

6. We have set out our views from the perspective of smaller firms on the two missing additional objectives, plus the objectives as listed by Hector Sants and required by the Committee below.

CONSUMER ACCESS TO PRODUCTS AND SERVICES

7. We believe that the RDR in its current form is in danger of reducing access to financial advice for the majority of consumers.

For middle and higher income consumers

8. Independent financial advice is currently focused on middle and high income consumers. The proposals under the RDR to charge fees without commission payments means that full independent advice will increasingly focus on high income consumers rather than middle income consumers. These middle income consumers ,will not have high enough levels of investments to justify full independent advice on a fee basis, even through adviser charging. This could disenfranchise a significant proportion of consumers.

9. As a result of a combination of the move to fee based models, the higher qualifications, and the increased capital requirements, the FSA has acknowledged that this will lead to a reduction in the number of advisers in business. Hector Sants said a loss of 20% of the current 25,000 advisers would be, ‘acceptable’. However, if each adviser serves an average of 200 clients, the result is one million people potentially left without an adviser.

10. It has been suggested that the loss of 5,000 advisers would not be a problem as their customers will immediately be taken on by the remaining advisers. There is reason to challenge this assumption. The advisers who are left are likely to serve a smaller number of customers with the increased customer expectations when moving to a fee-based model. The greater time commitment per customer significantly reduces the number of customers that can be served by each adviser. This is supported by the FSA’s own research (conducted by Deloitte) which shows that fee-based advisers are only able to serve a third of the customers a commission- based adviser. (80v230). This, in numerical terms is potentially another 3m of customers who would be left without an adviser.

11. The RDR seems therefore to be only addressing part of the market: there must be a means of encouraging the provision of financial investment advice to middle and low income consumers as well as high income consumers.

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For low income consumers

12. Research2 shows that low income families - due to a variety of issues, including low financial capability, mistrust of the financial services industry and the view that mainstream providers “are not for them” - do not purchase financial products in the same way as the more affluent sections of the population. Those on low incomes will also not engage in the low cost web based distribution systems that are attractive to more affluent sections of society.

13. Examples of this can be seen in the low take up of the Child Trust Fund in the less affluent areas of the UK, which illustrates the point that even “free money” is shunned by those on low incomes unless they are given advice on the product and encouraged to participate. Regulatory measures can have a severe impact on this sector - the regulatory and competence requirements introduced by the PIA in the 1990s effectively destroyed a whole sector as the Home Service companies left this market. This meant that low income families were no longer able to purchase protection and savings products from a competitive market which had many providers. It is no coincidence that since that time the discussion on financial exclusion has escalated.

14. By significantly increasing the cost burden, the RDR is in danger of destroying the current network of mutuals that gives financial services’ access to a whole sector of society. Other providers will not fill the void for low income saving because the profit from small premium business is too low for their business model. In the absence of any alternative, those on low incomes will be permanently excluded from purchasing affordable financial products.

SUSTAINABILITY OF THE SECTOR

15. We believe that the RDR must consider the sustainability of the sector in developing its detailed proposals. This objective must not be dropped, as threats to the sector directly threaten consumer access. It is not only higher income consumers who will suffer if advice is restricted through the RDR – the market has developed to enable mutuals to provide lower income consumers with advice on saving or managing their money through commission, and this sector will be unsustainable under the current proposals.

Impact of fee-charging 16. Many independent advisers will not be able to survive a switch to fee based advice, simply because the business model will become more complex and expensive.

17. So advisers will find that their businesses are unsustainable, and leave the industry. In addition, the smaller number of advisers that may be left could suffer significant

2 Savings in lower income households. A review of the evidence Elaine Kempson and Andrea Finney June 2009. Developing models for delivering insurance through CDFI’s. Dayson, Vik, Ward, Community Finance Solutions 2009 Consumption denied? The decline of industrial branch assurance. Burton, Knights, Leyshon et al Journal of Consumer Culture 2005

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additional financial pressures that may well lead to a second tranche of advisers leaving the industry at a later stage. The RDR is also likely to impact on the diversity of the industry, as it becomes more and more difficult for small firms to survive, leading to conglomeration and a dominance of larger firms, to the detriment of consumer choice and flexibility.

18. As the numbers of advisers decrease, there will be more pressure on those that are left in supporting levies for the regulatory system, particularly the FSCS, so causing more firms to come under financial pressure and increasing the general cost and yet further restricting consumer access.

19. In addition, according to HMRC3, 50% of the population own less than £37,283, including their homes (50% of the population have Net Capital of £37,283 or more). In addition, Ernst & Young’s paper ‘2012 – Going for gold?’ said that “mass market research has found an individual earning around £22,500 per annum (the average national wage) has net monthly income of about £1,400 per month and outgoings of £1,388.” These people might be less incentivised to seek advice if they know the adviser will charge a fee, even if it can be paid through adviser charging.

Impact of increases in capital requirements 20. The proposed increases in the levels of capital requirements for firms at the same time as the RDR will cause significant additional pressure on the sustainability of firms in future. The plans are for the minimum level to be increased to £20,000, or the amount needed to cover three months’ running costs – whichever is the larger. These costs will increase for the advisers who are changing their business models from commission to fees, as the fixed cost salaries are likely to increase significantly. So the very advisers who are adhering best to the RDR are likely to be hit hardest by the increases in capital requirements.

21. Although the FSA seems to be expecting new and better qualified advisers to come into the market to fill the gap left by those departing, these increases in capital requirements will make it difficult for new entrants. Unlike in other areas of business, the FSA’s rules forbid firms from borrowing or factoring to cover requirements for reserves. So, start up firms will have to find at least £20,000 of capital, in addition to all working capital, before they can be authorised. We believe the planned increase in capital requirements will be a significant barrier to entry for new firms.

22. The changes to capital requirements seem to be an example of the FSA’s tendency towards a “one size fits all” approach to regulation. We have yet to see a justification for why the FSA needs to see the capital levels to be able to cover the orderly run off of an advisory business as opposed to a deposit taking business. The FSA should only be concerned about consumers and their ability to claim for compensation if necessary, and this is already covered by the FSCS. Instead it seems the FSA is applying a response to the financial crisis which was necessary in other

3 HMRC – Her Majesty’s Customs and Excise - http://www.hmrc.gov.uk/stats/personal_wealth/menu.htm

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sectors to a sector that was not responsible for the problems in the crisis. The main result of this will be to increase the scope of consumer exclusion as many firms struggle to maintain the higher capital requirements.

TRANSPARENT AND FAIRER CHARGING SYSTEM

23. We fully support the original aim of the RDR to provide transparency and fairness in the charging system. However, we are concerned that plans to introduce adviser charging do not provide a fairer solution for consumers who may not have the cash flow to pay fees up front. We think that fairness and transparency can be achieved just as well by consumers being fully informed of the cost of their advice, and the fact that this charge will be covered through commission. Consumers can then see how much the advice is costing, and how much the product provider is paying to enable their product to be sold.

24. We also continue to be concerned that the UK is moving ahead of the rest of Europe and may be going in a different direction, at a time when European legislation is increasingly tending towards maximum harmonisation in the implementation of directives. There is a very different model in Europe, with distribution dominated by larger banks and insurance companies and no significant equivalent of the smaller firms and diversity which is prevalent in the UK. It is therefore conceivable that those larger firms will dominate decision making in Europe, and future European requirements may cause the UK to dismantle the RDR’s changes, with significant costs to the UK financial services industry.

A BETTER QUALIFICATION SYSTEM FOR ADVISERS

25. We support the ambition of increasing the professionalism of financial advice. However, we believe that qualification requirements should be appropriate and proportionate to the advice being given.

26. Essentially the RDR qualification requirements - set to cover complex investment vehicles - will significantly increase the training costs and salaries of the new ‘league of advisers’ such that product providers in this market sector will not be able to distribute and advise on these small premium products because the regulatory overhead will be too high, unless they are stakeholder products through basic advice. We believe that the qualification requirements of the RDR will add no value at all to those on low incomes. The current diploma syllabuses contain many requirements which are irrelevant to the needs of those on low incomes. It is difficult to understand how the attainment of the full diploma for advisors operating in this market sector would either help the advisor do a better job, or the low income consumer get better advice.

27. It is also the case that many on middle incomes may require advice on a specific aspect of their income or investments, and may want to restrict the advice that they pay for to just that area. We believe that if the FSA had clear rules on the liabilities for restricted advice, many advisers could specialise in particular product areas. These advisers may have only a basic knowledge across the market, but then specialise in a particular sector and provide full independent advice in that one sector such as pensions.

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28. We believe that the FSA must retain a more flexible system of qualification of advisers under the RDR – just as all consumers are not the same, so not all advisers should be the same in having to offer a full and expensive service. There is an urgent need for the RDR to recognise the variations needed in developing its detailed proposals.

GREATER CLARITY AROUND THE TYPE OF ADVICE BEING OFFERED

29. All people, at whatever level of income and investment, should have easy access to fair and not misleading financial advice. The FSA needs to ensure that the RDR achieves a level of distribution at a price point which gives good value for the customer.

30. Many of the concepts being developed in the RDR are already incorporated in other aspects of FSA regulation. In recent years, the FSA and the industry have spent significant resources and money in embedding the regulatory principle of “treating customers fairly” (TCF) into their organisations. The results of this regulatory work have yet to be fully assessed and yet we are embarking on another significant regulatory change trying to achieve similar objectives.

CONCLUSION

31. The future of financial advice is important to consumers and to the industry. The RDR is being developed in a disproportionate manner. It deals with some of the current issues in the retail financial sector, but does nothing to create an improved regulatory environment to meet the needs of consumers; indeed consumers will be disadvantaged as a consequence of these changes. There must be a parallel development of a system of simplified advice and products to provide financial advice which is simpler and cheaper to deliver and more targeted to customer needs.

32. The RDR is being implemented at a time when the objectives of the regulation of retail conduct are to be changed with the creation of the CPMA. We believe it would be much better if the new CPMA objectives could be set and checked with the RDR before the requirements of the RDR are finalised.

33. We believe that the current proposals are a “one-size fits all” to both qualification requirements and provision of services that will lead to the further exclusion of the majority of the population and lead to a large number of experienced and competent advisers losing their livelihood, at the expense of consumer access and at the very real risk of yet further exclusion when we as a society need more people to save, not less. The fact that the FSA has recently announced consultation4 on excluding certain product types suggests an acknowledgment that ‘one size does

4 FSA CP11/01: Quarterly consultation paper No.27. Chapter 8 RDR – exemption of certain Holloway Sickness Policies – January 2011

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not fit all’ and we would ask that this be reflected in a much wider reconsideration of the RDR, rather than just excluding a small number of products.

34. Our headline suggestions for amendments to the RDR are as follows:

• The FSA should take the lead in setting out a clear regulatory environment to enable the creation of simplified products and the provision of simplified advice for those products within the same timescale as the rest of the RDR.

• There should be a delay in the RDR to allow the simple products regime to be developed, a broader cost benefit analysis of the whole of the RDR to be carried out, and for the CPMA objectives to be set and checked against the expectations of the RDR.

• Professional qualifications should be set at different levels to reflect varying consumer needs and that enable simpler products to be bought without significant regulatory overlay.

• There should be a further delay in the deadlines for any higher capital adequacy requirements linked to the RDR. The FSA needs to provide a better justification for the increased level of requirements to ensure that it is relevant to advisory firms. At the same time, businesses need to embed their new business models (which are likely to provoke cash-flow uncertainty) before having to adhere to more rigorous capital requirements, if justification is forthcoming to keep these requirements applicable.

January 2011

APPENDIX 1

ROLE AND REMIT OF THE SMALLER BUSINESSES PRACTITIONER PANEL

1. The Smaller Businesses Practitioner Panel (SBPP) was set up by the Financial Services Authority (FSA) to represent the views and interests of smaller regulated firms and to provide advice to the FSA on its policies and strategic development of financial services regulation.

2. Our members are drawn from smaller firms operating across the main sectors of regulated business.

3. We consider several factors when deciding on the definition of “smaller” businesses and take a flexible approach to the application of criteria. A firm may have – in relative terms – a minor market share or small number of employees in the context of its industry sector. In addition, the firm’s financial position and whether the firm is owner-managed may be relevant.

4. We work to ensure that the interests of smaller financial services firms are taken into account and their importance to a healthy, successful and vibrant marketplace are properly reflected in the policies of the FSA.

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5. The names of the members of the SBPP as at 17 January 2011 are as follows.

Panel Member Position

Guy Matthews Chairman Chief Executive, Sarasin Investment Funds Clinton Askew Director, Citywide Financial Partners Ian Dickinson Director, The Brunsdon Group Paul Etheridge Chairman, The Prestwood Group Peter Evans Chief Executive, Police Credit Union Sally Laker Managing Director, Mortgage Intelligence Fiona McBain Chief Executive, Scottish Friendly Assurance Andy Smith Special Projects Advisor, TD Waterhouse UK Ian Templeton Managing Director, UIA (Insurance) Ltd Andrew Turberville Smith Chief Operating Officer and Finance Director, Weatherbys Bank Ltd

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Written evidence submitted by Mike Reynolds, Moneywise GB

I refer to the attached letter sent to you by Hector Sants of the FSA, in which he tries to justify the RDR.

There is no doubt that improving the professional image of the financial services industry is supported by advisers across the UK but the RDR falls short of that aim on several counts.

Mr Sants cites surveys, commissioned by the FSA, that purport to show that the public do not trust financial advisers, that commission leads to product bias and that qualifications by examination should lead to better quality advice being given to consumers. Many of these surveys are based on small numbers of people interviewed. They do not make distinctions between independent advice and that obtained via banks and insurance companies and ignore the fact that, of complaints upheld by the FSCS, over 61% are attributed to bank advice and under 3% to IFAs.

Mr Sants sees the remedy for improving the professional image to be abolishing commission and making existing advisers re-qualify to retain their right to practice. He readily accepts that up to 30% of experienced IFAs, the vast majority with excellent advice records, will leave the industry by 2012. My concern is that the consumer will be left with restricted choice of whom they could use to obtain financial advice. The remaining IFAs will need to focus on higher net worth clients because less affluent consumers will no longer have the option of payment by commission and will not or cannot afford to pay the appropriate level of fees for advice. More people will have to rely on bank advice, which we have seen, has resulted in far higher instances of complaints.

Mr Sants is, in the view of many IFAs, undermining a sector of the financial advice industry which is highly valued by consumers, namely the independent advice sector. The huge regulatory expenditure of up to £1.7bn over five years will achieve nothing except restriction of opportunity for consumers to obtain good, independent financial advice.

December 2010

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Further written evidence submitted by Terence P O’Halloran, O’Halloran and Co

SUBJECT: ‘DO AS I SAY RATHER THAN DO AS I DO.’

I appreciate that qualifications are not the be-all and end-all of good practice, although the way the media, the life companies, the Insurance Institute and others have pandered to the FSAs authoritarian promotion of the Retail Distribution Review (RDR), one would think that qualifications were certainly the ‘be-all, and end-all.’

Eleanor Downie is a Fellow of the Chartered Insurance Institute; a level of qualification that once equated to a Masters Degree in insurance and is now relegated to a first year under graduate. I wonder how many other people with degrees, who have carried out fifty hours of CPD every year, would tolerate such a demotion. She and I both have to spend a lot of hours going through our “getting up to speed” matrix of questions to satisfy the FSA, for them (the FSA) to ensure that we are suitably qualified to talk to the public.

Here is the rub:

The people who are saying that we need to be qualified in order to give information to the public not only do not hold relevant qualifications themselves but (see attached letter) deny any responsibility to tell people that they instruct in the art of conducting their professional life, what the professional qualifications are that they, the arbitrators, hold, if any.

Sandra Collins apparently reflects the view of the senior management, who earn £340,000 plus, for not knowing what they are doing, because, as she states: “It is not a requirement to maintain a record of qualifications since a member of staff has joined the FSA.” She also goes on to state that the qualifications Associate of the Chartered Insurance Institute (A.C.I.I.) or Fellow of the Chartered Insurance Institute (F.C.I.I.) are not required at the FSA. Let us remind the management that part of the FSAs responsibility (in fact most of it from what one can gather) is to deal with life assurance and pensions contracts. They don’t need CII qualifications? Then why do I?

The Manager in charge of Retail Distribution, Jon Pain, also informed me that I have no need to know his qualifications but that they are something to do with banking. This is a man that was at the top of the TSB (Trustee Savings Bank) food chain when they were selling the only two unregulated products on the market in order to steal a march on their competition and stitch up as many people as they could before the rules changed.

You might recall that bankers were also the only organisation, through the Securities and Investment Board, that were NOT subject to fines because the SIB were not empowered to impose fines, whereas the rest of the market, FIMBRA, LAUTRO, IMRO, et al, were busy fining the industry out of existence.

You might not have much ‘truck’ with the Financial Services Industry but I would lay odds that it has earned you a very good living one way or another whether you criticise it, which most of you do, or you praise it, which some of you may. Having spent forty years advising clients I can only think that your ire should be directed now and should 245

have been directed over the last fifteen years, towards the insensitive, money grabbing, bureaucratic emporium that is the Financial Services Authority.

Whether it is scrapped or not bureaucracy will stay, the same people will stay, they will just put another notice board over the door which incidentally, will cost millions of pounds for the facelift and do nothing for the cancer ridden ‘guts’ within this organisation.

I am incensed not only by the contents of the attached letter (and the one from Jon Pain and Hector Sants and many before them) denying that they need appropriate qualifications to do their job (which incidentally appear to be filled from the same recruitment agency, using the same stockpile of names that ignores the same people, like myself, who have applied for eight positions and never got to an interview! (But I forgot they don’t need anybody with my qualifications or experience in the FSA). The recruiting agencies earn a fortune hiring unqualified individuals and the FSA believes, according to the FSA letter, that, that is the correct way to proceed?

You have a choice; you can either ignore what is going on at the Financial Services Authority, and its successor organisation, or you can start to put a stop to this slavish indulgence to paper bureaucracy and actually ensure that properly qualified individuals are in charge of regulation as they were when FIMBRA, IMRO and LAUTRO were in place. Regulation worked then. The consumer was protected then. It was only Sir Gordon Borrie and the political antics of the Office of Fair Trading stopping the Maximum Commission Agreement coming into force that allowed much of what latterly happened to take place including TSB selling unit trusts and term insurance.

The banks have a lot to answer for and yet it is bankers or consumerists (whatever they are) who seem to be running ‘the show.’ None of them qualified and all of them hell bent in the supermarketisation of the Financial Services Industry. Please do something about it. Stop it before it is too late. It is your choice and; at least you cannot say you did not know.

December 2010 246

Written Evidence submitted by Care Asset Management Ltd

We would like to express our support of the proposed RDR.

We believe that the stated objectives of this review are all ones which are entirely consistent with the needs and requirements of the consumer in the UK today.

The proposed measures will certainly present problems and challenges to the financial services industry and there are understandably many who will wish to oppose the RDR. However, we believe that none of the objections which we have seen are justifiable other than to serve the self interest of practitioners.

For too long, the financial service industry has been a product selling environment in which the financial institutions have created those products which in turn advisers have been persuaded, and offered financial inducements, to sell. As those products have become more complicated, as individual wealth has grown and as the world’s financial structure has grown more complex, our current distribution model has been exposed for what it is and is quite simply not fit for purpose.

It is now time for reform and we believe that higher standards of knowledge, a fundamental change in the way advice is paid for and greater clarity for the purchaser in terms of what they are buying, should be viewed as minimum standards, not a future ideal to be water down by negotiation ahead of 2012.

Those who have looked at RDR from an independent or consumer perspective, must in our view, conclude that it is the right way forward and that it is essential to creating a genuine professional service in which the public can have confidence. Many practitioners like ourselves, have already embraced the spirit and details of RDR. Many, also like ourselves have absorbed much of the restructuring costs, education expense and underlying attitudinal changes that are required to make RDR work – at a time when many of our colleagues have at best done nothing or at worst sought to use the period between now and RDRs implementation, to exploit the current regime at the ultimate expense of consumers.

We therefore hope that the current proposals will be implemented in full and without dilution and we are confident that the consumer will be far better served once this has been achieved.

January 2011 247

Further written evidence from Simon Mansell, Temple Bar IFA

I attach to this memorandum a copy of the letter that I have received from the Commission of the European Union [not published]

This demonstrates that there are a number of substantial and unresolved issues about the interaction of the RDR proposals and the United Kingdom’s obligations as a member of the European Union.

It also demonstrates that if the FSA proposals were implemented IFAs based in the United Kingdom will be subject to requirements not applied to those in other member states. Apart from the difficulty that might arise for IFAs in competing with firms operating from other EU states, one obvious detriment to the UK would arise if a fund manager based in Germany, France, Ireland or Luxembourg were to maintain commission payments to a distributor also based in a EU member state. The effect of the RDR could be to divert UK savings (and insurance) business to competitors in other member states.

The FSA have confirmed that passporting is possible and EU firms will only be subject to certain rules. In response to my letter the European Commission confirms passporting firms will not subject to the RDR. An FSA spokesperson also confirmed this.

EU advisers will only have to comply with the FSA’s Conduct of Business rules, which cover adviser remuneration, but will not have to comply with the RDR’s rules in relation to qualifications.

The revelation could leave the market open for European adviser firms, wishing to take advantage of more lax rules in their home countries, to enter the UK market. It is also possible that some UK-based firms may wish to move jurisdiction in a bid to avoid some of the harsher rules due to be implemented with the RDR in January 2013.

To follow this story as it has unfolded please click on the links:

http://www.international-adviser.com/article/fsa-confirms-passporting-firms-can-avoid- key-aspects-of-rdr http://www.ftadviser.com/FTAdviser/Regulation/Regulators/RetailDistribution/News/articl e/20110126/cd2e5bfe-287c-11e0-bb3b-00144f2af8e8/EU-firms-dont-have-to-comply- with-RDR-Mansell.jsp

http://www.international-adviser.com/article/eu-passporting-blow-to-rdr

THE ISSUE

I have specifically asked the Commissioner for Internal Markets and Services about EU law and super-equivalence and the above link reports the findings!

The FSA RDR actions are in danger of handing over to the EU a huge financial advantage over UK based and regulated advisers who face heightened 248

competition from other EEA states, and will be unable to respond because their hands are tied.

January 2011 249

Written evidence submitted by Martyn Young The following is taken from Money Marketing on Jan 13th 2011. I find it revealing that when the FSA seeks to use research in support of its proposals, it conveniently ignores the alternative interpretations that are frequently placed on the same data by the researchers. One example is the lack of industry trust that Callum McCarthy and others have frequently alluded to. In 2008, the FSA helped produce Consumer Research 65a. This confirmed that accountants, solicitors and bank managers were the most trustworthy occupations, with financial advisers not far behind. Consumer Research 76, also from 2008, established that between 67% and 92% of consumers considered advisers worthy of high or medium trust. In September 2010, the FSA’s annual consumer confidence research found 98% of those questioned believed their adviser had treated them fairly. Banks scored 83%. FSA Occasional Paper series 32, in April 2009 confirmed, “Charles River Associates (2004) finds limited evidence of commission bias in the market for UK retail investment products.” This is not new but it is nice to see the FSA confirming it. The 65a Research asked consumers what they considered important when purchasing a product. The three areas highlighted were product information, if the adviser is independent or not and id the adviser meets regulatory requirements. The least important? – How fees or commission is calculated. Charles River carried out further FSA research in January 2009 and this included the statement, “It is often argued that providers offering higher commission will ‘buy’ market share. We did not find evidence to support this.” Another part of Charles River research related to advisers recommending distribution or with-profit bonds instead of equity Isas. The research in 2002 allocated £49.5m a year of consumer detriment on the basis that each sale lost the consumer up to 0.5%. In June 2009, Oxera calculated commission on bonds has been reducing year on year, falling from 5.25% in 2005 to 4.32% in 2007. Additionally, back in 2002, total sales of such bonds were 433,000, a figure which fell to 71,439 for the year ending September 2010. IFAs were only responsible for 45.6% of these sales. The detriment figure should be zero if we also take into account Charles River’s observation that the RIY on bonds is sufficiently lower than Isas that after 10 years the detriment disappears. Many of the other FSA assumptions are built on hills of sand?

January 2011 250

Written evidence submitted by Alastair Lyon

IFA since 1986. Owner of Credenda since 1990, variously regulated by SIB/FIMBRA, SIB/PIA, FSA

I started to write about the RDR but am so totally bored by either being ignored, overruled, or just seeing the big battalions get their way that I was not going to do it

BUT THE LATEST REGULATORY BUMF IN MY POST ARRIVED THIS MORNING AND IT IS THE INTERIM FSCS LEVY

The FSA will of course tell you that the FSCS is really nothing to do with them. If you can find one IFA who agrees with that please do let me know.

This levy represents approx 1 % of my annual turnover on top of all the other direct and indirect regulatory costs.

This levy 25 years after the introduction of financial services regulation is a measure of the total failure of that regulation as presently represented by the FSA

The very same FSA who announced (with no supporting evidence) that the retail distribution model was broken 4 years ago while the wholesale model was not merely broken but collapsing before their eyes.

If the major banks, insurers or investment companies were hit with an interim levy of 1 % of gross turnover I believe there would be bloodshed in boardrooms, the FSA, Downing Street and elsewhere in the City and Westminster, and things would change.

I have no doubt others will comment on human rights, abandonment of the assumption of innocence if you are a financial adviser, the legitimacy of being authorised to advise on 31/12/20 and not on 01/01/2013, Regulatory interference in consumer choice re fees/commission etc

It is also obvious that the FSA is driving the RDR forward in the knowledge that it cannot be prevented from doing so.

I see nothing of benefit to the consumer in this vastly expensive regulatory project that could not have been done quietly and progressively under the existing rules.

The RDR is the usual regulatory sledgehammer to crack a nut at vast expense, and with no accounting to its membership who pay its costs for that expenditure. Only in this case there is considerable doubt as to the existence of the nut.

I apologise for lack of figures to evidence consumer benefit or detriment from the RDR. But unlike the FSA I feel it would be wrong to just make them up. But if consumer choice in methods of remuneration is removed I believe that to be significant consumer detriment. If significant numbers of IFAs, leave the market at the precise time when the country is trying to rebuild the savings culture I believe that is significant consumer detriment. If this is also happening at the same time as the introduction of compulsory 251

pensions and the enormous new demand for advice that will incur I believe that is significant consumer detriment.

But of course whether you share my views or totally oppose them the really sad thing is that it seems you can do nothing about it, the government of the day having put the FSA outside of government and parliamentary control when they set them up.

January 2011 252

Written evidence submitted by Fidelity International

About Fidelity International Fidelity International is an asset manager serving investors globally outside North America. It was established in 1969 and manages all significant asset classes for institutional and retail investors in long-term savings products. FIL International employs over 4,000 people in 21 countries managing US$246 billion of assets worldwide and services over 7 million customer accounts.

In the UK, FIL distributes life, pensions and fund products through its platform business, FundsNetwork, as well as being a pre-eminent manager of an extensive range of its own range of UK domiciled OEICs and unit trusts. As a UK business we have in excess of 1 million customers, manage relationships with over 12,000 financial advisers and administer over 400 employer schemes. The platform business has over 90 asset manager relationships and £35.1bn in assets under custody. As an asset manager FIL distributes through almost every distribution mechanism in the UK, including the majority of ‘platform’ operators. FIL also runs a Life Insurance business, supporting a number of significant group pension schemes. FIL is the largest provider of non-cash ISAs. (all data as at 31/12/2010)

Executive Summary Over the last 4 years Fidelity International has been a strong supporter of goals and objectives of the Retail Distribution Review. We recognise the enormous complexity in delivering these changes, and as such have lent considerable time and resource to this process to help in the implementation of the rules.

The possible success of the RDR has to be looked at in terms of the outcomes it will look to achieve, and in particular improving those of the consumers of the products and services provided in the market place. We believe that as it stands there will be a number of significant benefits of the proposals, but also a number of other unintended consequences.

Our fear is that however clear and right the objectives of the proposals, the implementation of the RDR simply creates a more complex environment for participants to operate within. The overall outcome of any regulatory proposals within the retail long term savings market should be that it creates an environment to increase both the numbers of individuals and the overall levels of saving. The risk is the current proposals fail on this front.

The Committee has asked for evidence on three specific points and Fidelity International is pleased to respond to that call. The following provides a summary of the points raised within each question and an overview of our current views on the proposals.

1. The proposals around how advisers are remunerated are entirely correct. This will create an advisory industry that is remunerated based on relationships, and will improve the transparency of the cost (and value) of advice

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2. The adviser charging rules should be managed in line with other forms of remuneration and non-monetary benefits received in the adviser market. If the removal of commission is to be successful, all other forms of product bias should also be reviewed to ensure that ‘commission-like’ models do not develop.

3. The qualifications standards should be seen as a minimum for both new and existing advisers and will bring substantial improvement to the service to clients. The level of professional qualifications held by financial advisers should increasingly be seen as a differentiator, and as such further benchmark levels should be set as demonstrating excellence in advisory practices

4. The current definitions of independent and restricted advice are at best sub-optimal, and will not lead to any improvement in consumer outcome around the disclosure and implications of either service. Restricted advice will be seen for some as a means to drive costs down, which although creating ‘bargaining power’ for advisers and consumers, does not mean that the consumer will be receiving the best product. If a large number of advisers simply move into the restricted market, and assuming consumers do not understand the differences in offering, these proposals will have failed.

5. There are significant discrepancies between the regulation of different providers of products and services in the market place, which will lead to different outcomes. Although the consumers of these products and services see these as being homogenous, the regulatory environment will treat these differently. For example the execution-only, adviser, life insurance and mutual fund industries will all have different regulations applied to them. These regulatory differences will at a minimum create consumer detriment due to different client experiences, and at worst carries a significant risk that it opens up regulatory arbitrage opportunities for providers who deem an area to be less tightly regulated. There must be consistency applied to suppliers of homogenous products and services, as to do otherwise would produce client detriment and inefficiency.

6. The current outcome of the RDR is likely to see an initial increase in costs of advice, but also a reduction in the supply of the service. The proposals around introducing a ‘simplified regime’ currently require significant detailing before any business could adopt these standards. We would encourage the Treasury to continue to look at ways in which advice and guidance can be provided more cost effectively, and that a regulatory environment is embraced that reduces complexity.

7. The impact of taxation is an area which requires further consideration. The current proposals already risk seeing costs rise due to the increased complexity introduced by the proposals. Notwithstanding this issue, the tax efficiency of the proposals risk in their own right a material increase in costs, specifically around VAT and CGT on the fees payable to both advisers and product providers in some instances. 254

8. The impact of the legacy market will create significant complexity and also potential irrational behaviour. The proposals only focus on business written going forward and as such consumers of products and services will be subject to two different experiences in the ‘pre and post RDR- environment.’ This will introduce complexity that will need to be explained. The legacy market in its own right may provide a disincentive for providers and advisers to move clients and assets as it would risk bringing these assets under a new set of rules, whereas some change in investment might be in the customer’s best interest. This issue as yet has not been addressed.

9. The current timings of key decisions and the corresponding detailing of requirements are not forthcoming, and there is still a significant proportion of outstanding work still awaiting publication. This detail not only creates costs in managing the required change programmes required to implement the rules, but carries with it significant risk that either market participants simply run out of time to develop the required capabilities, or that when the detail is published, fundamental flaws or undesired outcomes emerge. There is a significant amount of detail still awaiting publication from the FSA.

10. The current proposals will not in their own right reduce costs in the industry, and in fact the implementation and ongoing running costs, coupled with the likely reduce in the supply of a number of core services risks in fact seeing costs being increased. The proposals should although increase the levels of transparency in the market place, which in its own right increase price competition. This has to provide a long term consumer benefit. And the standards in the advice market should rise substantially.

A transparent and fairer charging system The banning of commissions and subsequent introduction of the adviser charging regime will be a fundamental step towards creating a more transparent and fairer charging system. This should become the blueprint for European distribution, and as such the recent EU Commission consultation on the MiFID directive could be seen as aligned to the proposals.

The outcome of these proposals should be that it creates transparency within the value of advice, and will enforce a relationship based model demanded for a successful advisory model. These in their own right should be good outcomes for consumers.

The focus on disclosure within the proposals should create a more transparent market, and create positive consumer outcomes. Transparency should lead to greater competition, especially around price differentiation. Advisers will be key gatekeepers to helping gain better value from the services and products they use, and the RDR should create a more transparency in parts of the market.

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That said, the rules currently do not create uniformity in how providers of what are relativity homogenous products and services are either remunerated or forced to disclose their services. The FSA must create parity in the rules for how different parts of the market are regulated where they are providing homogenous offerings.

Finally, there needs to be focus on the other forms of remuneration that may develop or become more prevalent as a result of these proposals. If there is a model where it is felt it easier for a provider or supplier of a service to be remunerated, then this is likely to attract additional interest. There are a number of possible ‘loop holes’ in the proposals which create areas of the market less affected by the proposals, which in our opinion risks be abused. These must be closed.

A better qualification outcome for advisers We do believe that the proposals on qualification are correct, and we would urge the Treasury to continue to support these. Advice on financial matters is often highly complex and its effects may only be observed very much later when any errors may be difficult to rectify. The effect of poor advice on individuals can be devastating.

The FSA proposals will lead over time to greater professionalism, this will have a number of beneficial effects. It should lead to a greater number of younger people joining the industry because of its perceived professional standards and clear development path. It will be seen as a minimum standard, many will seek higher qualifications. This competition in excellence will benefit clients. We would seek to encourage any further proposals that allowed further qualifications to be seen as a mark of excellence and possible further differentiation of adviser businesses.

We also believe that the stance on grandfathering is correct, although we have sympathy with those advisers who have been operating to an exceptional standard for a number of years who are now required to gain further qualifications. Other markets that have been through similar processes have shown that not allowing grandfathering has been the most effective mechanism for improving financial advisory standards.

Fidelity International operates across Europe, and in that context the FSA’s move could appear belated. Countries such as Germany and Sweden have already introduced compulsory qualifications at degree level. In neither case has grandfathering been allowed.

Greater clarity around the type of advice being offered There are some doubts about the proposals for the classification of advice, and whether these will be effective. The changes in adviser remuneration will create an environment which will remove the majority of product bias in the advised market, and will create greater clarity in the value of the service being provided.

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The proposals that look to classify the type of advice being provided are less effective, difficult to practically implement, and risk being misunderstood by the end consumer. The test for independence is drawn on the basis of the adviser being able to survey the whole market to find suitable products for his client. That is too wide a test. All advisers will be independent under RDR in one sense in that they will not be able to receive payments from providers. The breadth of the product offering that will be required to be under consideration may be vast, just to prove the independence of the adviser.

This is in stark contrast to the range of products considered by an adviser under the new restricted advice category. This could cover any adviser who limits the range to potentially only a few products, even those just from a single provider, or those who limit themselves to a broader range or perhaps a few hundred funds. Clearly there is a difference between an adviser who simply ties themselves to a one or few providers based on a commercial interest, and those who carry out careful due diligence to restrict themselves to a carefully selected range of best of breed products. We believe that there does require greater clarity here that aims to distinguish these types of relationships, and perhaps an additional category needs to be created here.

We are concerned also that as it stands many advisers may chose to work under the restricted label as this is more in line with the current business models. If the majority simply adopt this standard then the proposals will again have failed, as the independent label will simply be dropped in favour of the simple term ‘financial adviser’. The creation of this new identity and the relative lack of disclosure around breadth of product offering will make it increasingly difficult for a consumer to understand whether any restriction of offering is either a good or bad thing.

The restricted market in its own right could have a positive outcome. It would be possible for a financial adviser to create a ‘panel’ of products that create a complete set of solutions that cover a wide range of consumer needs, but also allows them to use their restriction to provide preferential terms for the end consumer. This is clearly a good outcome, and also one that would demonstrate a high standard of advice. It is the model that operates successfully in the United States. Under the current proposals this would be deemed as a similar standard to a provider who simply operates off a limited range of products for convenience.

We would therefore suggest that these rules are again reviewed to create further clarity on the differences in offering and ensuring optimal outcomes.

Other issues The RDR proposals will stand and fall on their ability to create a more sustainable, attractive and ultimately successful market for the provision of financial advice. In doing so it should create a regulatory environment that creates simplicity and provides a more open and transparent market place. It should also aim to be regulating homogeneous products and services in consistent way. It current fails on a number of parts. 257

To many consumers of the products and services, what constitutes advice is broader than the current regulatory definition. The views in a Sunday paper, a website blog or the guidance of a friend, family of other consumer may also constitute a level of advice, albeit not personalised, against that provided by an adviser. The execution of a trade with a fund manager, investment platform, life insurer, through a financial adviser or directly with a stockbroker, would all be seen as relatively homogenous set of products and services in the eye of a consumer. The current implementation of the RDR proposals will end up treating all of these parts of the market differently, and as such the RDR will struggle to meet its objectives.

The proposals must create a landscape that provides a consistent and uniform approach to remuneration, disclosure and service offerings. The proposals must create an environment that becomes more accessible, affordable and sustainable, and creates simplicity and allows innovation. The management of the new and legacy regimes without doubt will make the industry a more complex environment with which to interact. As a result ,as the proposals stand today they risk doing the opposite.

Finally, there are too many proposals that currently still lack the detail required to enable implementation, and as such there now carries risk that either there is too little time to implement these requirements, or an associated risk that once the detail emerges there are too many flaws with the outcome.

January 2011 258

Further written evidence submitted by D. W. Johnstone, Creative Benefit Solutions

I am a member of the AIFA RDR Working Party and in this capacity have been sent a copy of AIFA’s submission to the Treasury Committee. I believe the submission to be well presented and professional and in many respects it has our support.

However on the issue of replacing commission with Adviser Charging or Consultancy Charging in the case of Group Personal Pensions (GPP’s), I do not believe the submission reflects the views of a substantial majority of the membership of AIFA. I think it is important this is brought to your attention.

I am advised that today only 8% of remuneration is by fees and the balance by commission. This means that the whole retail financial services industry must go through a revolutionary change in how it conducts business and on remuneration to accommodate Adviser and Consultancy Charging. It is impossible to believe the majority of advisers welcome this. It is also worth mentioning that much of the high cost of implementing the RDR is associated with this change in remuneration.

There is some real evidence to support my view in that there is currently no prohibition on advisers being remunerated by fees if they prefer that basis but most utilise the commission structure. I also strongly believe investors prefer to have the choice between commission and fees.

In paragraphs 1, 11, 12 and 13 of their submission AIFA give the distinct impression that their position on RDR (which is supportive of the ban on commission) has the broad support of their wider membership although they accept there is opposition.

I requested evidence from AIFA to support their view that RDR and especially the commission ban has their members support. I have asked them in particular whether they have ever conducted a survey of their whole membership. They have not answered this point so I have to conclude they have not done so. While they claim to have independent evidence to support their position they will not supply details to me.

In paragraph 13 of their submission they have quoted from the “independent” research by the NMG Group of July 2009 which I have been told was commissioned by the FSA. There are different ways of interpreting this research and it is interesting that advisers were not asked directly whether they were in favour or opposed to the RDR or the ban on commission.

I suspect Advisers responded to the research on the basis that the RDR is a “fait accompli”. The NMG data showed that only 30% of advisers were enthusiastic advocates and the balance less supportive by varying degrees. I believe this can be interpreted that 70% of advisers are opposed to the RDR.

The position of our company might help to explain my reasoning. While we are opposed to the new regulations being introduced by the RDR we have no alternative but to be willing adaptors and would have responded to the survey accordingly. We 259

have a business to run and must do so based on the prevailing legislative and regulatory environment.

As a quite separate issue I would like to add to AIFA’s submission on factoring. I believe they made an excellent case in support of factoring for regular contribution plans which I endorse. However they failed to mention the substantial extra cost of the introduction of Consultancy Charging in the GPP market. We believe this runs into hundreds of millions of pounds and should have been included in the FSA’s Cost Benefit Analysis.

AIFA are aware of my concerns on their position and submission and that I will be raising them with you. I have sent them a copy of this letter as a matter of courtesy so they may respond if they consider it appropriate.

January 2011

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Written evidence submitted by Consumer Financial Education Body (CFEB)

Introduction

The Consumer Financial Education Body (CFEB) is an independent body, created in April 2010 by the Financial Services Act 2010. We are responsible for helping people understand financial matters and manage their finances better. We do this by providing information, education and advice through our unbiased money advice service.

Executive Summary

• We are responsible for helping people understand financial matters and manage their finances better. • Our work means we have a direct role to play in supporting the Financial Services Authority’s stated outcomes for the Retail Distribution Review (RDR). • We provide generic financial advice through our money advice service. This will form a crucial part of the advice landscape in the UK and will help people understand how to manage their money and seek help when needed. • This free, unbiased advice service will complement the work of the financial services industry and wider advice sector, as well as help fill the potential ‘advice gap’ created as a result of the RDR.

Introduction

1. CFEB was established by the Financial Services Authority (FSA) in April 2010 “to enhance– (a) the understanding and knowledge of members of the public about financial matters (including the UK financial system); and (b) the ability of members of the public to manage their own financial affairs.”1 2. Our statutory functions include promoting awareness of the benefits of financial planning, promoting awareness of the advantages and disadvantages in the supply of financial goods or services, and provision of information and advice to members of the public. 3. The Committee asks whether the RDR will achieve its stated outcomes – a transparent and fairer charging system; a better qualification framework for advisers; and greater clarity around the type of advice being offered – and whether these outcomes can be better achieved. 4. This response sets out how our work relates to the these outcomes, with particular focus on the last.

1 Section 2, Financial Services Act 2010 http://www.legislation.gov.uk/ukpga/2010/28/section/2 261

Our Role

5. Since our creation in April 2010, we have been continuing the programme of work begun by the FSA. This aims to help people through critical stages and events in their lives and includes projects to help schoolchildren, young people, students, employees, new parents, and other targeted groups such as people facing redundancy, approaching retirement and those going through divorce or separation. We deliver these in partnership with the financial services industry, consumer groups, professional bodies, voluntary organisations and the media. 6. We are also responsible for the national roll out of the UK’s first unbiased money advice service. This new advice service will allow people to speak to trained money advisers who will assist them with their money issues. 7. We believe that the current charging system for financial advice has a fundamental problem: people think that advice is free when it is not and they are subject to potential mis-selling due to commission bias. A transparent and fairer charging system will lead to a significant improvement in the way that people understand and pay for advice. 8. We also believe that professional advisers having to achieve higher standards will benefit people who get regulated financial advice so we welcome a better qualification framework for advisers. 9. Of the three RDR outcomes, the most important to us is greater clarity around the type of advice being offered, for two reasons: i) The advice landscape is complex so we will need to help people understand the differences between independent and restricted, as well as basic and simplified, advice. These will each come with different payment structures, delivery methods and, in some cases, different qualification levels. ii) We provide free, unbiased money advice online and over the phone. We also offer face-to-face appointments in a number of priority areas across the UK, and from spring 2011 these will be available nationwide. It is important for consumers and other stakeholders to understand how this fits within the advice landscape. We set this out in more detail below.

RDR framework for financial advice in the UK

10. The RDR proposes that firms that advise on retail investment products must clearly describe their services as either "independent" or "restricted"2. 11. To qualify as independent, firms must make recommendations based on a comprehensive and fair analysis of the relevant market, and to provide unbiased, unrestricted advice. 12. If advice is not independent, then it must be described as restricted. This covers firms that advise on their own products or on a limited range of products, such as bank advisers and other single-tied and multi-tied adviser firms. Restricted advice also covers:

2 PS10/6, Distribution of retail investments: Delivering the RDR – feedback to CP09/18 and final rules, FSA (March 2010) 262

• Basic advice – regulated advice on ‘Stakeholder’ savings and investment products using a process that involves using pre-scripted questions. It was designed to deliver simple products to people with straightforward needs. • Simplified advice – an industry-designed advice process to help people whose needs are relatively straightforward access the market for investment products. 13. Also worth noting are non–advised services, or execution-only sales. These are where a customer buys a product but no advice or recommendation is given. 14. The final part of the landscape is generic advice – advice that is not regulated but helps people to understand and manage their money and take the right decisions based on their needs. We play a central role in the provision of generic advice to UK consumers.

Our money advice service

15. A ‘pathfinder’ to test the potential for a nationwide generic advice service, and delivered under the Moneymadeclear brand, was run by the FSA in partnership with Government in the North East and North West of England. 16. Following the success of this pathfinder3, a national money advice service will be rolled out in spring 2011. In the meantime it has already been extended and is now available in 37 priority areas, including Greater London, Scotland, Wales and Northern Ireland. It remains in operation in the North East and North West of England while the national financial advice service is rolled out. 17. Our national money advice service will be the UK’s first free and unbiased money advice service, and will provide advice on all areas of personal finance. It will operate online, face-to-face and over the telephone. A key component of the service is the development of an online financial health check which will provide people with an interactive review of their finances and the actions they need to take to understand and manage their money. 18. The service will fill the gap between financial information and regulated advice, by providing unbiased money advice which will include generic product recommendations. This does not mean it will recommend specific providers, nor will it give regulated financial advice, however it will advise people on how to manage their money and the actions they should take. This will form part of a personalised action plan that they will take away from an advice session. 19. This action plan will include specific actions, such as drawing up a budget using our calculators and online tools or taking out a generic financial product, for example life insurance. In other areas it will refer people towards further advice – such as debt advice, or regulated financial advice where appropriate. In all areas, it will equip people with the information they need, and the key things to think about, so they can take effective action. 20. A key part of our advice service is to articulate clearly what regulated advice services exist, what the different types of advisers are, and how people can access them.

3 Summary http://www.cfebuk.org.uk/pdfs/20100709_pathfinder_summary.pdf and full report http://www.cfebuk.org.uk/pdfs/20100709_pathfinder.pdf

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Where we have identified that someone using our service would benefit from regulated financial advice we will refer them on appropriately. 21. For example, while we would be able to explain the differences between different types of mortgages we would not recommend one provider over another. If this advice was required we would refer the person to a mortgage adviser. Before doing this, we will ensure he or she understands the nature of the organisation to which they’re being referred, as well as equipping them with the information they need and questions they should ask so they can benefit from the referral. 22. We will refer people to regulated financial advice when it is clear that they have a long-term planning need and will benefit from advice on specific products, a service that only IFAs can effectively deliver4. Similarly there will be occasions when we expect that people will turn to their main financial services provider to buy new products and we will explain the implications of receiving this, restricted, advice. 23. Our money advice service aims to equip people with the knowledge, skills and confidence to make more appropriate financial choices and engage with the financial services industry on a more equal footing. We believe that our work will bring clear benefits not only to consumers but also to the financial services industry. 24. We expect our work to lead to an increase in the demand for IFA services as people are made aware of the benefits that seeking such advice offers. This has been our experience during the pathfinder stage of the money advice service. 25. Our pathfinder also showed that there was an 'advice gap' in the UK. Some people lack the confidence to engage with the financial services industry, others do not trust it, others believe that they can neither afford nor benefit from professional financial advice. 26. That gap may widen when the RDR comes into force – research published by the FSA suggests that the number of advisers and advised clients would be reduced by 11% as a result of market exit5. Should the market for regulated financial advice become even more restricted then our service can help fill this larger gap. We will both help people who are unable or unwilling to seek independent advice as well as refer people to IFAs as appropriate. 27. So our work is complementary to that done by IFAs and many other types of professional advisers, such as accountants, tax specialists, debt advisers or insolvency practitioners. We will refer people to these experts where appropriate. Similarly we expect that many people will access an adviser directly and it is not our view that everyone will need to access our service before they approach a professional adviser. 28. We are following closely wider developments across the advice landscape. For example, we have been working with Government on its recent consultation on simple financial products, and how such products might be integrated in our work. We are also following industry initiatives on simplified advice. We will continue to work with all relevant stakeholders to ensure that our work complements these initiatives.

4 For example, we refer people to www.unbiased.co.uk, which allows peopleto search for an adviser near where they live, as well as the Institute of Financial Planning and the Personal Finance Society which offer similar tools. 5 http://www.fsa.gov.uk/pubs/policy/oxera_rdr10.pdf 264

Final comments

29. The RDR is aimed at making the FSA-regulated market work better for both firms and their customers by changing the way that retail investment advice is provided in the UK. We support the FSA in this aim. 30. However a financial services market that works better for consumers cannot rely on regulatory initiatives alone. Our money advice service is a demand side initiative, part of the wider effort to improve the financial capability of the UK population. 31. Our work will complement the RDR by increasing consumer access to financial products and services. More people are likely to have identified savings, investment or protection needs once they have received free, unbiased advice. When people are in a position where they could benefit from regulated financial advice, we believe that the RDR will present them with a simpler and more transparent framework for obtaining the products and services that best meet their needs.

January 2011 265

Written evidence submitted by Hargreaves Landsdown

We write further to recent invitation to comment on the Retail Distribution Review (RDR).

We have kept our comments succinct. However, Hargreaves Lansdown is one of the UK's largest financial services businesses of its type and we would be happy to discuss our views with any of your representatives in due course.

Our comments are below:

Background

Hargreaves Lansdown is the UK’s largest Direct to Client fund supermarket. We administer approximately £20 billion of client assets. Our major service is called ‘Vantage’ and allows clients access to a wide range of investments at low cost. The main products are an ISA, Pension (SIPP) and Fund & Share Account. Within the products, clients select their own investments on an execution-only basis.

Last year we processed approximately 5,000,000 trades and have over 330,000 clients. Over the years Hargreaves Lansdown has been a key contributor to bringing investment opportunities to the general public and using negotiating power to reduce prices in the marketplace for its clients. Last year Hargreaves Lansdown saved its clients £180 million in charges.

Our key thoughts

We understand the RDR is designed to achieve the following three objectives:

• A transparent and fairer charging system • A better qualification framework for advisers • Greater clarity around the type of advice being offered

We have based our comments around our view of whether the RDR is likely to meet these objectives.

Our overall conclusion

We believe that the RDR has some laudable aims, but has been misguidedly implemented. It is a concept that has swelled well beyond the realms of what was an acceptable brief. As a result, it threatens to deliver unintended consequences, bureaucracy, cost and confusion for both private investors and financial services companies alike. We believe it needs to be pared back to the few aspects that will do genuine good, if it is to proceed at all.

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A transparent and fairer charging system

The original problem was a simple one. There was bias in personal finance advice due to the payment of large initial commissions to financial advisers by product providers. We agree with the need to remove this bias. The banning of large initial commissions from product providers to advisers, allied to a requirement that ongoing (“trail”) charges could only be levied in return for a genuine service, would have been a simple solution, sufficient to achieve the end required.

Financial advisers would have had to be professional, well capitalised, and offer a good service if they were to keep their ongoing income.

However, the RDR project has now gone far beyond the original brief in its proposals in respect of what can and cannot be charged for by a wide range of businesses. In addition, proposed excessive additional disclosures – despite the clear evidence that excessive disclosure confuses clients and does not help them make better decisions or understand charges better –threatens to create confusion in the market and amongst investors. As a result, the original laudable end is likely to be obscured.

A better qualification framework for advisers

This part of the RDR is a good idea and the proposals have been reasonably well executed. More professionalism and a higher standard of qualifications are necessary in order to maintain and improve confidence in financial services. This is particularly true in the area of personalised financial advice.

The government should not be distracted by the fact the most vociferous objections have come to this aspect of the project. It is needed.

Greater clarity around the type of advice being offered

This objective has been flawed from the start. Whatever the regulatory and legal definitions of “advice” it is well-known that most clients, when they pick up a telephone to a company, want good information that they can trust and rely on. They do not understand or differentiate between different “types of advice.” Information that can be trusted and relied upon can be delivered by the correct delivery of the two previous objectives.

To make matters worse the RDR project has so far proposed a range of measures which will undoubtedly reduce clarity and increase confusion. A vast range of additional disclosures has been mooted, none of which we can see will improve clarity for clients. What is more, these requirements will apply only to certain types of businesses. For example, the entire life insurance industry, ironically a key source of historically high commission paying and opaque products, is exempt from most of the requirements. 267

Lessons such as that of India, where similar rules were applied to one part of the market but not another, resulting in the collapse of mutual fund sales at the expense of commission paying products, seem set to be ignored.

Initiatives that seemed to fit none of the objectives

A range of measures seem to have been added to the RDR are that appear to relate to none of the stated objectives.

For example, it is being proposed that vast amounts of information must be provided to investors in unit trusts. This must be done at great cost and whether clients want it or not. No evidence has been provided that there is a demand for such information that warrants the cost or environmental impact involved. Indeed our own experience is that clients prefer paperless and efficient administration. The few who want reams of obscure data should be dealt with by exception, not as the rule.

As a result, we find ourselves fighting against a wide range of proposals, some with consequences that have not been thought through or are unknown. We cannot see how they will benefit clients or the financial services industry, although we work hard to try and find ways to implement them to cause minimum disruption, confusion and cost.

In our opinion the RDR should be reviewed and either stopped or refocused on the very few key initiatives that have come out of it with value.

We would welcome the opportunity to discuss our views further.

January 2011 268

Further written evidence submitted by Justice in Financial Services

THE FSA’S PAPER ON PROFESSIONALISM

Summary 1. On 20th January 2011, that is after the deadline for submissions to the Committee on the RDR, the FSA published new rules it has made on Professionalism. 2. We therefore ask the Committee to accept a further memorandum to address this. 3. The FSA has RETROSPECTIVELY imposed a part of the RDR 4. The FSA has circumvented the protections for individuals that Parliament - Mr Tyrie and Mr Fallon were parties to the debates on this - insisted on incorporating into the Bill that became the Financial Services & Markets Act 2000 5. The new rules for ‘professionalism’ are more likely to give the consumer a false sense of confidence than to lift standards. They seem extraordinarily well designed to encourage a culture of covering up errors in firms, by requiring employers to act as informers, denouncing their employees and ex-employees to the FSA.

Timing 6. On 15 December 2010 the FSA published the following statement on its website:

The Financial Services Authority was due to publish its RDR professionalism policy statement in December 2010. However, the FSA wanted to ensure that it had an opportunity to provide the Treasury Select Committee with a comprehensive rationale about why it remains committed to delivering the RDR. The FSA plans to publish final rules and policy statement in January 2011. The FSA remains fully committed to implementation of the RDR in January 2013.

7. On 17th January 2011 the Treasury Committee’s deadline for submissions expired. 8. On 20th January 2011 the FSA published its new rules for professionalism.

What the FSA’s new rules will mean for individuals 9. I start by describing what the effect of the FSA’s proposals would be for you if they were imposed on MPs. This is not a fancy - when the Parliamentary Standards Bill was presented to Parliament in 2009, it contained clauses (happily not in the Act) that would have allowed IPSA and its Compliance Officer (the infamous Alan ‘Biggles’ Lockwood) to control MPs in the same way that the FSA and FOS control advisors. 10. Consider this example: 269

• A constituent comes to you at a surgery and you write to a Minister about a welfare benefit • A benefit is provided, but the constituent later learns that he could have received more if he had been given another benefit • The constituent complains to Biggles. Biggles looks at the case and decides that you should have pressed for the better benefit. • IPSA is told that Biggles has found this and when your constituency Party commences the processes to decide who should be candidate at the next election, IPSA writes to the local Party office in charge of the process and states that Biggles has found that you gave bad advice to a constituent on a welfare benefit. 11. Happily the proposals that IPSA should have these powers over MPs were rejected. But I hope that the example explains to you both why there is such concern over what is going on in financial regulation and also why so many advisors are frightened about saying anything critical of the system if their comments might get back to the FSA. 12. I now explain what the rules are and how the FSA’s new rules will mean that individuals will lose their livelihood after false allegations are made for financial gain without any opportunity for a fair hearing.

The FSA’s new rules 13. The FSA’s rules are set out in RETAIL DISTRIBUTION REVIEW (TRAINING AND COMPETENCE) INSTRUMENT 2011. This is on the FSA website at http://fsahandbook.info/FSA/handbook/LI/2011/2011_5.pdf. The particular rules discussed here start on page 58 of 72 and are notification requirements that will come into effect on 1st July this year - i.e. well before the rest of the RDR. 14. The precise relationship between these rules and the other rules relating to professionalism is unclear - the FSA seems to have inserted into rules dealing with qualifications and professional bodies some additional measures. 15. To summarise what follows, the FSA is requiring firms to report any case of an adviser having been accused by FOS of having made an error in assessing the risk profile of a client or having made an unsuitable investment. The FSA will use that report to build up a profile of the adviser and may suggest to a prospective employer that it would not be a good idea to employ that adviser. The adviser may not know anything about this allegation, and will have had no opportunity to challenge the allegations against him; indeed he may be unable to obtain a copy of what FOS has said about him. The protections carefully written into Financial Services & Markets Act to make sure that an individual would always have access to the independent tribunal if accused of a serious breach of FSA without promulgating all of them - against rules 2.15 to 2.30 is written ‘[to follow]’. A number of these rules are designated by R - which means that they will contain obligatory or mandatory requirements; if the FSA had only delayed 270

publication of rules designated G - guidance - the matter might be less serious. The distribution of ‘R’s and ‘G’s shows that the FSA’s rules must be fairly fully drafted. 16. The FSA has promulgated rule 2.31 and a table setting out the circumstances in which firms must notify it of matters relating to employees. Rule 2.1.31(3) requires a firm to notify the FSA if it receives information that a retail investment adviser has failed to comply with a Statement of Principle in carrying out his controlled function and the event is significant. We might all think that an adjudication or decision by FOS is a significant event - even perhaps a complaint from a client, as the FSA requires a six monthly return from every firm of complaints made, responded to and taken up by FOS. 17. Statements of Principle are those high level statements of required conduct (or virtues) expected of all persons approved by the FSA to discharge certain defined functions, including giving investment advice. Statement of Principle 2 requires advisers to act with skill, care and diligence in giving advice. The FSA Handbook at APER 4.2 gives a number of examples of breaches of Statement of Principle 2, including a. failing to explain the risks of an investment to a customer; b. failing to disclose to a customer details of the charges or surrender penalties of investment products; c. recommending an investment to a customer, or carrying out a discretionary transaction for a customer, where he does not have reasonable grounds to believe that it is suitable for that customer, d. undertaking, recommending or providing advice on transactions without a reasonable understanding of the risk exposure of the transaction to a customer 18. These are typical reasons given by the FOS for finding against a firm. So in almost every case where the FOS finds against a firm, the firm will have to report an adviser. 19. There are already obligations on a firm to report matters to the FSA. If an adviser is dismissed then the firm has to report that at once on Form C. There is a fairly clear obligation under Principle 11 to notify the FSA of any occasion on which an adviser has displayed a lack of integrity. The requirement to act with integrity is Statement of Principle 1 deliberately doing something that is against a consumer’s interest is a breach of Statement of Principle 1 - the FSA provides a list that was expanded last year. 20. So what the FSA has done is effectively to remove the test of deliberateness from what it requires be reported. 21. This matters, because there is no opportunity in the regulatory system for advisers to deny acting with a lack of due skill, care and diligence. The FOS very rarely holds hearings and acts on such paperwork as is before it. In many cases, the FOS is looking advice that was given some years before and if an investor makes a claim, FOS very often upholds that claim if the firm is unable to produce 271

documentary evidence that refutes the claim. There are numerous cases where an adviser strongly maintains the he (or she) did cover a matter but for some reason the documentary evidence is not there. FOS rarely grants an oral hearing, so there are many occasions when under the new rules the FSA will be told that an adviser has breached Statement of Principle 2 without that proposition having been properly examined. 22. This situation has arisen because FOS has not done what the Economic Secretary to the Treasury assured the Committee considering the Financial Services & Markets Bill said would be done:

It is perfectly possible to operate the [FOS] scheme effectively while also protecting the parties' ECHR rights. Firms and complainants that bring disputes to the ombudsman will be able to exercise their right to a fair and public hearing. The option of a judicial review will be open to both firms and consumers once the ombudsman's decision has been taken, which ensures that all parties will be heard. Article 6(1) stipulates that in the determination of civil rights and obligations, everyone is entitled to a fair and public hearing by an independent and impartial tribunal. The scheme will provide for a hearing to be held if one is requested by a party to the complaint. We do not believe that the scheme will be legalistic. We expect the right to a fair hearing to be exercised frequently. (Emphasis added)

(Miss Melanie Johnson MP, Economic Secretary to the Treasury, in relation to proposed amendments to what has now become section 228 and Schedule 17 of the Act, 30th November 1999)

The FOS has not allowed requests for hearings - only one in 10000 cases go to a hearing, according to Mr Boorman at one seminar.

23. A further problem arises from the fact that FOS does not publish its final decisions - this may well be in breach of Article 6 of the ECHR which requires that judgments should be given publicly. 24. Parenthetically, FOS’s routine denial of oral hearings and the failure to publish final judgments is now being considered by the Strasbourg Court - by an odd coincidence, the Court directed the British government to file a reply to the Complaint by 17th January 2011, the deadline the Committee imposed for submissions to it. 25. The cumulative consequence of all of this is that individuals will have allegations against them that might have been rejected had there been a hearing in court recorded with the FSA. Individuals may be entirely ignorant of any complaint against them let alone the notification to the FSA. 26. Quite often, firms ask the FSA for guidance on whether an applicant for a job will be approved by the FSA before making a job offer. Even if they do not, and 272

the first the FSA learns of this is when a Form A arrives at 25 The North Colonnades, Canary Wharf. When a Form A arrives, the FSA checks whether there is anything noted on its internal files about the individual and if there is something, the file is passed to an FSA employee who investigates further and puts questions to the firm submitting the Form A. If a firm is asked questions (or told that there will be questions if a Form is submitted) a firm very often decides not to proceed with a job offer. 27. The practical effect of what the FSA has done is to create a situation in which advisers can be put in a very difficult position and potentially made unemployable without any opportunity at all to have the complaint against them heard before an independent tribunal. This is unjust because: a. Firms have on occasion decided to throw an adviser to the FSA wolves - this is especially likely when the firm itself has approved the advice given and hopes that if the FSA concentrates on the adviser, it will not dig into the support processes and see that the firm has being giving its advisers wrong guidance b. With the prospect of a four figure payment, investors often forget documents that they were given and what was said in meetings. The FOS system denies the person they are complaining against the opportunity to ask them questions. Such is the frailty of human nature, claimants often fail to mention matters that might stop them getting money. The FOS system does not require them to make declarations that they have made a full disclosure and honestly believe that they are entitled to compensation. c. Many complaints dealt with by FOS are made after an adviser has moved on so is never asked for his or her version of events or made aware of the complaint at all.

Retrospective elements 28. These rules come into place before the RDR qualifications and will involve reporting on pre-RDR events, indeed on events that may have taken place as long ago as 1988. (The FOS has recently handed one firm a decision on advice that was implemented soon after ‘A’ day in 1988). 29. This might be less objectionable if the FSA were to require that breaches of Statement of Principle 2 were to be reported if they related to advice after the RDD was fully in effect, or at least the Qualification part, then there might be a case for some reporting, if only to monitor the RDR. However the requirement comes into force before the RDR and what is going to be reported is conduct under earlier standards, almost certainly judged by the new standards. That raises a particular problem if the focus of any criticism of an adviser is not so much on advice as the documenting of advice, the area where the RDR may have greatest effect. 273

30. Although FOS says that it assesses complaints by the rules and standards at the time advice was given, the practice is often to judge by today’s standards. As there is no effective limitation period - in one recent case, FOS adjudicated on advice given in the late 1980s and the investment was sold in the early 1990s - it is almost certainly impractical to assess by the standards of twenty years ago. So there is a further, worrying, dimension to the retrospection in these rules.

The Concept of Professionalism and its relation to Ethics 31. To oppose professionalism is like opposing apple pie. But there are some serious arguments to be had, and in any event what the FSA is doing is not creating a profession.

Adam Smith 32. Adam Smith (WN IV.ix.51) regarded ‘the duty of superintending the industry of private people’ as a duty that exposes government ‘to numerous delusions, and for the proper discharge of which no human wisdom or knowledge could ever be sufficient’. His solution was the removal of systems ‘of preference or restraint’. This would imply the removal, rather than the promotion, of ‘professions’.

What is a profession? 33. The FSA does not seem to have offered a definition of a profession. It has some examples - notably lawyers and accountants - and it seems to be seeking a structure similar to that which has in recent years been imposed on solicitors and barristers, with it playing the role of statutory regulator, FOS of dealing with individual complaints and the bodies that the FSA proposes to licence the professional bodies. This gives rise to two problems. The first is that professions are not created by accreditation - they are an embodiment ( or at least were) of a shared commitment to certain standards and the second is that we have had very little experience of how well relatively new arrangements for the regulation of the legal profession work. 34. All the old professions (with the possible exception of the oldest) were self governing with their own codes. Entry was not just to be obtained by passing an examination but by a protracted process of socialisation - of which one remnant is the requirement on aspirants to be called to the Bar to eat dinners in Hall. A certain deference and ethos was obligatory - thus Sir Joseph Porter sings in HMS Pinafore ‘I wore clean collars and a brand new suit for the pass examination at the institute.’ My father who became a chartered accountant in the early 1930s told me he bought a new suit for his examinations - a convention this strong sends a message that something is happening here that does not happen when one turns up in jeans to hit keys on a computer. 35. One might also note that Gilbert also poked fun at the military equivalent of a modern FSA adviser in The Pirates of Penzane; the modern major general knew his mathematics (‘the binominal theorem’ and ‘the square on the hypotenuse’); 274

he knows the latest work on history - ‘I can quote the fights historical from Marathon to Waterloo in order categorical’ is a reference to Creasey’s Fifteen Decisive Battles of the World. Although the general would have passed Mr Gove’s new examination standard with distinction, he alas knew no more of the skills that would help him command in battle than ‘a novice in a nunnery’, a defect that became all too apparent in the early stages of a number of wars.

Over-regulation 36. The disabling consequences of thinking that regulation and precision in communications on the competence of naval officers in the long period of peace after Trafalgar is documented in Andrew Gordon’s The Rules of the Game - Jutland and British Naval Command. Anybody with experience of retail financial services who looks at this scholarly and readable book will immediately recognise the dominant mode of naval thinking - summed up as ‘Regulate Britannia’ - as that of the FSA today. Some justification is required before ploughing on with a regulatory approach that not merely allowed the High Seas Fleet to escape destruction at Jutland but very nearly caused the loss of some of the most powerful battleships afloat in the early stages of the engagement. 37. The FSA’s approach quite clearly assumes that one can determine somebody’s adherence to ethical standards by some form of examination. The author’s daughter is completing papers on ethics as part of an Occupational Therapy MSc. She has, I hope, acquired high ethical standards from her mother, from her schools, from a gap year helping a partially disabled child succeed in an ‘ordinary’ school, from placements on her course. But the idea that a tick box approach can inculcate ethics is so completely at odds with our collective experience in the 23 centuries that have gone by since Aristotle coined the word to describe something that can only be acquired by habituation. Traditional professional strengths have developed from the formation of their members. The FSA rules fail to achieve this. 38. A further consideration arises from a discussion over professional qualifications of finance directors before the PAC on 19th January 2011 (question from Mr Matthew Hancock MP) in which it was suggested that only about half the FDs of FTSE100 companies have a professional accounting qualification. (MBAs or equivalents can often provide a similar or superior basis.)

Do the FSA’s plans relate to the real world? 39. The FSA approach is almost certain to exacerbate a concentration on written rather than oral communication. But what if - as one strongly suspects can be shown - oral rather than written communication are determinative of investment choices? There is a real risk that the FSA will focus attention onto the wrong areas. 40. This drive to professionalism is likely to lead to advice being more costly. Is it really desirable that the FSA should drive the system into producing superb advice for those with more than £333000 assets but price it out of the reach of 275

those with minimal sums? This problem has received serious attention from Members of the House of Commons but appears of no interest to the FSA or ministers - and is unlikely to be of much interest to banks who stand to make most from chunky transactions. 41. It may be that a compelling case can be made for the FSA’s proposals for ‘professionalism’. It has not been and the above, one hopes, gives reason for questioning what is going on.

January 2011

276

Written evidence submitted by Michael Forbes Bates

I agree with the aims of the FSA to seek through the RDR;

• A transparent and fairer charging system • A better qualification framework for advisers • Greater clarity around the type of advice being offered

I disagree with the methods proposed to achieve these aims.

My 30 years' experience both the industry and profession of an investment broker (IFA) enables me to be fully-aware of the past-tried and tested regulation of the Financial Services Industry and I am extremely concerned about the impervious nature of Mr Sants who is obviously not so enabled and casts aside with the help of Mr Hoban all learned and experienced professionals' voices.

In essence they have disregarded the fact that the term IFA means independent of the marketplace ie an IFA is not commissioned to sell the products of the industry. He is a broker and is at law the consumer. Neither gentleman shows an understanding of what an IFA does with regard to the quality-control of the marketplace as well as ensuring that the consumer obtains the best product to suit his needs. Thanks to IFA-introduced business, the industry suffers fewer lapses and provides - through competing to be recommended by professionals who are responsible at law for their work - better products.

IFAs are the mortar that binds short, medium and long-term investment. The product- providers, because of shifting needs and commission structures, are like the banks concentrating only on short-term gains. Thus the stability of the UK Savings and Investment Industry would be harmed by the demise of the broker who the FSA regards not as a broker who earns brokerage, but as either a salesman who earns commission or an adviser who should earn fees.

For that reason their approach is flawed and the proposals to abolish the broker role with brokerage (payments) will prevent the RDR from achieving the stated outcomes.

The only true concern regarding the profession is with regard to any product bias. A registered and practicing IFA cannot at law be biased in the advice he gives. However there are rogues in every department of life and they should continue to be weeded- out with greater force by the authorities.

Nevertheless, the architect of the problem of bias was the genius who scrapped LAUTRO rules on brokerage ie set parameters of remuneration for products. These rules should be re-introduced.

I would be very pleased to submit more evidence if called upon to do so. My life is this industry. I have a spotless record, and in excess of 500 clients with approximately £125m under investment management and £150m life assurance and critical illness cover advised upon. Like many thousands of other bespoke-service IFAs, I do not have the qualification to remain in business under the proposed rules.

277

Mr Sants is wrongly-persuaded.

January 2011 278

Written evidence submitted by Paul Raseta

My name is Paul Raseta, I have been in Financial Services since 1986 – 24 years in Bancassurance (12 years in sales / 12 years in management positions), and the last 6 months as an IFA. I have been Level Four qualified since 1995 (Fellow of the CII).

I have three concerns:

1. The unaccountability of the FSA, and the ‘blind eye’ that is turned towards Banks. 2. The RDR objective of ’having greater clarity around the type of advice being offered’. 3. The proposed changes to charging in the name of greater customer fairness.

I would like to state categorically that it is not my intention to appear to be vitriolic in my comments nor to be ‘biting the hand that has fed me’ in the past. Whilst working in Bancassurance, I was only ever aware of the environment in which I existed. I adapted, but did not devalue my own principles in order to comply with their regimes. Since leaving, I have realised the true value of IFAs; the Banks’ arrogance towards regulation, and contempt for their customers, and the vindictiveness of the FSA towards IFAs.

1. I find it quite unbelievable that the FSA is accountable to no-one, not even Parliament. I watched the recent Back Bench debate, and whilst lifted by the cross party support, I and thousands more were amazed that unless the FSA listened (there was, and is no indication of that ever happening), then little or nothing would be done. I therefore welcome this opportunity to offer my views, in the faint hope that common sense and reality might ultimately prevail.

Since becoming an IFA, I have been saddened at the degree of ultra-biased scrutiny, levelled at IFAs by the FSA, and the suspicion with which this community is treated. I support regulation totally, and have seen many changes over the years which have resulted in a leaner, ‘cleaner’ Financial Services profession. However, the Banks’ attitude to Financial Services has not altered in the slightest. The main focus was, is and always will be customer penetration, targets and sales – not advice. Retail Bancassurance consultants do not give financial advice. They are order takers, who are told how much they have to sell each week in order to keep their jobs. Financial Planning, in this context does not exist, never has, and never will.

Banks apply unrealistic targets on their sales forces (10 to 15 first and 5 to 8 second appointments each week) which prevents time being spent with customers to accurately assess their overall needs. Hence, over 75% of Bank sales are investment, as these are the easy to identify leads, quick to sell, and produce instant income. In my experience, there are decidedly few bank customers who fully understand investment risk, and are cajoled into moving from deposit based savings into investments. A typical bank lead - the cashier identifies a customer as having ‘surplus’ funds and introduces them to the consultant ‘who can tell them about an ‘account’ paying ‘8.5%’. These have ranged historically from Endowments, to Maximum Investment Plans, Bonds and more recently Structured 279

Products, with all their associated degrees of risk. Training for these products is lamentable. I have attended audios (Barclays) comprising over 200 consultants, hosted by the providers, finalised by a test to be completed in your own time, using reference material containing the answers, which confirms knowledge of the product in question. The banks pay lip service to the FSA in every possible way they can, knowing that they have the power to dictate to the regulator. It is shameful, dishonest and hypocritical. The greed of the banks knows no bounds and their interest for their clients increases proportionately to the profit they will make from that customer. Treating customers fairly does not exist in Financial Services in the banking world.

How can consultants sell hundreds of thousands of pounds of investments to a single client without discussing Inheritance Tax Planning, and recommending suitable solutions to mitigate any liability? Answer - Most do not have the required knowledge, and the Bank does not have the range of solutions available to it. The investment sale is quick, returning instant income, whereby the protection sale takes longer, is less profitable, holds more risk for the Bank (clawback of commission if a policy lapses) and isn’t worth the time and effort.

Of the total complaints received, 80% are against Banks as opposed to 5% against IFAs. Banks spend millions of pounds on Compliance, principally to ensure that when complaints are received, all the multiple page, Suitability Letters, duly completed from pain stakingly constructed macro templates, are ‘water tight’, as far as the FSA (and the company) are concerned. The problem, with respect to the vast majority of bank customers, is that they do not read these lengthy epistles, rather trusting that they have been sold the right product by their consultant. When a legitimate complaint arises, the paperwork is all in order (usually), and hence the claim is dismissed.

A consultant who took over my clients when I left the Bank (RBS) phoned to tell me that the new directive was to switch everyone from Stakeholder pensions to SIPPs, regardless of need. The rationale? The Bank made nothing from Stakeholders but did from SIPPs and the consultants would get paid for churning the business. I originally recommended Stakeholder because SIPPs were inappropriate both from a charging aspect and clients did not want the investment options associated with SIPPs. He delighted in telling me that he was ‘raping and pillaging’ my client bank. One married, business couple, aged 62 and 64 and looking to retire in 3-5 years, were switched over on the basis that they were going to buy another business property and wanted to put it in a SIPP, which I knew was not the case. I also knew that the company compliance did not allow a SIPP to be sold in this example. I was later told that his case was initially rejected by compliance, but if he amended certain documentation, it would ‘go through’, which it subsequently did. The clients were none the wiser, but I hate to think what the potential consequences have been. One of many examples which confirm to me that Banks know that mis-selling is ripe, but they condone it, accepting that they will pay up when they have to.

Only in specialised areas, such as Corporate Financial Planning, will you usually witness financial planning skills, extensive product knowledge, available products, experience and 280

genuine interest in the clients being displayed. Not surprisingly, these consultants are generally IFAs within the Bank structure.

2. I wholeheartedly agree that there should be clarity of advice, but the emphasis should be on advice that can be, should be, and is actually offered by a consultant.

When Terms of Business were introduced (and subsequent legislative changes), the Banks ensured that every consultant underwent immediate ‘training’ to ensure they knew how to ‘get around’ explaining the mandatory issues, without raising any unwanted questions from the customer. They will do exactly the same if they are restricted to specific advice areas. The prospect horrifies me.

For the client, it is disadvantageous to license individuals to give advice on specific areas only, be they an IFA or in Bancassurance. A consultant should be authorised to conduct a full fact find, covering all need areas, and provide recommendations on all shortfalls identified (with the possible exception of Equity Release, and Unregulated investments, Offshore Trusts/Pensions etc. where, I believe, specialist knowledge is required, as these are not the normal ‘run of the mill’ scenarios). The Suitability Letter should record both accepted and declined recommendations, and the reasons why in each instance. This should happen in all cases, but will never happen in Bancassurance for reasons stated above.

Most of the Banks, at some time or other, have had part or all of their sales forces authorised as IFAs, able to give whole of market advice. Their reasons for changing to tied or multi-tied were quite simply down to lower costs and greater profitability. The result being restricted/limited ‘advice’ supported by an equally restricted/limited product range – but higher profits. Due to the overheads associated with a Bancassurance operation, they cannot afford either the resources required to support an independent adviser, or for the consultants to be spending time with customers which might result in little or no business (which would invariably be the case if they were carrying out their roles correctly.

The FSA is approaching this issue from entirely the wrong direction. Firstly, if the customer is to receive the correct advice, every adviser in the UK should be independent; be suitably qualified and authorised to provide recommendations across all need areas, having access to whole of market solutions from all product providers. Secondly, the FSA should then be required (by Act of Parliament) to apply identical scrutiny and rigour to monitoring the Banks’ IFAs as they currently do with the present IFA individuals. Without being flippant, Hell will freeze over first.

3. Whether a bank is tied or multi-tied, the product ranges are extremely limited, be they investment, protection or pension related. Premiums and commissions are reflected accordingly. For one piece of business I wrote for my last employer – a series of life policies – the bank received £29,990 from the provider. When I ran the same quotes as an IFA, whilst the premiums were identical, the commission was reduced by almost 30%. Not 281

surprisingly, as the bank promised to place all its’ business protection with this company, we had to use them. If the FSA want fair charging, remove this bargaining element, and introduce the capped commission structure for all providers.

I know that commission has been the driver for many in my profession (IFA and Bancassurance), but from a customer’s perspective, regardless of how this has been explained to them, they have not had to personally pay anything to the consultant. Quite simply, a mandatory change to a Fee based charging system will disadvantage/alienate the smaller investor who will not be able or prepared to pay a fee which is in excess of the commission that would ordinarily be received. For example, an investment of £10,200 into an Equity ISA would involve a minimum of 10 hours work. The commission received for this would be £306, significantly less than the costs incurred. Hence, flexibility to offer remuneration via commission, fee or a combination of the two, is paramount, if the client is to continue to be able to afford to receive financial advice. It is quite understandable why, in February and March of every year, the Banks have ‘ISA Campaigns’, as these can be turned round in a minimum of time, and the cost of doing so is less than the profit income – principally due to the fact that the ISA is the only issue discussed with the client, as that is the only item on the consultants’ (and Bank’s) agendas.

Forget RDR. If the FSA is truly intent on providing correct advice to the public, and Treating Customers Fairly, the simplest solution is that all Retail Bancassurance businesses should be terminated with immediate effect. The number of complaints would virtually disappear overnight. The FSA statement that a 20% loss of consultants is acceptable would be completely different if the loss occurred in Bancassurance. The positive of this initiative (or dream) is that the existing IFA fraternity would increase by employing the ex-Bancassurers who demonstrate that they are worthy to be in the profession (and there are many of them but who unfortunately, are not allowed to maximise their potential whilst working in the Bancassurance culture), and the public would have access to affordable advice, whole of market advice solutions and a choice of how they pay for the service.

This will never happen, but a big problem often requires a big solution, after having made a big decision.

January 2011

282

Written evidence submitted by Concept Financial Planning

I am very much supportive of RDR – the implementation needs more consideration;

A transparent and fairer charging structure I believe RDR does go some way in achieving this – however, I would like full implementation by product providers in order to facilitate a clear transparent process. The back track on bundled and unbundled does not promote confidence – I firmly believe that the fund management world should be unbundled therefore giving greater confidence to consumers that they know what they are paying for – fund charge for the fund management group whether active or passive / wrapper charge – price for using the tax wrapper / advice charge – whether this be for initial advice and / or ongoing advice – thus making absolutely clear to the consumer how much it piece costs and they can then determine the value gained.

A better qualification framework for advisers Completely agree, however, consideration should be given to the fact that you are able to pass an exam does make you a good financial planner – there are a number of skills needed to become an excellent financial planner – and these cannot be measured by exams only. Wider consumer understanding of the role of a financial planner and the benefits that can be obtained

Greater clarity around the type of advice being offered Totally agree, it should also be remembered that should no advice be given it should be made clear, in terms of protection rules. Consumers should be able to understand between advice and no advice – the risks involved in taking either one of the options and the price. On no account should terms like restricted advice be used – one set of rules for each – therefore creating better understanding for consumers.

In summary; Unbundled charging Exams stay QCA level 4 – but uniformed Clear charging structure designed by the client and the planner Advice or No advice – clear outcomes for the consumer

I trust this helps the committee, however should you require further information of personal representation please do not hesitate to contact me.

January 2011 283

Written evidence submitted by LifeafterX Ltd

Executive Summary

1. The goal is financial inclusion: a state where everybody has access to an appropriate range of financial products and services, allowing them to effectively manage their money.

2. LifeAfterX, a totally new personal finance service, seeks to plug the gap for financial advice for the mass market. LifeAfterX has ethical behaviour at its heart and is delivered online and through telephone coaches. It may be described as an e-IFA that sources and engages with its customers via online social media. The service, which is built around life events, will help customers plan their finances and then, if they have a need, help them to buy the right products at the right time in their lives, in a cost-effective way. It also seeks to build long-term relationships with its customers.

3. We believe that we bring a new perspective to the debate because:- - The Treasury Select Committee consultations are being submitted by an industry which focuses on the mass affluent and high net worth (HNW) clients - The current regulatory system for financial advice was developed originally in the 1980s and assumes face to face advice and paper based systems. Though it has clearly been updated, there have been massive changes in the social fabric of the country within which it must exist including society’s use of the internet and social media.

4. We cannot cover all aspects so in this note we focus on comments on two of the original RDR objectives of:- - standards of professionalism that inspire consumer confidence and build trust - regulatory framework that can support delivery of all these aspirations and which does not inhibit future innovation where this benefits consumers

5. On professionalism, we would recommend:- - extending the current modular approach to training to reflect customer segment, i.e. mass market, mass affluent, high net worth - allowing ‘Grandfathering’ where it can be shown that advisers are appropriately qualified and experienced within customer segment advised, product area specialism and role - devolving responsibility for individual authorisations to professional bodies and removing this from the FSA. We suggest the model for such a system could be that operated by the British Medical Association. - creating categories of General Advisers and Specialist Advisers so the client knows who is advising them - requiring a General Adviser to hand off the client to an appropriately qualified specialist. 284

6. On innovation, face to face advice using paper based systems is expensive. Hence, we do not believe that financial inclusion for the mass market can be achieved cost effectively without advice provided online using the internet and social media. This needs to be a customer friendly process taking no more than 30 to 45 minutes even for the more complex products. A key constraint to industry use of these processes is the attitude of the FSA and Financial Ombudsman Service (FOS). We ask that the FSA and FOS provide clarification on how such online automated advice can be handled within the regulatory environment.

Professionalism

7. The RDR objective on professionalism was:- • standards of professionalism that inspire consumer confidence and build trust;

8. The existing training regime is modular in approach based on role undertaken and product area(s).

9. Two examples, using Chartered Insurance Institute (CII) qualifications, would be:- - a claims administrator for a motor insurance company would work towards the Certificate in Insurance involving 3 modules, IF1 Insurance legal and regulatory, IF2 General Insurance business and given their specialism in motor insurance, IF5, Motor insurance products - an Independent Financial Adviser (IFA) specialising in advice to elderly clients would have, under RDR rules, to hold at least the Diploma in Regulated Financial Planning plus study for 3 additional modules, CF6 Mortgage Advice, CF8 Long term care planning and ER1 Equity Release

10. LifeAfterX believes that there are two distinct customer segments with differing needs:- - mass market, those of modest means who in general need simple products sold using a simple process with a simple cost structure - mass affluent/HNW, those who have more complex financial needs require complex products which, by their very nature, lead to a complex sales process and pricing structure

11. The existing training regime is not modular by customer segment. Hence, each advisor has to learn aspects relevant to all customer segments, whether mass market, mass affluent or HNW. That means every IFA has to learn everything on tax from treatment of jobseekers allowance to inheritance tax, regardless of the customer base they will provide advice to.

12. The FSA state they would like to move to degree level training. There are two potential issues with this:- - unless modular training by customer segment is recognised, students will need to learn even more material across all market segments irrespective of the customer base they will provide advice to 285

- whilst there are excellent initiatives by universities to offer financial planning courses the FSA will need to recognise these degrees as appropriate qualifications so that graduates do not end up having to either do ‘gap fill’ CPD or having to take further exams to obtain a recognised qualification.

13. The argument against training focussing on specific products, e.g. for mass market clients, is that the IFA needs to understand the wider market to ensure that the specific product recommendation is appropriate. We believe that is true at the boundaries between customer segments. However, we believe the syllabi could be considerably simplified for mass market customers and, where necessary, a mass market customer referred on to a specialist IFA.

14. An example would be a mass market customer who inherits £250,000 being advised by a ‘mass market’ qualified IFA:- - scenario 1, customer is married with children, has large credit card debts, large mortgage, is in ‘negative equity’, has no life insurance, no ‘rainy’ day savings and no pension provision. Advice in this case would be to pay off debts, put some money aside for ‘rainy day’ savings, take out life insurance, pay off some or all of their mortgage and if any money left over, high interest savings account or pension plan - scenario 2, customer is single, has no debts, small mortgage, has life insurance, ‘rainy day’ savings, a cash ISA and employer provides a reasonable pension plan. Customer is now looking for sophisticated investment advice. IFA refers customer on to appropriate specialist.

15. The argument against ‘grandfathering’ is that it would confuse clients about the standard of advice. We agree that the client needs to be clear whether they are being advised by a general or a specialist adviser.

16. The industry already has specialist advisers. Authorisation is linked to training and specialist processes. For example, a company cannot be FSA authorised to sell equity release products unless they have an appropriately trained adviser.

17. FSA will require Statements of Professional Standing (SPS) for each adviser under RDR from recognised professional bodies. Advisers will have to join a professional body to obtain an SPS and ensure that any training they undertake including Continuing Professional Development (CPD) is reflected on the professional body’s database. If they do not, their SPS will be incorrect.

18. The FSA have also consulted and the FSA handbook will be amended to state “any approved person performing a significant influence function should take reasonable steps to satisfy themselves that each area of the business for which they are responsible has in place appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of staff.”

19. The implications of this are:- - To understand and keep up to date with the necessary knowledge on all aspects in all products is not possible given the range of products used across all market segments at all stages of people’s lives. 286

- Advisers can be trained in subject matter that they are unlikely to ever use depending on the client base they have. - There will be duplication of training and competency records and multiple assessments of advisers by Company Directors, professional bodies and the FSA.

20. There will be considerable extra regulatory overhead and cost which the end consumer will pay for. The consumer will not be delivered with better quality of advice or service.

21. Hence, on professionalism, we would recommend:- - extending the current modular approach to training to reflect customer segment, i.e. mass market, mass affluent, high net worth - allowing ‘Grandfathering’ where it can be shown that advisers are appropriately qualified and experienced within customer segment advised, product area specialism’s and role - devolving responsibility for individual authorisations to professional bodies such as the CII, Institute of Financial Planning (IFP) and removing this from the FSA. We suggest the model for such a system could be that operated by the British Medical Association. A doctor can be struck off if incompetent or unethical. The CII could operate a similar system. If struck off, you could not practise as an IFA - creating categories of General Advisers and Specialist Advisers similar to General Practitioners (GPs) and Specialists in the medical profession so the client knows who is advising them - where there is a ‘boundary’ issue, require the IFA to hand off the client to an appropriate qualified specialist colleague. This would be similar to a GP referring a patient to a specialist. If there was evidence that inappropriate advice had been given, e.g. because of commission incentives, this would be grounds for a professional body to strike off the IFA.

22. The benefits of this approach are:- - appropriate training by role, product specialism and customer segment served - clarity to the customer on the level of adviser providing regulated advice - cost effective professional monitoring - self regulation by individual IFAs - reduced regulatory costs passed on to the consumer

Innovation

23. RDR objective of innovation was:- regulatory framework that can support delivery of all these aspirations and which does not inhibit future innovation where this benefits consumers

24. Association of British Insurers research shows advice typically costs £670 in total and is therefore beyond the reach of about two-thirds of the UK adult population. Hence, we agree with the ABI belief that there is a need for a 287

cheaper advice process for those people who cannot afford, or do not require existing full advice propositions.

25. This needs to be a customer friendly process taking no more than 30 to 45 minutes even for the more complex products. This process should be capable of being “chunked” to allow the customer to be in control of when and how they obtain advice. The only way this is possible cost effectively is via the telephone or web. ABI research showed 83% of respondents rated their experience of a mock process as either very good or quite good.

26. The following table contrasts the complementary traditional and ‘new world’ models of advice. Traditional ‘new world’ model

Customer focus High Net Worth Mass Market Mass Affluent Products In general, medium to highSimple complexity Pricing Commission or high fee based Low fee

Channel andIn general face to face, though Online advice and sales Process some via telephone. via internet plus, if Information gathering andcustomer wants to talk, display can be internet based,advisers on telephone. e.g. view portfolio online. FullSimplified advice advice process Use of socialIn general, none Integrated part of media offering

27. The ABI have identified that a key constraint to industry use of simplified advice is the attitude of the FSA and Financial Ombudsman Service (FOS). Would the FSA fine a company because it was perceived to break the full advice rules? How would any customer complaints be judged by FOS? Would they be judged based on any limitations outlined to the customer at the start of the process or against information disclosed under current full advice face to face disclosure rules? Hence, we recommend that the FSA and FOS provide clarification on how such online automated advice can be handled within the regulatory environment.

January 2011

288

Letter from Hector Sants, Chairman of the FSA, to the Chairman of the Treasury Committee

Retail Distribution Review

We welcome the Treasury Committee's continuing interest in the FSA’s Retail Distribution Review (RDR). The RDR is an important aspect of our programme to address fundamental flaws in the market for investment products and services in the UK and we will of course submit formal written evidence to your inquiry in January. In the meantime, I hope it will be helpful if I set out why we remain committed to modernising the industry through the RDR to address a market that was not working, and does not work, well for consumers, advisers or the firms which provide these products and services.

Problems in the market

In recent years, mis-selling scandals and a lack of consumer trust have severely damaged the reputation of the retail investment market, with nearly £15bn having been paid in compensation for mis-sold personal pensions and endowment policies. However, this is not just a historic issue. Our supervision has shown that problems continue to exist in the market and there is widespread agreement that fundamental changes are needed in the market to address these problems. Specific examples of unsuitable sales and an illustration of the associated annual cost of consumer detriment based on detailed reviews we have carried out are as follows:

Mis-selling review % of unsuitable sales Illustration of annual consumer detriment Pension switching 16% £43m (2008) Unit trust vs. equity 12–20% £70m ISA (2005) Investment bond vs. 12–20% £92m equity ISA (2005) Personal pensions Analysis indicated a link Up to £18m (2005) between commission payments and market share

These figures, which amount to an annual consumer detriment of £223m, underestimate the scale of the problem as they are based on just four incidences of mis- selling. Ongoing supervisory and enforcement action means we are unable to cite more recent examples; however, we estimate that the average annual detriment arising from the sale of unsuitable products to be nearer the range of £0.4bn to £0.6bn. 289

At present, around 70% of consumers do not seek advice from an investment adviser.1 Trust in advisers is higher for those that use an adviser than those that do not but it is worth noting that 40% of those who have recently used an adviser say that they do not trust financial advice. Our consumer research has found trust to be a more important factor than price for selecting an adviser2 and that confidence can be established in advisers through the demonstration of knowledge and qualifications3. Achieving greater trust in the investment advice sector could lead to greater engagement in investment advice, and so to more consumers seeking advice.

RDR proposals

The high incidence of mis-selling in this sector arises from fundamental flaws in the market. We launched the RDR in June 2006 to work with the market to identify and address these flaws and have developed our proposals in conjunction with industry, consumer groups, trade associations and professional bodies following the FSA’s most extensive and far-reaching consultation process to date.

The RDR is designed to provide a clean and sustainable market for the future. It will ensure customers get good quality advice, products and services suited to their needs from advisers displaying higher standards of professionalism and expertise. The regime needs to change and this change will be supported by our intensive supervisory approach including a greater focus on individuals. Our policy proposals aim to do this by:

• increasing the professional standards of advisers;

• improving the clarity with which firms describe their services to customers so that they know whether they are getting advice which is truly independent (covering the full range of possible investments) or is restricted in some way (for example advising on a particular range of products, or on products from one or a limited range of product providers);

• addressing the potential for commission bias to distort consumer outcomes; and

• ensuring personal investment firms have adequate capital resources for complaint redress.

Our rules on adviser charging, service description and capital have already been made by our Board. We believe all these reforms are necessary in order to equip retail investment advisers to deal with the challenges they now face and to remove

1 Baseline Survey of Financial Capability, FSA (2006): ‘In the last 5 years, have you received any professional advice about planning your personal finances? By that I mean things like planning for retirement, tax planning, or investing money, but please do not include advice related to running a business’ 2 February 2008, BMRB Social Research, Services and Costs Disclosure, FSA Consumer Research Paper 65a (www.fsa.gov.uk/pubs/consumer‐research/crpr65a.pdf) 3 November 2008, Strictly Financial, Assessing investment products, FSA Consumer Research Paper 73 www.fsa.gov.uk/pubs/consumer‐research/crpr73.pdf 290

distortions in the way the market has operated in the past. This will provide better protection for consumers and better outcomes for consumers.

Professionalism

We are, of course, aware of the concern that has been voiced in recent weeks by individual advisers and some of your parliamentary colleagues about the impact the RDR, and in particular our professionalism proposals, may have on this sector. We do not agree that the RDR will threaten the availability of good quality advice.

To achieve our aim of a more professional advice market, under our proposals all advisers will be required to adhere to common professional standards, including reformed qualifications and effective continuing professional development. If consumers are being advised on how to invest their life savings or choosing the right pension to support them when they retire, they expect an adviser to be professional and for that professionalism to be closer to the standards of, for example, a lawyer or accountant. At present this is not the case.

The new measures come into effect at the end of 2012, by which time existing individual advisers will have had four years to prepare, including meeting the qualification requirements. We were clear in November 2008 about our intention to raise professional standards, including modernisation of qualifications and we said that those who are on course to complete, or already hold an appropriate qualification4 could continue to give retail investment advice.

The new requirements will apply to all those giving investment advice to retail customers, regardless of the type of firm they work for (e.g. banks, insurers, independent financial advisers, stockbrokers or wealth managers). They will not apply to those who advise solely on mortgages or general insurance. I should point out here that due to the enhanced consumer protections provided by stakeholder products, the RDR will not apply to those giving advice under the Basic Advice regime.

Our experience is that advisers are now, on the whole, getting on with attaining qualifications, where they need to. According to research5 carried out in March 2010, 49% of all individual investment advisers were already appropriately qualified. A further 40% expected to have completed the qualifications by the end of 2012 and only 4% were steadfast in their view that they will not seek to attain a new qualification. Of the remainder, 1% expected to complete after end-2012 and 6% fell into the ‘not known’ category. Connected to this, one of the main awarding bodies, the Chartered Insurance Institute (CII) indicate they have seen a 65% increase in candidates sitting their qualifications in 2010 compared to 2009.

4 Our current proposals are that advisers holding certain existing appropriate qualifications may need to carry out activity to fill knowledge gaps through structured continuing professional development (a form of grandfathering). 5 Research published in March 2010 by NMG, a financial services consulting and research firm. 291

The qualification standards have been developed by the industry itself6 following extensive consultation by the FSA and the Financial Services Skills Council (FSSC). The response to our June 2007 interim report and the FSSC’s own 2009 consultation on the qualification standards (which cover content and level) showed strong support for qualifications to include practical application of knowledge: QCF level 47, which is the vocational equivalent to the first year of an academic degree, is the lowest level that achieves this. The reformed qualifications now include investment risk and ethics as well as practical application of knowledge, as part of the syllabus – we believe these changes are fundamental to equip the modern adviser to give good quality advice.

A minority of individual advisers have expressed concern about the time it may take them to attain the qualification they need. The FSSC’s consultation and working groups established that the new syllabus would map to a diploma sized qualification under the QCF. The Office of Qualifications and Exams Regulations (OfQual) guidelines suggest the average learner takes 370 hours to complete a diploma: this includes directed study, homework, assessment and preparation time. This is the expected time that a new entrant would take: we would expect those advisers with considerable experience to find that the time they need to study will be significantly lower than that. The main qualification providers for this sector have indicated to us that it is taking between 6-24 months for most advisers to complete their qualifications.

The majority of respondents to our consultation were opposed to the use of grandfathering, meaning existing practitioners should not be exempt from meeting the new qualification standards8. Those respondents (who included consumer and IFA representatives) told us that they felt that this would not achieve a level playing field for investment advisers and would not provide a consistent message for consumers about professionalism of the sector. Our experience in allowing grandfathering rights for mortgage brokers has been that it has seen a continuation of mis-selling, resulting in nearly 100 brokers being disqualified to date for incompetent and unethical practices. Whilst complaints can indicate potential issues, due to the long-term nature of investments the absence of complaints does not necessarily mean consumers have received suitable advice. This puts advisers in a difficult position because their customers very often do not understand the position they are in until many years later. Therefore, without applying the new qualifications to the whole industry, problems of mis-selling may continue under the new regime, further undermining confidence in the industry and at a cost to consumers.

We understand that many advisers find the prospect of taking further exams daunting and are sympathetic to this. In June 2009 we responded to consultation feedback and feedback from some individual advisers that we spoke to, and

6 The FSSC established industry working groups to draft the qualification standards 7 The Qualifications and Credit Framework: the UK implementation of the European Qualification Framework 8 Our definition differs to that used in other member states where the regulator sets the regulatory examinations and grandfathering is simply recognition of certain other qualifications as opposed to allowing unqualified individuals to operate. 292

agreed to allow for a move away from written examinations to allowing other types of assessment to be used in awarding qualifications. We have, and continue to, work with the qualification providers, IFA firms, and their representatives to make these types of assessments available. Since then, we have seen the launch of three qualifications that do not rely on written examinations to determine an award, spanning qualifications for the various types of adviser that are within the scope of the RDR. Additional qualifications using assessment methods other than written exams continue to be developed. There are also qualifications that do involve written examinations but are very much based on case studies and are highly relevant to the role of an adviser. For example, one qualification involves a candidate making recommendations based on a specimen fact find that is provided to the candidate two weeks prior to the examination itself.

The link between higher professional standards and better consumer outcomes is also borne out by several pieces of research in this area. Recent thematic reviews of industry performance that we have carried out show a clear link between advisers’ professional qualifications and the quality of their service. We will expand on the research in this area further in our written submission; however, two examples of this research are as follows:

• Our data from early 20109 on platforms shows the advice of advisers meeting current qualification standards was deemed to be ‘suitable’ in 11% of cases and 89% of advice was either ‘unclear’ or ‘unsuitable’. The advice of advisers with a similar qualification to the new standard was suitable in 43% of cases, ‘unclear’ in 32% and unsuitable in the remaining 25% of cases. Cases from the few advisers who had attained qualification in excess of the new standards indicated that 71% were classed as ‘suitable’ advice and were ‘unclear’ in 29% of cases.

• A review of the quality of financial planning advice by an expert panel from Australia (ASIC 2003 study)10 also showed that plans completed by advisers with a ‘certified’ / qualified status (around QCF Level 6) scored better than unqualified advisers.

Adviser charging Adviser charging is another key element of the RDR. At present, many consumers using the services of a financial adviser believe they are getting free advice. In reality, they do pay, as charges for advice have simply been added to the cost of the product and then the product provider pays the adviser commission. This creates a potential conflict of interest. For example, research referenced in our March 2010 Policy Statement found evidence of product bias in the equity ISA market, where in 20% of mystery shops with commission-based IFAs and in 12% of mystery shops with a tied-adviser an ISA was not recommended when suitable – instead clients were recommended unit trusts or unit linked bonds that could

9 This information is based on 12 firms and 46 advisers and 113 cases 10 http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Advice_Report.pdf/$file/Advice_Report.pdf 293

potentially pay the adviser a higher commission11. Furthermore, our consumer research found that only around half of respondents understood how the value of their product would be affected by commission. This can be damaging to consumers and undermines trust in the investment industry. Our new RDR rules will prohibit the receipt of commission in relation to advised sales of retail investment products. After that date adviser firms will have to set their own charges for advised sales. These charges should reflect the services being provided to the client, not the particular product provider or the product being recommended. We believe that this will remove the risk that provider influence could lead to product bias (or the perception of it) thereby contributing to improvements in consumer confidence, the fair treatment of customers and the sustainability of the UK retail investment market. The new rules require advisers to discuss and agree with their customers how they will pay for advice, and there are a number of different charging structures that might be adopted. Payment could be a fixed charge, it could be based on an hourly rate, reflecting the time taken by the adviser to perform the service, it could be based on a % of the amount invested or through some combination of these methods. Some customers with a lump sum to invest may wish to pay for advice upfront. Others may wish to invest a regular amount each month and so be unable or unwilling to pay for advice at the outset. In such cases there are a number of different charging structures that can be adopted, for example, spreading the payment over a period of time. This might be by means of a regular payment to the adviser, or if the product provider agrees, customers would also be able to ask for their adviser’s charges to be paid out of their investments. The difference between this and the present system of payment by commission is that it would be for the customer and adviser to agree how much should be paid. The product provider’s role is simply to collect and pay the agreed amount.

Capital resources

Holding capital resources against all Professional Indemnity Insurance (PII) exclusions, regardless of whether they relate to regulated business activities or other FSA-instigated events, ensures firms are in a position to redress complaints against which they are not insured. We are simplifying how firms will calculate this requirement and making it consistent for all firms. We are extending the expenditure-based requirement to all firms based on three months of relevant annual expenditure and increasing the minimum capital resources floor to £20,000. We have also set out more specific requirements as to the level of additional capital resources needed where firms have any type of exclusion in their PII policy.

RDR Costs

The detailed cost benefit analysis we have undertaken on all of the RDR changes has estimated the implementation costs, based on industry feedback, to be in the region of £1.4bn to £1.7bn over a 5-year period. This covers professionalism,

11 CRA (2005) Study of Intermediary Remuneration, a study for the ABI 294

clarity of services, commission bias and capital requirements for the whole of the retail financial sector, including intermediaries (a broader population which includes IFAs), banks and providers. The total initial costs to both intermediaries and providers are estimated at £600 to £750 million. The proportion of these costs applicable to intermediaries is 18%, banks 30%, and insurance companies a further 37% with the remaining 15% due to other types of advisory firm such as stockbrokers.

Clearly any additional compliance cost for firms, and ultimately consumers, is a matter of concern to the FSA. However, the cost benefit analysis we have carried out shows the annual consumer benefit of RDR to outweigh the annual implementation costs. While we anticipate the ongoing annual costs of the RDR to be between £178m to £221m, this needs to seen in the context of the annual consumer detriment from the sale of unsuitable products, which we estimate to be in the range of £0.4bn to £0.6bn. We have been transparent about the implementation costs, but industry also has to be transparent about the cost to consumers of mis-selling.

In terms of market exits, Oxera12 estimated that, if new firms do not enter or existing firms do not expand, overall turnover would be reduced by 9%, the number of advisers by 11%, and the number of advised clients by 11% as a result of market exit.

This is supported by research examining the implication for individual advisers13 In terms of individuals, research indicates that 5% of advisers say that they were already due to retire by 2013, 3% of advisers will retire earlier than planned, a further 3% will leave the industry completely and 2% will take another role within the industry (the remainder gave no response). We conclude that, in economic welfare terms, advisers leaving the market would not create a net cost because the supply of advice in the longer term will not be affected.

Any dilution of the proposals will result in an increase in the cost to consumers through continued mis-selling.

Despite the vocal concerns of some in the IFA community, we believe the RDR is absolutely fundamental to address the root causes of numerous problems we have observed in this sector and to improve consumer outcomes. We will expand further on the points made in this letter in our written submission.

Hector Sants

13 December 2011

12 http://www.fsa.gov.uk/pubs/policy/oxera_rdr10.pdf 13 Research published in March 2010 by NMG, a financial services consulting and research firm.

295

Written evidence submitted by Barclays

Retail Distribution Review

Barclays welcomes the opportunity to provide written evidence to the Treasury Committee on the Retail Distribution Review.

The review will impact several areas of Barclays including Barclays Stockbrokers, which is the largest execution-only brokerage in the UK.

Barclays PLC and its subsidiaries (‘Barclays’) are a UK-based financial services group engaged primarily in banking, credit cards, investment banking, investment management and retail brokerage. In terms of assets, Barclays is one of the largest financial services groups in the UK. Barclays has been involved in banking for over 300 years and operates in over 60 countries.

Executive summary

1. We fully support the objective of improved transparency and customer focus underlying the RDR. We also support a higher standard of professional qualification for all retail financial advisers as a measure that will help foster greater investor confidence and trust in the provision of financial advice. 2. Yet in order to achieve these objectives, we believe that more consideration needs to be given to several of the proposals, both in substance and on cost/benefit grounds as we believe that the cumulative effect of the proposals may actually increase the cost of advice putting it beyond the reach of many and could potentially exacerbate the savings and protection shortfall in the UK.

3. Specifically we are concerned that the proposals:

a. Are potentially incompatible with forthcoming European legislation including the review of the Markets in Financial Instruments Directive (MIFID) and the Packaged Retail Products Directive (PRIPS); b. Do not take adequate account of the unique needs of high net worth (HNW) individuals, who represent a large portion of our customer base; c. Will cause many in the industry to struggle with the labelling of advisory services into ‘independent’ or ‘restricted’, without corresponding benefit in terms of improve consumer understanding; d. May ultimately increase the cost of retail investment advice with the potential impact of disenfranchising a large number of retail customers – a segment that has historically relied on the provision of financial advice to encourage them to resolve their long term savings and retirement needs.

4. The structural change required to implement the RDR provisions will be extensive as firms will require significant and costly process and system changes. For firms also active in Europe, this will require bespoke arrangements for their UK business in stark contrast to the scale and consistency benefits expected through European harmonisation, and potentially leading to a reduction in product supply to UK customers.

296

Interaction with EU law

5. Despite the laudable objectives behind the RDR, there is an existing policy/regulatory framework which, if properly enforced, would go a very long way towards resolving the problems identified by the FSA in its justification for the RDR.

6. In addition, RDR implementation cannot be considered to be operating in a vacuum: the quality of the public policy outcomes it delivers is also a function of how the RDR sits with the evolving regulatory regime in Europe, which is not consistent with the RDR, even though UK firms will have to comply with these EU rules in addition to the RDR.

7. For example, under the existing MiFID regime the rules on suitability, conflicts of interest, and inducements are designed to deter firms from acting in a way that goes counter to their clients’ interests in the provision of advice, whether deliberately or inadvertently.

8. In addition, planned EU initiatives could potentially restrict the availability of execution-only (execution of orders on behalf of clients without personal recommendations) yet the RDR is likely to increase the need for this service as consumers seek cost-effective investments. This shows the need for more interaction with current and forthcoming EU legislation.

9. The Packaged Retail Investment Products (PRIPS) initiative also has similar policy objectives to the RDR but we see no evidence that this has been taken into account in the proposals.

10. The RDR should also be looked at with regard to the FSA/HMT policy on gold plating.

Applicability of RDR rules to High Net Worth (HNW) individuals

11. We have not seen convincing evidence of the FSA’s claim that ‘the landscape of retail investment advice is broken’ applying to our HNW individuals, despite the FSA extending these rules to cover private wealth management; nor do we believe some of the measures being introduced via the RDR are appropriate for the specificities of the HNW market which is highly competitive, and involves internationally mobile clients who are often more financially sophisticated than retail clients.

12. The research commissioned by the FSA in 20091 explicitly recognised the difference between the HNW and retail segments, which underscores the potential lack of ‘read-across’ of rules designed for the mass market to private banking market: “The developmental stage and the in-depth interviews with both mass market and HNW individuals consistently showed that the same label means different things to different people”.

Labelling of advisory services

1 FSA Consumer Research 78 “Describing advice services and adviser charging” page 56 297

13. Considerable weight has been placed on the labelling of advice as ‘independent’ or ‘restricted’, although we note that in 2009, the FSA 2indicated that this distinction doesn’t have a meaningful impact on clients and that the ‘restricted’ label may deter clients from seeking advice and “generated confusion” among a sample of individuals.

14. We feel there is a risk that few firms will be providing ‘independent’ advice, because of the onerous obligations of satisfying the whole of market criteria.

15. It should also be noted that the RDR represents the third major policy shift in this space in the past two decades. Polarisation was introduced in 1987 and was deemed a failure. Thus, it was dismantled with the introduction of depolarisation in 2004, seemingly to provide investors with greater choice, and to give firms more flexibility in developing their business models. After only two years of depolarisation, the FSA began its consultations on the RDR, which is likely to lead to re-polarisation to some extent, as multi-tied firms and many firms which operate panels based on an open architecture approach are not likely to meet the criteria on independence, or will not hold themselves to be ‘independent’ under the label, owing to the seeming impossibility of proving independence.

16. We do not think it is desirable to eliminate the opportunity for product specialists to be able to call themselves independent. For example, an adviser specialising in mutual fund distribution, which offers clients advice on the basis of a comprehensive, full and fair review of the mutual fund space, or which even advises clients on the basis of a full screening of the entire universe of the tens of thousands of mutual funds in the world, cannot be said to offer ‘independent’ advice, because they do not consider other product types beyond mutual funds, which are potentially suitable for retail clients.

17. Therefore, very few advisers are likely to opt to provide ‘independent’ advice and the labelling exercise potentially becomes meaningless.

Adviser charging

18. We expect that there will be an unmet demand for advice post-RDR (due to both a supply and a demand effect), which conflicts with the wider policy objective of plugging the savings gap and ensuring retail investors can access the investment services they require, especially in a world moving from defined benefit to defined contribution pension systems.

19. The increasing regulatory burdens on advisers and the greater costs the RDR will impose on firms means that some advisory services will disappear as firms position themselves strategically to remain commercially viable in a post-RDR world.

2 FSA Consumer Research 78 “Describing advice services and adviser charging” page 49 298

20. We do not think the FSA have done sufficient research around the potential availability of advice post-RDR given the inevitability that certain advisory services will disappear.

Conclusion

21. Barclays is prepared for the new framework coming into effect at the end of 2012 and to this end has invested significantly in training and compliance issues around implementation.

22. Whilst we do not disagree with the principles behind the RDR – improved transparency, higher professional standards and an overall increase of trust in the financial advice industry – we do have areas of concern particularly over the link between the RDR and ongoing EU regulatory developments.

23. We remain to be convinced that a change in the labelling of financial services will lead to increased consumer uptake or is warranted by the potential cost in terms of consumer access to advice.

24. We do not believe that many of the measures being introduced via the RDR are appropriate for the specific nature of the HNW segment.

25. We strongly support the higher professionalism standards, but recognise that this will potentially lower the supply of advice available at a time when the demand is increasing, therefore raising the cost.

26. Consequently we are concerned that the proposals will have the unintended consequence of making large numbers of consumers forgo investment advice as its provision gets potentially more costly and confusing amid a reduction in the supply of investment advice.

27. This would damage the ultimate political goal of improving the market and addressing the savings and investment gap amongst UK customers.

January 2011

299

Written evidence submitted by Aviva

1 Executive Summary

1.1 Aviva is the UK’s largest Insurer, with over 19 UK million customers relying on us for long- term savings and insurance protection.

1.2 Aviva has a wide range of distribution channels, with 80% of all Aviva’s new UK Life business1 arising through advisers – including IFAs and corporate advisers.

1.3 Aviva has long been a supporter of the RDR, and in addition to the required changes, we have spent a great deal of time; effort and resource developing support programmes to aid the intermediary market in the changes they face.

1.4 We have a robust programme of consumer and adviser research, to ensure we take account of relevant opinion when developing our response to the changes. This includes quarterly studies to track the progress and issues around RDR and a comprehensive annual survey across all our markets to gauge consumer attitudes to savings.

1.5 We support the principle of fair and transparent charging, the drive to increased professionalism. However, we support a more robust process of work based assessment as an alternative to exams for existing advisers, and are concerned the RDR will push financial advice further up-market.

1.6 There is a risk that large volumes of consumers may disengage with financial services or make financial decisions (without advice) that do not ultimately meet their needs. We therefore urge that the original objective of consumer access to products and services is reconsidered and prioritised. We believe that increased clarity from the FSA with regard to Simplified Advice would go some way towards giving firms certainty on what a commercially viable process may look like,

1.7 Finally, we are concerned at the two year gap before the reviewing the RDR, given that the market is undergoing such profound structural changes. It is essential that the Consumer Protection and Markets Authority (CPMA) which will replace the FSA in 2012 supports and actively engages in this process. There is concern about whether the CPMA will also be measured on its success in implementing the RDR. This is necessary to ensure that accountability is maintained in the new regulatory body, and that the RDR will not be subject to significant changes once the CPMA is in charge.

2. A transparent and fairer charging system

2.1 We believe adviser charging will put customers back in control of the relationship between adviser and customer. It is right customers should understand what they are paying, and for what. They should also have the opportunity to discuss with their adviser how much they pay for the advice they receive from their adviser.

1 As at Q3 2010. 300

2.2 Through our research we know customers are unaware about the link between commission and payment for the advice they receive: • 36% of IFA customers think advice is free or do not know how their adviser is paid. • This issue is even more pronounced in banks and building societies: when surveyed, 82% of bank and building society customers think advice is free2.

2.3 Aviva’s consumer research identifies the challenges paying for advice will present in the post-RDR world. Whilst our research shows clients trust their advisers and value their relationship, advisers are concerned about how many of their clients will be prepared to explicitly pay for their services.

2.4 In addition to some customers being unclear whether they pay for advice at the moment: • 31% of customers wish to pay less than £75 per hour for advice; • Only 1% is prepared to pay over £150 per hour - the level advisers believe they will have to pay3. • Advisers estimate only 20% of their current client base would be prepared to pay adviser charges at the level they intended to charge4.

2.5 Aviva believes more transparent charging is better for consumers in the long run, and resistance to paying for advice will lessen over time, and the range of options to ‘pay’ for advice will help mitigate the impacts.

2.6 To mitigate the issue, Aviva is assisting advisers move to the new charging system through activity such as our Business Transition programme. This helps advisers move from taking upfront initial commission, develop their service proposition and help them have the charging conversation with their clients. We are further developing this proposition to involve remote support via the web, rather than the intensive face to face course we currently offer.

3. A better qualification framework for advisers

3.1 Aviva supports the drive to increased professionalism. We believe this is crucial in delivering better outcomes for consumers and improving trust and confidence in financial services.

3.2 Our own research has shown a spectrum of opinion on the RDR over the past three years, with a steady growth in those accepting and adapting to the RDR. Wave nine, conducted in January 2010, showed 62% of advisers were already working towards additional qualifications, and the CII estimates over 50% of IFAs now have the required qualifications, and approximately another 40% are en route to be qualified by the end of 2012..

2 Aviva research September 2009

3 Aviva research carried out September 2009;

4 Aviva adviser survey, October 2009 301

3.3 We support the proposal to introduce a time limit to reach the QCF4 level qualification standard, monitoring of behaviour and continuing professional development (CPD) but we have concerns about the proposed process.

3.4 We are concerned the proposal to appoint a number of approved professional bodies to assess standards could dilute their quality, compromise standard consistency and introduce an element of bias across the profession; for example where a network for advisers or training organisations become an accrediting body. We suggest a more robust process of work based assessment as an alternative to written exams for existing advisers.

3.5 Aviva does not agree with the proposal, from some industry voices, for “grandfathering” into the new regime. Advisers’ length of tenure does not necessarily correlate with the delivery of quality advice and competence. We suggest a more robust process of work based assessment as an alternative to exams for existing advisers.

3.6 As with other industries, professionalism isn’t just about exams, it’s about delivering the best outcome for each customer dependent on their unique and often complex circumstances. This needs experience and in-depth knowledge of what is available in the marketplace and matching of a wide range of financial products (whether simple or complex) with each customer.

3.7 The requirement for CPD in the RDR proposals suggests advisers can simply undertake the required hours of personal development each year. We suggest that, without a qualitative element to CPD, these hours may not achieve the required outcome to maintain technical knowledge once qualified. We would welcome further control processes to ensure CPD adds quality and relevance to the advisory toolkit. In addition, other CPD categories could be added to those proposed which add value, improve adviser credibility and gain consumer trust; e.g. pro bono work, mentoring etc.

3.8 We have concerns about the mandating of qualifications to a profession where the average age profile is high and experience may be lost. We believe this will lead to industry exits, leaving consumers with less choice and reduced availability of advice. A compromise position could be to allow current QCF Level 3 advisers to remain in the industry to provide only a Simplified Advice process for customers.

3.9 Aviva has developed a range of support for advisers to help them with RDR changes. The Aviva Financial Adviser Academy, launched in 2008, offers learning support to reach the RDR qualification benchmark - 7,600 advisers are now members of the Academy and exam pass rates are above the industry norm.

3.10 In 2009 we also launched the Aviva Future Adviser Programme to attract high calibre recruits to the industry and provide a pool of talent from students at UK universities with specialist business courses. We would encourage further development and co-ordination of these types of programmes.

302

4. Greater clarity around the type of advice being offered

4.1 The new market structure will divide into distinct areas – ‘independent’, ‘restricted’ and ‘simplified’ (all attracting adviser charging and increased qualification levels). Remaining outside of the scope of the RDR are ‘basic advice’ and ‘non-advised’ sales. As the new structure applies across all financial services firms who provide advice, banks and building societies will have to describe their service as ‘restricted’ in future. Aviva broadly supports the division of the market into its new structure; however we have a number of concerns.

4.2 The first relates to the title of ‘restricted’ for those advisers who are not independent. The FSA itself admits that the word ‘restricted’ was not popular, and in our own research, customers found the word confusing and open to misinterpretation.

4.3 Second is the requirement for ‘oral disclosure’ of the adviser’s status – this does not work well in non-face to face environments, especially if advice delivered via the internet is developed.

4.4 Thirdly, Aviva disagrees with the retention of the ‘basic advice’ regime. Sales through this very restrictive sales process are so low that the ABI no longer reports them. If a successful Simplified Advice regime can be developed, there is no need to retain ‘basic advice’, as both types of advice aim to answer similar customer needs. Instead of preserving a regime that was intended to be scrapped, we would like the FSA to devote its resources to more productive engagement with the industry about Simplified Advice.

5 Consumer access and simplified advice

5.1 Aviva understands wider access to financial advice was an original RDR objective and it is essential the FSA remembers who the ultimate customer is and ensures UK citizens are the primary beneficiary from the RDR.

5.2 Aviva welcomes the intention that adviser charging will make consumer costs more transparent. However, measures to improve transparency have the potential to affect the numbers of people unable or unwilling to seek advice. It is therefore essential that the FSA understands the risk that consumers who are not high earners will be disenfranchised by advisers due to the high cost to serve, low reward and a consumer inability or unwillingness to pay. Added to this FSA’s own research (conducted by Deloitte) demonstrates that fee-based advisers are only able to serve a third of the customers served currently by a commissioned-based adviser. .

5.3 The FSA’s solution for the majority of people unwilling or unable to pay is Simplified Advice which the industry has been tasked to develop. There has however, been little guidance on an acceptable solution and the relevance of the QCF4 qualification to a simplified, prescriptive process.

5.4 We believe it is not appropriate for the industry to develop its own solutions in a regulatory vaccum. It is therefore vital the FSA accepts that it needs to provide some clear regulatory guidelines because the market is finding Simplified Advice development a 303

challenge and some developments have been abandoned due to high R&D costs. We also believe there is a need for the Ombudsman to sign up to Simplified Advice rules to avoid "after the event" reinterpretations. These guidelines should provide the legal clarity to avoid retrospective thematic judgements under this regime in the future. There is a risk that if a solution cannot be found, large volumes of consumers may disengage with financial services or make financial decisions that do not ultimately meet their needs.

5.5 Our research indicates many consumers still require confirmation that products suggested by simplified processes are the most suitable for them. We are therefore investigating development of both ‘simple advised’ and ‘non-advised’ services, through a range of channels.

5.6 The major barriers are whether the adviser or the advice needs to be qualified to the new standard, and making the services economic enough that customers are prepared to pay for them. We are investigating web-enabled solutions with decision trees and low costs and simply explained products using easy to understand instructions on-screen and over the phone.

6 Conclusions

6.1 The RDR tackles systemic failings in the financial advice profession. Aviva fundamentally believes these need to be solved - increasing transparency of charging, being clearer in explaining how we all serve customers and demonstrating increased professionalism. Although the detail of each of these areas is not always ideal, we believe the process should not be derailed at this stage.

6.2 However, we would call for the objective of consumer access to be reprioritised. This should be a central aim of the RDR – providing better advice to those who already receive it is not good enough on its own.

6.3 We urge the Treasury Select Committee to push the FSA to engage actively in this issue, producing more detailed and workable guidance for Simplified Advice. We want to see a much stronger lead from the FSA with FOS signed up to the principles to define ‘good’ advice rather than ‘best’ advice, providing legal clarity about the safer limits in which to develop Simplified Advice. We hope this will boost firms’ appetite to develop a commercially viable process enabling ‘more consumers to have their needs and wants met’.

6.4 Finally, we believe the FSA and its replacement the CPMA should be proactively engaging with the industry throughout the transition process, and should be monitored and assessed closely post implementation.

January 2011 304 Written evidence submitted by Nikhil Chauhan

I am writing with regards to the implementation of RDR.

I believe the requirement for an increased level of qualification can only be seen as positive move for the industry; it is my personal belief that the qualification should be uniform amongst all advisors and no concessions should be made for those working within the High Street Retail Banking Industry (especially as their client base is substantially larger than those from private practices and therefore their advice will have a greater impact the wider society, than those from private practices).

That said, I believe there to be many fundamental flaws with regards to the change in re-numeration – without doubt I fear that this will affect a great number of consumers and the affordability of key financial products which are already under supplied.

It is already no secret that there is an increasing Protection, Savings and Retirement gap for many individuals and therefore it is my belief that the area of financial advice should be more openly available to the retail client rather the current proposal - which I believe would price those most in need out of the market.

If it is felt that remuneration patterns should be made more clear or should be more uniform then I believe it should be done via another method; for example:-

All providers of investment must pay the same commission to the advisor when investing for the same term and amount (for example a client who wishes to invest £20,000 for 10 years will result in a payment of £x commission irrespective of which provider has invested the funds for the client).

This would mean the follow:-

1. The client can be certain they have not just been offered the product which offers the best commission payment to the advisor. 2. Uniform payment method amongst advisors within the whole industry will result in increased competition amongst product providers – creating an incentive for providers to monitor costs and increase service levels. 3. The above proposal will not price clients out the market as the current RDR proposal may well do. 4. Standardised payments makes it easier for the client to understand how they are paying for the service their advisor is providing.

Above, is just one of many possible options available to improve and standardise the method of payments and charges within the industry.

I strongly believe that the current RDR structure will create a long term Macro-Economic disaster for this government’s fiscal policy and will exponentially worsen the current pension crisis.

I believe what should be of primary consideration is the potential cost of rectifying any possible failure of RDR.

January 2011 305

Written evidence submitted by Owen Hoye, OPH Financial Consultants

FSA Retail Distribution Review

I refer to the published letter from Hector Sants dated 13 December 2010 on the above.

Perhaps the first thing I would ask is, IF the FSA are so confident that RDR will address what it refers to as 'fundamental flaws in the market for investment products and services' why at its March 2010 Board meeting did it consider abandonment on the grounds that it would not meet its aim? Public record has it that a decision to continue was taken on the grounds that "to do otherwise would lead to the FSA losing face!” Don't they realise that the Public has already lost all faith in them?

Problems in the Market

I note with interest that 'Our supervision has shown problems continue to exist' and he then goes on to show a table of concerns/ BUT, from where does he obtain his data - the FSA themselves? And what are the sources of the complaints/concerns? The 'Retail Distribution Market' straddles a large area - initially composed of Independent and tied advisers, changes in recent years have introduced blurred border with whole of market and multi-tied advisers emerging. In a nutshell, 'independent' and 'whole of market' advisers provide help and advice service to their clients recommending the products that best suits the identified client needs.

'Multi-tied' and 'tied' advisers sell their 'host' provider's products to their customers based on 'best fit' principles. Such advisers have a contract with the provider which usually involves minimum sales volumes linked to increased commission rates. For example, almost all of the problems indicated in the table for "Investment Bonds vs equity ISAs" will revolve around tied sales where commission rates of 8% plus of the amount invested are common. Compare that with the Independent/Whole of Market adviser who invariably get paid at the same rate as for Unit Trusts (typically 3% of investment plus ¼%-½% per annum fund based servicing renewal).

I would also draw your attention to the fact that all equity ISAs have a Unit or Investment Trust at the centre and that Commission therefore is payable at the same rate whether an ISA wrapper is used or not! I note the comment on the link with pension sales and market share—again something I would suggest is more likely to be linked with who is currently selling pensions? Unfortunately, due to a combination of poor publicity, lack of individual commitment, etc., most current pension sales are via Group Stakeholders Schemes almost invariably through our friends the 'high street banks' tied/multi tied 'advisers'.

Two final points on this section

• Under the original legislation, a scale of the maximum rate of commission that was legally payable was established (LAUTRO Scale) that was legally payable was established (LAUTRO Scale) that attempted to address commission bias. Unfortunately, OFT objected—urged on by the banks?—and the scale was scrapped as it was felt it was uncompetitive and would lead to everyone paying 306

the high scale set. Still used as a base line today, the maximum scale as adopted in 1987 is significantly below current levels even for the ‘independent marker’. • I am surprised that the 70% of consumers do not seek advice figure—I would have said more. BUT why not? In my experience it is because of both a lack of education, and fear that advisers charge as solicitors and accountants at exorbitant rates. Those that use my services do so because of commission, appreciating that at the end of the day, they pay for my services as commission forms part of the provider charges. NB Providers do NOT make lower charges where advice is not sought or given - Has Mr Sants taken steps to ensure that post RDR as it stands, providers will reduce their charges to reflect savings due to no commission, or will they be allowed to increase their margins as with other pseudo regulated industries such as gas and electricity? RDR will almost certainly see fees rise if only to cover the cost of greater regulation and increased educational costs.

Please remember, RDR as currently defined, will result in less consumer choice with more being forced to seek the help of their bank or building society - the source of over 90% of all consumer complaints per the FSA's own figures.

RDR Proposals

Let's start with the 'fairy tales' of industry support and consultation. I believe it was your own Committee that recently questioned trade bodies such as AIFA as to where they claimed their support from. Various MPs present all identified the claims of AI FA, CII/PFS etc. did not mirror their postbag from advisers and public alike. Consultation appears to have gone un-noticed as it is obvious that the feedback from advisers such as myself has gone largely ignored. The FSA has even ignored some of the information gleaned by its own commissioned researchers when it comes to post RDR adviser numbers!

• No-one objects to increased professional standards. But who is to impose them? Certainly if you translate new standards to TCF Directive on providers, the FSA is woefully inadequate as an enforcement agency! • Clarity - please take a look at the present situation at least for 'independent/whole of life' advisers. We have to provide our clients at the first point of contact with current up to date terms of business which clearly shows our services etc., an initial disclosure document which simply and concisely details the level of 'advice' we provide, and a business card. ALL transactions have to be documented by a provider generated illustration together with a key facts document setting out full contract details, and including full information of what commission is payable! Our recommendations have to be confirmed in writing making direct reference to the client's identified needs and how the product or service recommended fits this. All advantages and disadvantages of the actions are also identified. HOW clear can we be? Once a contract commences, the provider steps in sending the client a 'cooling off package that re-iterates the contract details, commission, etc. and gives the client up to 28 days to cancel at no cost. RDR will not improve on this. • Commission bias exists and RDR will not address it. Forcing customers to pay 'up front fees' for genuine unbiased advice will result in fewer people taking advice. 307

Tied agents such as the banks, will appear to continue to offer customers 'free advice' whilst negotiating still higher commission/fee from the providers than now.

Current 'independent' advice regime offers the consumer more protection than post RDR is likely to provide simply because of its wide availability and relatively low cost. 'Best advice' based on unbiased access to all authorised providers must be better value than buying from/being sold to by a 'tied adviser' only authorised to sell one company's products.

Professionalism

One thing is very clear -academic qualification does not equal professionalism! Many current professionals—lawyers, accountants, nurses, valuers and surveyors, etc.— acquired their qualifications based on levels of academic qualification that today would NOT get them on their base course! They are NOT being asked to update their qualification to its current academic equivalent or stop working. So why IFAs? For example, my wife is an NHS Ward Sister with 36 years post qualification experience, but her 'entrance qualification' would be totally unacceptable today. Indeed, she cannot 'retrain' as a nurse because she does not have the minimum entrance level academic qualifications for a nursing course! Are she and her fellow nurses being told requalify to current Diploma, or the new Degree standard by end 2012 or quit nursing? NO - so why should professional financial adviser have to? The FSA continue to ignore this question.

I note with interest Mr Sants highlighted comments on Basic Advice which appear to be contrary to previous FSA RDR comments. As understood all post 31/12/2012 RDR requirements apply to ALL levels of advice. Which is correct?

There is still considerable lack of clarity within the industry as to what QCF Level 4 relates to and what work they need to do. Mr Sands quotes the CII for example, BUT the CII admit themselves that many of its members who have been told they had achieved Level 4 status have 'shortfalls' which have to be addressed via accredited and marked CPD. However, there is no time limit on obtaining this additional accreditation. Such accreditation shortfalls are contrary to Mr Sands comments and claims.

Grandfathering would have made more sense IF there is a genuine wish to improve professional as opposed to academic standards whilst not losing experience within the industry. As part of its Consultation Research, the FSA commissioned research into how many current advisers would leave the industry, and its Research paper indicated this could be up to 30% of current levels, although the Researchers went on to comment this was a guestimate which it felt to be conservative, ie higher number may be involved. In December 2010, Marketing-Hub published their latest research from subscribing IFAS which found that only 60% of current advisers expected to remain in business post 31 December 2012! Given that there is already a current shortfall where will the difference be made up from? Mr Sants quotes other research into adviser numbers -where does it come from as it clearly does NOT reflect the FSA's previous research published by then in early 2009.

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Costs

A quick comment on the costs of RDR. There is no doubt that RDR will mostly impact on the current 'independent' and 'whole of market' sectors of the Retail Distribution Market be it on reduced numbers, higher academic costs, or simply cost of meeting RDR as indicated by Mr Sands (top of last page). BUT - go back to the beginning and reflect of who is responsible for the problems in this sector -if any? The FSA's own statistics indicate that IFA/WofM advisers generate less than 3% of all complaints, and of those, the Ombudsman refutes the majority! Banks, bancassurers, building societies and so on generate over 90% of complaints the majority of which are found in complainant favour. BUT 'intermediaries' will bear 18% of the costs, and the banks just 30%.

The FSAs own research and 'consultation' papers identified that RDR will see the banks and their allies as the clear winners as customers are forced to go to them for 'advice' either because unbiased advice is not available to them from other sources, or is but only at a cost they are either unable or unwilling to pay especially when payable before any advice is given. Is this really what RDR was attempting to provide? Will forcing more consumers into the avaricious arms of the banks and their cohorts meet the FSAs claims of 'returning consumer confidence in the financial services industry'? I think not.

For me, the RDR as exercised by the FSA has a number of fundamental weaknesses which whilst drawn to their attention have failed to be taken on board. These include:

• No attempt has been made to 'categorise' advisers and the problems arising. Independent advisers—better called unbiased advisers—work on behalf of their clients accessing all providers. Not only are we a minority within the 'adviser' sector, we generate a significantly lower of complaint than other categories yet will bear the brunt of RDR changes. Is that equitable? • Banks, bancassurers, and building societies will be 'the winners' under RDR as they obtain a still larger share of the market. They will continue to operate commission bias as they sell their customers to the highest bidder often leaving them high and dry when it comes to post sales service as in the past as they change 'provider'. • Mr Sands is suggesting in his letter another change in this sectors favour -who sells Basic Advice products in quantity? • Commission is paid by providers as a means to gaining market share and so can skew the market. Wrong—commission is paid by the consumer and higher rates of payment make products less competitive. Unbiased advisers have to take this into account BUT tied agents such as banks don't as they can only 'recommend' the one provider! • Commission bias can be killed dead - simply re-introduce the LAUTRO scale or its equivalent. As such the Government/FSA will decide on how much an adviser is paid and the providers will then work around this as part of their charges. • RDR does not address what I believe are the two driving forces to decline in consumer confidence in the sector -the lack of confidence in providers, banks and so driven on by consumer advice publicity and despite TCF, and the total lack of confidence in the likes of Sants, FSA, Treasury, Chancellor et al to bring the banks to account. Recent debacles such as Goldman Sachs, Lehman 309

Brothers, Northern Rock and the long standing debacle known as Equitable Life, are but a few.

Post the various pieces of legislation, mis-selling scandals etc., all too often the cost of failures by providers and regulators has been dumped on "advisers". Are you aware of any other profession who effectively pays several times over for the same cover? I have by law to carry PI insurance, but also have to pay levies to the FSA and FSCS to cover the insurance costs of those who failed to pay or exceeded their authorisations. For example, why following the recent banking debacles, do IFAs have to contribute into the FSCS a proportional greater amount than any potential liability than the banking sector for Lehman brothers failures? Why should the likes of Barclays 'phoenix again' having closed its 'independent' arm to all business following pensions misspelling? RDR is a farce and should be scrapped. Proper rigorous supervision of providers with full implementation of TCF and all it entails will improve consumer confidence in providers and the services they provide.

Implementation of a LAUTRO style maximum scale of commission payments will stop commission bias. Gradual introduction of higher academic standards for those with current short term experience and newcomers might lead to increased professional standards. Proper 'polarisation where you can be a provider of products and services, or a 'seller' of such services but not the two as now. Look at say LloydsTSB which owns banks—Lloyds, Halifax, Bank of Scotland: mortgage providers—Cheltenham & Gloucester, Birmingham Mid-shires: internet savings/banking/mortgage provider Intelligent Finance: pension/investment providers Abbey Life, Scottish Widows, Clerical Medical, various general insurance providers, credit card providers, warranties and guaranties, etc.. Banks should concentrate on banking, lenders on loans and mortgages, and so on. Often the left hand doesn't know what the right is doing. And finally, let us not forget that as Regulator, the FSA and its predecessors failed in their mandate to educate consumers on financial planning matters. When will Mr Sands and the FSA start to meet that obligation?

December 2010 310

Written evidence submitted by Towry

Summary

We are the largest National IFA in the UK, employing 770 people, including over 200 advisers. We advise in excess of 25,000 active clients.

As the leading UK IFA, we fully support the Retail Distribution Review.

We have a rapidly growing client base, which has over the last 4 years been entirely transitioned from a commission basis to a RDR compliant fee basis.

We have acquired a number of other IFAs, including approximately 100 advisers from Edward Jones only 12 months ago, and we will be compliant with the RDR rules well before 1 January 2013. Meeting the RDR rules is not onerous but does require application

All our advisers will be QCF Level 4 qualified or above by 1 January 2013, including the ex Edward Jones we acquired only one year ago.

We support the RDR as the route to professionalise the delivery of financial advice in the UK.

We consider that consumers have a right to expect a high standard of professionalism from firms deemed to be 'independent financial advisers' by the FSA.

Consumers need to have access to a high level of professional advice as the burden of retirement provision falls on them and not their employer.

Your Committee should welcome the RDR as a means of ensuring that sections of the UK population receive professional financial advice and do not become a burden to the state in their retirement.

The self-interest of a small number of IFAs unwilling to change or have their 'experience' tested should be ignored. As an experienced CEO, who has had the opportunity to run a major international bank - Coutts & Co and Coutts Group, also the largest Private Client Bank in the UK - the largest UK stockbroker, NatWest stockbrokers, the largest Lloyds of London motor insurance underwriter, Cox Insurance plc, and now the largest IFA in the UK, I feel I am in a very strong position to give a unique perspective on the development of, and input to, this critical piece of regulation. I would welcome the opportunity to speak to the Committee direct on this issue.

Background

The Gleneagles speech by the former Chairman of the FSA, Sir Callum McCarthy, cited an industry which 'is based on incentives which produce results which are unattractive to reputable provides, unattractive to their customers, and whose benefits to intermediaries are questionable.'

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He went on to describe an industry where product providers, such as life insurance companies and fund management companies, were paying too much for distribution: the commissions that they were paying IFAs were too high in relation to the persistency of the product. IFAs were frequently switching clients into different investment and insurance products in order to achieve another commission payment. This was detrimental to the insurance companies, who had to pay high levels of commission (or not be recommended by IFAs) and who were not receiving a return from their sales costs.

Consumers, your constituents, suffered as they were being sold high commission paying products, which may not have been appropriate for them. As importantly, your constituents did not realise that the cost of the commission was, effectively, the cost of the advice they were receiving - i.e. a real cost to them, deducted from the performance of the product.

Your constituents permit the life and fund management industry to pay huge commissions to IFAs. There should be little surprise that the most vocal people in the debate to change the system are those IFAs who have profited from the system; a system, in the words of Sir Callum McCarthy, whereby ‘the consumer does no better than the providers ...(that) suffers from product bias, provider bias and churn. Product bias - in other words, (your constituents) not being advised to take action consistent with their priority needs – is arguably the most detrimental.' (Sir Callum McCarthy, as above)

Why the RDR should be implemented

The RDR aims for 3 outcomes:

• A transparent and fairer charging system • A better qualification framework for advisers • Greater clarity around the type of advice being offered.

1. A transparent and fairer charging system

Today's charging structure is neither transparent nor fair.

The key item that is not transparent to the buyer of financial advice today is the cost of advice. Commission is paid by the product provider to the IFA today and the IFA advises the consumer of this commission. What consumers do not understand is that this commission is a real cost to them, the investor. Further they do not understand that this commission need not be paid to the adviser and that the commission could be used for their benefit.

The unfairness of the current system is that the cost of advice to the consumer is a function of the level of commission that the adviser receives rather than the cost of the advisers' time or a percentage of the assets on which advice is given. This risks, and has historical lead to, poor consumer outcomes and advice being based on the level of commission paid rather than suitability to the client i.e. commission bias.

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Most advisers today do not receive a salary - the company we recently acquired paid no salary to advisers once they had reached a threshold competence; the advisers received a percentage of the commissions that they generated. This structure is typical across the IFA industry. It is the structure that is typically seen in sales companies and not professional advice businesses.

Putting in place a system whereby the client must pay the adviser direct for their advice, as proposed by the RDR, is entirely in line with other professional services businesses.

Arguments against the proposed new system usually revolve around two issues:

i. Customers will not pay fees. This is entirely incorrect. We have converted thousands of clients to paying fees. Customers, if convinced of the value of the service and when advised of the real costs of commission, will always pay fees. ii. Smaller investors will not be able to afford financial advice. Advisers today advise smaller clients. Those clients today pay for that advice - but the cost is neither transparent nor fair to the consumer. The solution is either to retain the current system: your constituents thereby remain unaware of the cost of advice - or change the system and allow competitive forces to develop a service for all investors, large and smaller, in a way which they will consider offers value.

2. A better qualification framework for advisers

Nobody will argue against the idea that we want the public to have access to the highest levels of skill and expertise in the area of financial advice.

The debate is whether current, long standing, independent financial advisers should be forced to take exams or whether their long standing in the industry means that they already have standard of knowledge and skill equivalent to Level 4, as required under the RDR proposals.

There is general agreement that Level 4 is the correct new minimum requirement. The disagreement surrounds how to test that people have reached the Level 4 threshold. Taking the exams is the most obvious way of testing this. Taking on trust that long serving people have the required new minimum level of skills is the highest risk approach. It is an approach which would not be accepted by, say, the airline industry when it came to pilots.

We have significant, practical experience in helping advisers reach the Level 4 qualification. We have so far moved about 120 people from Level 3 to Level 4. Most of this has been achieved under the written exam regime rather than the new multiple choice exams. In our experience, the number of hours of study required to achieve this is 80 hours per exam. For experienced advisers, the type of person who is requesting 'Grandfathering', we estimate that this is 30-40 hours per exam. This is based on the assumption that these Advisers are fully competent and have undertaken the required levels of CPO (Continued Professional Development).

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The RDR exam requirement for these experienced, Level 3 qualified advisers is 4 or 5 multiple choice exams and 1 written exam. We estimate that an experienced Adviser will need between 30-40 hours study per exam. This equates to 1 hour a day, Mon to Friday, and 4 hours over the weekend per month, per exam. An experienced adviser would therefore have to undertaken this quantum of work for one month in every four between now and Dec 2012.

This level of study is, in our opinion, not onerous, will not impact on the profitability of their small business and will have the huge benefit to your constituents: knowing that those people who claim expertise have had that expertise tested.

Of course, those people who wish to be 'Grandfathered' have known since June 2009, the publication date of CP 09/18 by the FSA, that the FSA have not been in favour of 'Grandfathering' and, by not commencing the exams, have increased the pressure on themselves to take a exams. The suspicion has to be that a number of IFAs wishing to be 'Grandfathered' do not have the knowledge that they claim and that these are the same advisers that contributed to the various mis-selling scandals that have blighted the IFA industry over the last 15 years.

3. Greater clarity around the type of advice being offered

The greatest clarification that the RDR brings is in the area of advice. The RDR removes the key conflict of interest that blights today's regulation: the adviser advises the client but is paid by a product provider. By stating clearing that anybody 'advising' a client must be paid by the client makes it very clear to consumers that the adviser is working for them and not as an agent of a product provider.

The best advice that many consumers should have received over the past decade would have been to reduce their household borrowing. Because of the structure of remuneration in the IFA industry such advice is rarely given. If you are not 'advising' in the post RDR world then you are 'selling'. The current structure of advice does not give this clarity.

Conclusion

The RDR has been debated widely in the industry. The FSA should be commended for their wide-ranging consultation. A small number of IFAs have triggered a debate in Parliament on the RDR. It would be a disaster for the consumer if the RDR was to be delayed. The Review is not perfect, and rules will change going forward, but the RDR is an essential change required so that the mis-selling scandals of the past are not repeated and the UK consumer can be more confident in the level of expertise and cost involved in helping them plan their finances and, in particular, their retirement.

Your Committee should be strong supporters of the implementation of the Retail Distribution Review. It would be devastating if, at this stage, defeat is snatched from the jaws of victory and an industry that currently has the reputation it deserves is allowed to prevail, whilst the consumer continues to be abused.

January 2011 314

Written evidence submitted by Jonathan Blake, Independent Financial Adviser

As an IFA I am providing written evidence to you in respect of my thoughts on the above subject.

I have an office in the middle of a working farm with part time secretarial support and my wife assists with compliance and other administrative duties. My clients live in remote locations and at both ends of the country from Pendeen in the far west to Colchester in the east and almost anywhere in between. I see most of my clients in their home and therefore cover over 15,000 business miles per annum. I pride myself on providing a personal service and set up my business six and a half years ago.

Some of the RDR proposals which come into force on 1 January 2013 will undoubtedly have a negative effect on me and I would question my ability to continue to trade unless changes are made to the proposals and the FSA see sense.

I believe you want hard facts and figures well that is exactly what my intention is to do for you and detail my thoughts below.

The biggest pension which I manage is currently worth approximately £467,000 and the client concerned is a Company Director. Thereafter I have two couples where their pensions combined equal approximately £225,000. All of my other 111 pensions fall below £150,000.

My point is that I do not manage many clients with large pension funds and, having completed some further research would advise that the average pension which I manage is approximately £62,192. I would certainly not categorise myself as managing high net worth clients and this is further illustrated below.

The average investment case taken forward over the last 15 months through my business was only £19,700. I would, therefore, further reiterate the fact that it is a fallacy that Independent Financial Advisors only deal with high net worth customers which is one of the driving forces behind the RDR and effectively is completely misrepresenting what the majority of IFAs actually do. Someone investing these modest amounts cannot afford fee based advice.

The majority of my business comes from referrals and sometimes it is a case of 'if it's good enough for him it's good enough for me'. It is completely wrong for those commentators who want change to bang on about qualifications in particular as every single client that I deal with has, without exception, never asked what qualifications I hold. They appreciate that I am "authorised and regulated by the Financial Services Authority" and to this end, with the profile that the FSA has and the strict regulation that it undertakes this is deemed to be adequate for them.

I am nothing special and if, at any stage, anything comes across my desk that is perceived to be "complicated" it would be referred to a specialist who will take forward the advice for me. In over 10 years as an IFA I have never had to refer anyone forward with the exception of pension transfer cases. This is an understandable consequence of previous mis-selling which was before my time in Financial Services although I have been involved with money since leaving school to join Nat West Bank in 1985. 315

In respect of my clients, of whom I have approximately 200, 158 are 'active'. Amongst these the occupations are many, varied and as follows:

Occupation Number Approx income High Court Judge 1 Company Director 5 £50,000 Solicitors 4 £50,000 Surveyors 3 £40,000 Teachers 3 £35,000 Builders 5 £25,000 Electricians 6 £25,000 NHS 6 £25,000 Monumental Mason 1 £25,000 Herdsmen 2 £20,000 Garage Proprietors 2 £18,000 Hairdressers 2 £18,000 Mechanics 3 £18,000 Secretaries 6 £16,000 Sales Assistants 10 £13,500

As you can see from the above a high proportion of my clients can only be described as "ordinary" people who work hard to try and accumulate capital to secure their retirement and financial future. I acknowledge that I do have a small number of wealthy clients who, on paper, are worth over £1 million but these have invariably been successful through their own endeavours. I believe that most clients require nothing more than uncomplicated, simple and clear advice. There is no need for a string of qualifications just the ability to convey financial information in layman's terms.

I think the FSA have got their priorities seriously wrong. I see approximately 7 clients a week and do my utmost to comply with the FSAs "treating customers fairly" initiative and can honestly see very little opportunity or time to take leave to study for additional examinations which are, not only expensive, but will be of no benefit to my Herdsman or any others for that matter. Is my Herdsman really going to be asking about my qualifications when he has 300 cows to milk twice a day, 6 days a week?

High net worth clients who need tax and subsequent pension advice employ an Accountant to work out their tax commutation so one would question why would I need to be examined on this? Trusts have become simpler but, if an IFA has a professional relationship with a Solicitor then they can refer clients to them for guidance and pay for the help if necessary. Why do I need to be examined on this aspect when complicated cases just never come up?

In respect of the various initiatives which the FSA have instigated I have taken these forward including a client management system and a full breakdown of income which each client generates. I have also segmented my client bank in order to monitor income and justify every single penny that I earn in order to provide a full audit trail in case I am ever asked. I am in agreement with the FSA in that there is a need to continue to ensure that clients are looked .after, but with a 20% forecasted drop in Advisors after RDR it is beyond me how the consumer is going to be better served If this is correct the number of people without access to advice will be over a million! 316

On one subject, I am in agreement with the FSA and that is in respect of the capital adequacy requirement. I have no issue at all in ensuring that my business has adequate capital to satisfy the Regulator at the end of 2013 and already have planned for this with 3 times the current level of capital in reserve in case of need. It has not been a struggle to save this money from cashflow to ensure it is available in line with the requisite proposal.

In summary, as I have already indicated to Ms Baldwin and my local MP (copies attached as further evidence), I implore the Treasury Select Committee to consider some of the evidence that I have provided above and also, if required, would be happy to take any further questions in relation to my particular role in the community as a local IFA.

The need for additional examinations, whilst commendable for those who wish to focus their business on high net worth clients may be necessary, but is not for the majority of ordinary hard working professional Advisors. I hope that the information I have provided above will go someway towards allowing the Treasury Select Committee to indicate a need for the FSA to have a reality check in respect of what actually happens beyond London especially in rural communities. I think the FSA have got it all wrong and certainly these examination requirements in particular will jeopardise my business if they are forced through.

January 2011 317

Written evidence submitted by Peter Falls, Financial Adviser

Synopsis

This report covers the following:

I) Introduction. A general description of my business and how I try to serve a regional middle market

2) Mortgages. These are seen as an introduction to the financial services industry for most people in my client bank. Looks at why mortgages, as the largest expenditure in a vast number of households, if properly managed throughout the term of the mortgage, is of significant important to the clients.

3) Investments and Pensions. In particular stakeholder pensions and NESTS, and why I believe stakeholder pensions have not worked and NESTS will not work either.

4) The Advice Process. This looks at why I think the current advice process is fundamentally flawed and why it needs reformed so that the general public will have confidence in the financial services industry.

5) Conflict of Interest. I strongly believe that the sale of financial services within 2 industries, banks and estate agencies, are in reality conflicts of interest, and this should be looked at in detail by the Financial Services Authority.

6) Examinations and Grandfathering. With some reservations, can understand the need for further qualifications, for older advisers like myself.

7) Other Issues. Debt management and Buy and Rent back. Two areas of interest close to my heart where I think the regulator needs to do more in one case, and has got it wrong in another.

Introduction This report is a description of my business, how it operates, some of my prejudices and some of things that I feel should be done, to help the general public get a proper service from the Financial Services industry.

My business is office based in Cookstown, Northern Ireland. I have 2 employees, I full time, and I part time and also outsource my reports to a Para planner who works on a subcontracted basis.

For some years now I have operated as a port of call for what would be considered a middle market in the financial services industry. Primarily clients in the socio/economic groups B/C1/C2.

Much of my client bank tends to be the type of client that many IFA's shun, considering them too low value. 318

In order to service such a client bank two things are needed volume and efficient processing.

For that reason all interviews are held in office, I have long since given up home visits, I work on a principle that my door and my phone is always open to my clients no matter what their concern is.

For obvious reasons most of my work is dealing with mortgages, life insurance, some pension work and some investment work and crucially debt management. Central to my business is that all clients shouId, without having to pay for the facility, be in a position to speak to me regarding any of these aspects of their financial planning.

A cornerstone of my business is that all clients have the right:-

1. Once they come to near the end of their mortgage product, to have their mortgage reviewed free of charge.

2. That those who have investments and pensions have the right to come in as and when they feel like it, but are normally phoned once a year for review to allow them to discuss their investments.

This model sounds simple but needs to be efficient. All report writing and other secretarial work is pushed back to my staff, leaving me free for the advice process.

One of the major downsides of such a business model is that while I may have a turnover of £110,000 to £120,000 per year, costs are high between staff costs, compliance costs and office costs, £80,000 to £90,000 will to be spent on these overheads.

[ believe the model can work, with the proper level of support, for turnovers of up to £200,000 per adviser.

Ultimately if such a business model is to work, it has to be based on integrity and good service. If integrity and good service are adhered to, then profitability will accrue naturally as the need for new products by existing clients becomes apparent.

Such a model, if widespread throughout the UK, would alleviate the need for a simplified advice process to service the mass market, as currently advocated by the British Banker's Association. (See Money Marketing Dec 22010 P21).

The current government has emphasised a fair society and the FSA has spend literally, millions of pounds on a campaign for treating customers fairly. In my view putting in place a simplified service for the so called mass market, is flying in the face of these 2 regimes.

If the bankassurers feel that such customers are not profitable, why do they not refer them out to IFA's like myself, who would be only too glad to take on the business.

319

Mortgages

Within my business model mortgages are a major door opener. For most people within the socioeconomic groups in which I normally work, the biggest expenditure they are likely to make in their lifetime is their mortgage. The proper management of this loan is a key requirement for their financial wellbeing over the period of the loan. Both in terms of mortgage products and the ancillary insurance products that go with it.

If! place a mortgage I do not charge a fee other than the lenders procuration fee, plus the commission which I receive for the various insurance products. If, by chance, the customer doesn't want to take an insurance product, or I refer the client directly to the lending institution and do not receive a procuration fee, then a fee may be charged. I try to avoid charging upfront fees as this practice, I believe, drives clients to go directly to the lenders, limiting their choice, and pressurising them to take additional services, e.g. a current account to service the mortgage. A current account to service a mortgage should be the free choice of the client, not a prerequisite of the lender.

The service I offer entitles the client to the placing of the mortgage and processing throughout underwriting to the point of offer. Beyond that clients have the right before the end of their mortgage product, be it a fixed, discounted or tracker product, to a full mortgage review. Their ongoing mortgage needs are discussed in detail, whether to stay with the same company and renegotiate a new product or remortgage to another company. Also discussed will be, further borrowing, repaying extra off the loan or changing the mortgage term.

If such a process is carried out over the lifetime of a mortgage, the customer can save thousands of pounds on their mortgage on the one hand, avoid unnecessary hardship in difficult times on the other.

Normally I find that up to 80% of my clients stay with their existing lender and take a renegotiation product.

I will say that the attitude of lenders to advisers like myself varies enormously. On the one hand Progressive Building Society here in Northern Ireland look upon the client as jointly the responsibility of myself and the Society, and will interact with me. They will let me know what the mortgage balance is and exactly when the product is coming to an end. They will allow me to discuss the renegotiation product with the client on a one to one basis and put in place an appropriate product for them. As well as that they pay me a fee for carrying out this work.

On the other hand the major lenders like Halifax, Santander and Nationwide BS tend to have a system where I can only get information on my client's mortgages, by the use of a Letter of Authority, and even then the Letter of Authority has a limited time span. In some cases they will even ask for a fee to disclose the information, which I find absolutely ridiculous.

In such cases, I find it easier to call the client in, phone the lender on an open line in the office, and allow the company to go through security with the client, thus getting the necessary information to discuss the available products with the clients. This way the client gets a proper advised service. 320

When the customer tries to phone their own lender, they are offered what is called a "non-advised service". Often this leads to an inappropriate product being taken by the client. Many clients do not understand that a fixed rate may offer security; it can come with quite a hefty price tag in terms of either, or both, an arrangement fee or a rate that is substantially higher than a tracker or discount product. Notification of this price variation should be part of the "non-advised service" but as far as I am aware, never is.

The classic example is Mr & Mrs M whose originally mortgage was set up with Halifax, through another broker. When they phoned Halifax in July 2008 they negotiated what was called a staged fixed rate of 5.45% to the end of August 2009,5.95% to the end of August 2010 and 6.55% to the of August 2011. At this point in time they are spending £628 per month on an outstanding balance of £83,000.Foliowing the dramatic fall in interest rates in late 2008, this couple, with proper advice, could have saved thousands of pounds on their mortgage over the last two and a half years.

When I phoned Halifax on their behalf, Halifax view was that if the client paid the redemption penalty of £1,780 approximately upfront, then they would renegotiate down to a tracker rate which would save them approximately £250 per month. As a young couple, with a young family, they simply do not have this sort of money to pay this upfront fee and are forced to pay their existing mortgage through to July 2011, hardly treating customers fairly. Because the house is almost certainly in negative equity they are, in effect, mortgage prisoners and will have to stay with Halifax.

As this product was taken through a non advised service with Halifax, Halifax will not accept responsibility for Mr & Mrs M taking the product.

Such experiences are all too common within the financial services industry and lead to client disillusion with the industry. Mr & Mrs M's experience highlights the need for good quality independent financial advice, not only for the high net worth market but also for the mass market.

How was I paid for my service? Simple... the couple's life insurance products were too expensive, both clients were in good health, I rebrokered their life, critical illness and accident and sickness cover, to other providers with a saving of approximately £25.00 per month and I have earmarked them for a mortgage review in June 2011. A simple straight forward process that works and is proven to work.

I heard a statistic which I cannot verify, that when interest rates fell sharply in the 2008 crash, almost 50% of all mortgages in Britain were on a fixed rate. As a mortgage adviser of nearly 20 years I find that a damning indictment of the industry as a whole, and should not have happened. I believe that fixed rates should only be taken where there is a real danger of unaffordability if interest rates should rise sharply. For most mortgage holders, particularly those whose mortgages have been out for a few years, tracker and discount rates are almost certainly a better option.

Investments / Pensions

Stakeholder pensions by any standard have been an unmitigated disaster and unfortunately the thinking behind these pensions, can be seen from the article which I 321

read in Money Marketing (2 December 2010) where Miss Angela Eagle MP was interviewed, clearly shows why they are a disaster.

Quotation,

"Miss Eagle acknowledges concern over an advice gap left by the RDR but says 'less advertising and more information' on products should reduce the need for advice in the mass market. She says 'if you are operating in a system where greater access to information is being achieved, the requirement for advice on every product would hopefully lessen because people could see clearly what they were being offered and the price of it. I think it was particularly invidious when commission charges and hidden charges were influencing advice or at least colouring it".

Five things stand out clearly from this quotation:-

1) The advice baby is being thrown out with the problematic commission bathwater. 2) Pensions are, by and large, not bought, they are sold. The mass market as opposed to those who are financially astute, simply do not understand pensions, and regardless of how clear the information given on websites and brochures, it is simply not being read by the mass market.

Much of what is written about pensions and investments, as well as decision trees simply goes over the head of those that it is targeted at. In my view, and you will find in the view of most IFA's, decision trees are a total and utter waste of time and government money.

3) If you have to sell pensions then someone has to be paid for selling them. The thinking that by making pensions cheap to the mass market they will be automatically bought is simply wrong, and the lesson of stakeholder pensions verifies this.

For those committing long term to a private pension, their commitment is on a par, in monetary terms with their mortgage. No one would advise a first time house buyer not to take financial advice. Why then, should first time pension buyers be denied advice?

If advisers are needed to sell pensions, and they are, the advisers will have to be paid for selling pensions. Unfortunately the idea of the public writing out a cheque for anything from £500 upwards, to an adviser to set up a pension, simply isn't going to happen except in the high net worth market. The result is that pensions are simply not taken up.

I will go so far as to say that unless NESTS are made compulsory, a very large proportion of the population will simply opt out, whether through the encouragement of their employers or simply through lack of understanding of why the need to buy such products.

An example is Mrs T, who is an employee in Boots and currently has a stakeholder pension with Legal & General, to which she contributes £100 per month. Although educated to third level, she does not understand the policy but felt uneasy that she wasn't saving something towards her retirement and as such agreed to put the 322

minimum into the pension. Even though affordable she can see no reason to increase payments to the policy. This is hardly an example of a decision tree working properly.

4) This brings us to the commission's element of Miss Eagle's statement. The fact remains that most people who come through my door are neither naive nor stupid. They realise that I have to be paid for both my time and my expertise.

If commission, fees and/or client remuneration, regardless of what term you use for such payments, are explained clearly to clients and the level of this remuneration is also explained, clients will understand how I am paid and they accept these charges are necessary for the work that I do.

It may come as a surprise to many within the regulatory framework that the general public do realise that financial advisers are not a charitable institution and need to be paid for their work.

The general public wants as wide a variety of remuneration options as possible as a means of paying for their pensions and investments.

The British taxpayer pays hundreds of millions of pounds to fund the FSA surly it is not beyond this organisation to put in place a regulatory framework to counter commission bias? Or is it?

5) Pensions, as well as mortgages, should be one the largest investments most people make during their lifetimes. The fact that they are not is probably an indictment of the whole financial services industry. For this reason pensions have to be serviced as well as sold.

If we are going to have good pension planning for the mass of the UK public, we have got to have a framework in place that can support them through the long years of saving towards a retirement. The vast majority of the people who come to my door seeking investment/pension advice simply have not got the wherewithal, to put in place a strategy for themselves nor how to manage that strategy going forward.

This is particularly important in times of market stress.

When fund values fall, many clients walk away from their investment strategy through sheer disillusionment. It is very difficult for those who do not have an innate understanding of the markets, to continue funding a pension or regular savings ISA, if the fund value has actually fallen over the previous 12 months, although they have continued to contribute towards it. This is what has happened with personal and stakeholder pensions down through the years, and to maybe a lesser extent with ISA's.

The result is that we have tens of thousands, possibly millions, of small paid up pension pots, lying dormant and grossly underperforming. This is hard earned money belonging to people who have become, simply disillusioned by the pension system.

During times of stock market stress my phone will continuously ring with clients worried about their funds. They need a hand holding exercise where they are told "look, don't panic, you do not need your money now and leave it were it is, it will recover through 323

time". This can never be achieved through the sort of system that Miss Eagle contemplates.

Consider this scenario.

For a high network client assume £60,000+ per annum income, the idea of putting £6,000 gross per annum into a pension then receive a tax deduction of 40%, £2,400, the net loss to their income of £3,600 is unlikely to seriously affect their lifestyle. They are still going to be able to change their car, have an annual holiday etc.

Now consider the same situation for someone on a £20,000 per annum, trying to put away £2,000 per annum. Their position is very different. Firstly they are only receiving a 20% tax deduction i.e. they will invest £1,600 of their £2,000 out of their hard earned salary. That £1,600 can be the difference, if they continue to fund their pension, of having to defer changing the car or defer taking a holiday each year. The saving of 10% out of gross pay, into their pension represents a real struggle, particularly with all other living costs.

Such customers certainly need to know that their contributions will return a long term gain for themselves. In the current pension market that is simply not happening. This government has decided, in its wisdom, that it is going to work towards a flat rate pension of £140 per week, for every individual pensioner. I can only say that it cannot come too soon. The system of guaranteed minimum income has been one of the major disincentives for people in the middle income bracket, saving towards their retirement. Their attitude being, why should I pay towards a pension to simply subsidise what the government is going to give me anyway. All the decision trees in the world won't explain this to those on lower or middle incomes. These people need to know that their money is well spent, and if well invested, will materially benefit them in retirement.

Ultimately for pensions and investments, the advice has to be paid for. In my model I have a set fee which can be paid through commission or by writing out a cheque, the choice is the clients. I also charge a 0.5% trail commission which at this time, allows me then to continue to service the client. When one of my clients phones me I am able to offer them advice and help if needed as well as regular reviews. The model is relatively simple and though time consuming once set up, can be very profitable.

The Advice Process

The major cause of disenchantment with the financial services, by the general public, is in my view, the way regulation has been set up.

It is my belief that the current system of fact finding and report writing, is all about protecting the adviser and the advisory firms, and not about protecting the customers. Put simply, the advice process covers the back of the adviser, which was never its primary aim. Two examples come to mind:

1. Where a client has possibly £100,000 to invest, should that be going into collectives, units trusts, OEIC's or into a bond. If the bond pays more commission then there is always the risk that the adviser will go down the bond route. For an experienced adviser like myself, justifying that bond against collectives is not that difficult, in almost all 324

circumstances. That has simply got to be wrong. It should be possible to outlaw commission bias, without killing product based remuneration.

2. I have seen some work carried out by Alliance & Leicester where the client has been asked to sign a document referred to as: - Personal Financial Review-Important Information followed by the name and address of the client.

This document serves no other purpose than to cover the financial advisers back and has little value in confirming the needs of the client, and for those who may not be reasonably well educated, a difficult document to understand.

There is no doubt that there is a culture whereby clients are asked to sign reports and personal financial reviews. In some instances the information in these documents has been proven to be inaccurate at a later time. This has worked against any complaint the client may have had. Unfortunately it is not that difficult for unscrupulous advisers to have documents signed first and then amended later, this mitigates against the best interests of the clients.

At the heart of financial advice is "Know your client" and this has to be true. The practice of meeting a client for the first time, filling out, fully, a personal financial review and having this signed, and then going off and working out solutions for the client's problems is great in theory but totally absurd in practice. When a client first comes to an adviser they rarely have all the information to hand that is needed. With that in mind at a second interview, new information may come to light, which will change the advice. For that reason personal financial review should be moving documents and the client should not be asked to sign it at any point in time, pre advice is just ridiculous. While the document should be available for the client to view and amend if necessary, it certainly should not have to be signed, as is the request by many compliance departments.

Suitability reports need to be simplified with a basic outline of the client's needs, of the advice given and why it was given. Disclaimers of why other advice wasn't given and technical jargon should be kept to a minimum. As much of this information is usually cut and pasted into reports, making the document so complex, largely nullifying the point of the report in the first place. Risk warnings are usually available on Key Features documents so there is no point repeating them in reports and much of the research should be held on file but shouldn't necessary need to be included on the report as well. It should be available to the client if they want it.

A simple report covering a mortgage and associated insurances can run up to 20 pages which will almost certainly never be read. Complete madness.

Conflict of lnterest

One of the worries I have is conflict of interest. For this reason I do not have a formal agreement with an estate agent, as I always worry that my advice will be in contradiction to what the client is hearing from the estate agent etc.

Some accountants and solicitors would refer cases to me on an ad hoc basis but I do not have a formal agreement and as such I do not pay them any commission or fees. 325

Three examples clearly come to mind:-

1) A client puts a bid on a house and is accepted. I arrange a mortgage and when the survey is carried out the value is less than that which the client offered. If the client has not been sent to me by an estate agent I simply say to the client, please go back to the agent and renegotiate the price.

If the estate agent has referred the case to me, where do my loyalties lie? With the estate agent, who is trying to get the best price for his client, or with my client the purchaser?

2) A more serious issue arises when the client concerned cannot meet mortgage criteria in terms of income, affordability etc. Pressure inevitably comes on the adviser, by the estate agent, to try to make the client fit the criteria so that a sale can be progressed. This situation should not be allowed to happen.

3) A client has come to me in the recent past and she confirmed that she was asked by a developer, through the estate agent for a non refundable £1,000 deposit. She was then referred on to the in house financial adviser, who discovered, due to a poor credit rating that he was unable to place the mortgage. When she failed to get a mortgage, the estate agent failed to return the £1,000 to her. Because the builder, estate agent and crucially mortgage adviser were all working in tandem, she was not made aware of her rights with regard to her deposit. I felt this was wrong and if the financial adviser had been acting only for the client, she would have been advised to go to the Consumer Council or her solicitor before handing over any money.

Banks

By the same token I feel that this is a problem within the banks.

What banks do best is offer retail banking products, mortgage, loans, credit cards savings/current accounts etc. A conflict can arise when they try to sell other financial services. The problem arises, particularly with investments, when the client needs a truly independent portfolio which should include bank products. How can the included bank products be best advice, if the bank will almost certainly insist on offering fixed term bonds, cash ISA's etc, from its own portfolio?

When the Financial Services regulation was put in place in 1988, financial services were taken out of solicitors and accountants offices. It is my view that the same should have happened with the banks. The banks should be forced to set up independent financial advisory services independent of the bank itself, to which they can refer their own customers and know that that customer will receive independent advice.

Throughout this report I will refer to the Progressive BS, a local mortgage lender here in Northern Ireland, who by some distance I regard as the best lender, in terms of probity and customer service. In their case, while the do not offer an independent advisory service, they refer all their financial services out to a tied Legal & General rep. I have questioned the fact that this isn't actually independent but rather they refer out to a tied agent but I believe that the simple principle is correct. Having spoken to the local 326

Progressive BS manager, Progressive BS has no input into the advice that will be given by the Legal & General rep.

It is up to the banks in this position to make the system profitable.

Examinations and Grandfathering

Someone like me at age 59 is going to find it difficult, but will have to eventually sit the exams as necessary. I can completely understand that there is a perception that financial advisers are poorly trained and poorly educated. It is important that we are not only seen to have a level of expertise through what we do in our everyday life but also in terms of the qualifications of which we hold.

For this reason I am of the opinion that we are better to stay with the present requirement that we move towards Q4 level for all financial advisers. I will suggest that possibly a longer time frame was put in place, possibly one if not two years extra, to allow for the uncertainty that has occurred in the previous 2 years over RDR.

RDR is by and large a good idea; it did need to take place. I do feel that much of the thinking behind it has been put in place through centralised government thinking and with little input from people like myself, and those out on the coal face where we are meeting individual clients on a daily basis. We probably have a much better understanding of what the man or woman in the street needs from a good quality financial services industry.

Other Issues

Debt Management I see debt management as a crucial part of any advisory service but at the moment it is not regulated.

The problem as I see it is the thinking is that anyone who gets into trouble with debt through banks, private loan companies etc, should go to their Citizens Advice Bureau who will offer them what is considered a free service. I think this is simply wrong.

Those responsible to a greater or lesser extent for an unmanageable debt, on the one hand are the lenders and on the other hand the debtor. As such they should have to pay for clearing up the mess, not in these stricken times, the hard pressed tax payer. Surely it is not beyond the remit of the FSA to regulate debt management companies, whereby their charges are made transparent and those of us in the financial services industry can refer cases that come across our desks to them, in the knowledge that everyone is singing off the same hymn sheet.

Buy and Rent Back Schemes

Such schemes have been taken under the wing of the FSA. I have got say that where this simply was a problem and needed regulation, the standard of regulation seems to be so onerous that no one is now prepared to offer this product. 327

There is no doubt that a well constructed Buy and Rent Back contract has a lot of advantages for both the landlord and the tenant. There are quite a few cases whereby this type of arrangement could stop repossession if properly carried out. Unfortunately here in Northern Ireland the regulations are so onerous that no company at this time has been able to register.

When I speak to the companies who were initially considering setting up, their attitude was that the regulation was so onerous, that they have simply walked away from it.

Surely a case of over regulation killing off what was probably a good idea.

January 2011 328

Written evidence submitted by Mark Gosling, Castle Investments Consultants

I feel it is important for anybody outside our Industry to try and gain a fuller understanding of how Independent Financial Advisers (IFA) operate and serve the general public. We are an IFA business that started in 1986 and have continued to survive because, like many IFAs, we have always put our clients' interests ahead of our own. From facts known, this is clearly not the case with some of the larger Institutions such as banks. We know that these Institutions have high target figures for business imposed upon their staff. We also know that this has led to a sales culture rather than advice. Mis-selling issues have ensued. IFAs come to the fore as a result of this as we genuinely offer advice and do not just try and sell a financial product.

Until 1988, there was a maximum commission agreement between all the Financial Service providers. This meant that wherever a client obtained advice, any commission generated was the same across the board. The Office of Fair Trading decided that this was a "restraint of trade" and this maximum commission agreement was abolished. The result was that the larger banks and businesses negotiated far higher commissions than had previously been paid. This was where matters first started to go awry and banks in particular saw the increased profit margins and took more interest in selling financial products rather than their traditional banking role! This point is ably demonstrated by complaints against IFAs (around 1%), compared with banks etc. (in excess of 60%). Hard sales tactics will always lead to a proportion of inappropriate advice.

We have a number of bank staff as clients including retired and current bank managers. We are wholly aware of the sales practices employed by these Institutions which should be stamped out.

We, as a Company, frequently rebate commissions into contracts for the benefit of clients. In many instances, investments placed through us mean that the actual amount that is invested on behalf of the client is more than the amount that the client originally wrote their cheque payment for. Providers are also often prepared to offer to enhance the investment, a feature which is well received by clients as they can see an immediate increase in their investment. RDR proposals are due to ban any increased allocation rates (initial enhancements) and, with no commission being allowed to be generated, of course no rebate can be made. This practice cannot, in our opinion, be treating the customers fairly as it will put them in a worse position than they have available to them at present.

We have, as an Industry, since January 1995, had full hard commission disclosure. Clients are provided with an upfront disclosure of commission and this is again repeated through the cancellation notice sent directly by the Provider to the client. All our clients have known what the cost of our advice has been since 1995.

We, as an IFA firm, have always offered the client a choice to pay a fee rather than commission. In our experience, in over 95% of cases the client has opted for the commission route. This has specifically included a good number of high net worth clients who have always stated that they are aware, from the illustrations provided, of the cost of advice. They are perfectly happy with this arrangement. Please note that if fees only are charged then there can be an additional cost of VAT, currently at 20%. 329

I am aware of a number of surveys where clients have stated they would not be prepared to pay a fee. This coincides with our findings, having dealt with our clients as mentioned above.

The RDR proposals will totally take away choice for the consumer on how the cost of our advice is going to be met. This cannot be fair and will clearly go against the idea of Treating Customers Fairly (TCF) which is an FSA theme that has now been running for some time. It will restrict clients' freedom of choice and is trying to drive the system down a route that clients generally do not want and are unlikely to accept. This clearly goes against the FSA's TCF legislation.

We know there is a savings culture gap in this country and it is only companies like ourselves that can help to advise clients to better save for the future for themselves and their dependants.

I know of no other business that has been attacked in such a way under false pretences. Everyone becomes a loser - the clients and the adviser community. It is generally accepted that the best independent advice has always been available from IFAs. The banks, building societies and other large corporations are only in business for as much profit as they can obtain.

We frequently give free advice to clients as we believe that all communities need a certain amount of support. Often, the amount of savings available means that a no risk savings account is recommended. We often find that these clients come back to us in later years when their financial situation has improved and require further financial advice.

New Qualification Rules

Whilst much publicity has been concerning the requirement for further examinations to be taken, I do feel this is not fair on Advisers (and possibly against our Human Rights) who have been trading for many years and have always been authorised and had to undertake Continuous Professional Development. How can a Regulator suddenly impose new requirements which potentially drive Advisers out of business? This has never happened in any other Industry i.e. a Barrister who qualified many years ago only has to continue with CPD work despite the fact that current exam standards may have been raised/improved.

Removal of 15 Year Longstop Rule

There is a major concern within the IFA community that the 15 Year Longstop Rule that has been enshrined in English Law has been taken away which has meant that IFAs can be pursued for claims to the grave. This has resulted in at least one known suicide and it is clearly wrong. I believe that it is against our Human Rights to not have the protection that all other professions have, such as accountants and solicitors.

I believe that the Speaker of the House, John Bercow, recently expressed incredulity that we have no end to liability. This has got to be changed. 330

Should you require any further information from me relating to the above or any other issues I would be pleased to provide this either in person or in writing.

January 2011 331

Written evidence submitted by Paul Naylor, A P Financial Services UK Ltd

I understand that you require information on this matter from practitioners such as myself in order to review the proposals set down in the RDR.

There are a number of areas I would ask you to consider could impact on both the Financial Services Sector as a whole, the possible effects on retail investment into the equity markets and the availability of Independent Financial Advice to the consumers.

Last but not least the assumption that Commission paid by product providers to fund the costs of advice is not acceptable by the consumer.

1. Potential Impact on the Financial Services Sector

It has been mooted by press and other pundits in the industry that the IFA sector could see some 30% of current practitioners closing down and leaving the industry. Even Hector Sants the head of the FSA has estimated that only 20% of IFAs will leave the industry post RDR implementation.

There are apparently about 21,000 IFAs operating at present in the UK, the loss of 20% of those advisers (around 4200) is too appalling to contemplate, the need for financial advice has grown exponentially over many years and IFAs have dominated the Investment and Pensions market to drive the retail investment sector forward by providing advice and services which the consumer can rely on as competent and ethical. Unlike the banking industry which has generated 4 times the level of complaints to the Financial Ombudsman Service for mis-selling financial products, the IFA sectors record is infinitely preferable to the activities of banks whose driving force is to sell products, not give competent affordable and appropriate financial advice.

If we were to take the worst case scenario and take 30% of IFAs out of the industry as a consequence of RDR proposals, that would mean the loss of 6,300 advisers.

2. The possible effects on the Retail Investment and Equity markets.

If one assumes a worst case scenario of a 30% loss of IFAs, there will also be a knock on effect for the loss of support staff as well. Estimates of the numbers do not bear thinking about, but another 3 support staff for each IFA who leaves the industry, would, coupled with the number of IFAs leaving, put another 25,000 + out of work and seeking jobs, which will no longer exist.

Aside from the human cost, if, as anticipated, that 30% of IFAs leave, that is 30% less retail investment business going into the investment markets.

The effect on the economy and the recovery will be felt almost immediately and I do not believe it is in the country's interests to see such a decline in the investment markets halfway through the governments term of office.

Most established IFAs have around 500 clients per practice, some much more (networks 332

for example would naturally have thousands of clients) so if we take 30% of IFAs out of the sector, I estimate that over 3.15 million clients will no longer be able to access their IFA and that is not acceptable.

If only every one of those clients stopped paying or indeed did not continue to pay into their pension plan at an average premium of£100 per month, that would mean over £300,000,000 per month would not be invested in the equity markets, the yearly figure is too much for my simple mind to contemplate.

The assumption that disaffected clients who can no longer access their IFAs services will take advice from the banking sector is not supported by any cogent or compelling evidence or research, so the probability of a dramatic decline in the retail investment sector will occur post 2012, is a very real and economically frightening prospect.

3. The Availability of Independent Financial Advice to consumers

Under the current FSA regulations IFAs are obliged to provide advice most suited to a clients personal requirements, affordability and attitude to risk and only recommend a product, which after a full analysis of the clients financial situation can meet that need. The current system of payment for advice has specific non negotiable requirements :- a. To offer the client the choice of payment by fees or product commissions b. To fully disclose wherever possible, prior to the sale of a product the actual commission in real terms that the product provider will pay the advising firm.

The RDR proposals take away these choices and revert to one method only, Fees paid directly by the customer, or in the alternative front loaded onto an investment contract as a deduction from their initial investment.

The commission system, has to date been the preferred method of paying for advice by which the majority of clients fund their need for advice. It offers a cost effective method of obtaining the services of their IFA, without having to pay directly from their income, which in todays recessionary times is becoming an issue for most middle income families. The costs of Commission is usually spread over the first five years of the contracts purchased, so in effect it is a loan to both the client and adviser and if the plans lapse the commission has to be repaid in part or in full depending on the term the plans have been in force.

The commission system, also enables lower income clients to fund the need for advice in order to enhance their meagre savings into pensions and pay for Life Assurance protection.

4. Commission on Financial products vs Fees

I have no doubt that for a small minority of unethical and unprincipled advisers, there has been an abuse of the commission method of paying for advice, but these occurrences tend to be in the minority.

A fairer system of commission which puts a cap on the level of payments providers can 333

offer to IFAs as a possible inducement to sell products, would inject an element of fairness and equitable treatment into a system which is not fundamentally flawed and provide the client with an easy method of comparison between the costs of advice for various products, compared to the costs of fees.

The current system is a free for all and providers set the level of product commission, capping those levels would be infinitely preferable to clients, than losing the choice of methods of payment.

Naturally as an IFA, I would prefer to be paid up front fees by my clients on a time costed basis, but for the majority of middle income clients the costs of just taking pensions advice would be somewhere between £700 - £1000 in fees and if the adviser concluded that there was no need to purchase additional products, that could be a very expensive exercise indeed for the middle and lower income client.

The FSA has ignored one fundamental principle of business, that is to generate sufficient profits from their business to pay their costs, wages and taxes, by taking away what has been the main engine of market growth, the economy will stall, possible stagnate and the economic recovery will falter and possible fail, with no back up plan.

The decline in the IFA sector will also inevitably result in a decline in tax revenues, which no seems to have considered.

In your interview with Money Marketing issue 9/12/2010, you believe the FSA listen to the concerns expressed by MPs.

Most IFAs know that the regulator is not answerable to parliament, conducts its activities without proper consideration of the legal ramifications of the RDR proposals and the Restrictions on Trade, which are unfair and has not taken any notice of submissions from the IFA sector including the professional bodies like AIFA. It is in fact the worst kind of Qango, out of control, costing the industry and consumers millions of pounds without any real benefit to either.

This regulatory body has, by its many failures, demonstrated it is not fit for purpose and is biased towards the banking sector, the RDR in its current form amply demonstrates such bias and is unlikely to contribute anything to improve the economy, the retail investment sector or consumer benefits, the FSA admits that the costs have escalated beyond their original estimates and if one takes into consideration the possible loss of jobs in the IFA sector, the effects of a decline in retail consumer investment in the equity markets, it will prove to be an expensive exercise in futility.

5. Professional qualifications and status of IFAs

I have no dispute with the need for improving the overall necessity for better qualified and more knowledgeable advisers in both the IFA sector and the banking industry to come into the industry has existed for some time.

At age 61 however, I dispute the need that after 20 yrs as an IFA, without any customer 334

complaints, that after 2012 if! do not take additional exams to bring me up (so called) to the diploma level, that I am deemed no longer competent to advise retail clients.

No doctor, Solicitor or Accountant or Nurses, once qualified to their original required standard, can be forced many years down the line, to take additional qualifications to continue practising.

The FSAs proposal to de authorise older advisers who do not bend the knee to the regulators edicts and obtain these often irrelevant further qualifications that bear no resemblance to how advice and services are promulgated and performed in the real world is not beneficial to consumers or the industry.

The need for improvement in knowledge and expertise is not covered by these additional exams as it is only with continued professional development and experience of how to advise real clients in the real world, that we become better able to do our job.

It transpires that a major portion of those FSA staff who regulate and control our sector have not even attained the basic qualifications that an IFA would currently need to be deemed knowledgeable about their job.

The FSA has lost its way, I can see little benefit in allowing such draconian changes to the way IFAs operate to go ahead, when it is clear to anyone with an ounce of common sense, that the FSAs assumptions on which they have based their proposals have not been properly researched (none has been published for us to view and consider) ill considered as to the benefits to consumers, ill considered as to the likely effects of a decline in the retail investment sector and are not supported by facts and substantive consumer research.

If this flawed legislation is allowed to be implemented, the effects will be irreversible and although predictable, seem to have been ignored by the regulator, despite substantial submissions by the IFA sector as to what will inevitably be a disastrous change to our beloved industry.

I put in simple terms the above, from a personal point of view, I love my job, have served my clients with exemplary ethical and honest advice, the RDR proposals are a mess, they do not address the real need for a strong and client friendly Independent Financial Advice sector and will ensure that ordinary middle and lower income families will soon, no longer be able to afford to go to their IFA for advice and service.

Once the IFA sector shrinks to the level it is anticipated, it will never recover and that would be a loss to the consumers and the country.

January 2011 335

Further written evidence submitted by Paul Naylor, A P Financial Services UK Ltd

I believe you require some factual information to show why the majority of IFA's firmly believe the Retail Distribution Review (RDR) will be detrimental to the continued growth of the investment and savings industry.

.Mr Hector Sants has stated on more than one occasion that the loss of20% of IFA's from the Financial Services Industry is acceptable when RDR is implemented and the New Level of Qualifications comes into force (without grandfathering) and when commission on financial products for IFA's is banned.

I believe most strongly that Mr Sants and the FSA's "Saving Face" attitude to RDR implementation is not supported by any cogent or compelling data as to the potential benefits for consumers or the industry as a whole.

Mr Mark Garnier who is a member of the TSC has stated he wants Pro RDR advisers to speak up and requires hard data to study, so I have enclosed two documents for the TSC's consideration, the most recent FSA Product Sales Data published in 2009 and the Financial Ombudsman Service Annual Review of Complaints. These two publications demonstrate that RDR proposals will have little consumer benefit.

Two things stand out in the PSD Report and that is how the general trend to reducing sales of pension and other investment products is evidenced in the graph on page 6 and also clearly demonstrated in the table on page 8 which shows a year on year decline.

In the FOS Annual Review it clearly shows on page I of that report that only 2% of all complaints received by the FOS were about IFA's and only 39% of those were upheld by the FOS.

Mr Sants has clearly stated to Money Marketing (6/1/2011 issue page 9) (copied herein) that mis-selling costs the public £600m per year. If that figure is correct and there seems to be no supporting data to back up this statement, then as a sector the IFA's are the least responsible for mis-selling as he puts it, yet we are being asked to pay for 18% of the costs of RDR implementation.

Not withstanding the ever increasing costs of this poorly planned, badly constructed and ill conceived plan, there is a disproportionate burden being placed on IFA's, of whom 20% are expected to leave by the end of2012, or in the alternative after decades of building up our businesses, be disenfranchised of our authorisation if we .do not comply with the new qualifications.

Having been an IFA for over 20 years and an industry practitioner previous to that with Life Offices for a further 6 years, I am deeply disturbed that a regulatory body such as the FSA can have the right to put me out of a job without any justification.

The costs of implementing RDR proposals far exceeds the costs of alleged mis-selling and therefore I can see no benefit to consumers, and the money would be better spent bringing the banking sector under control. 336

There is no evidence that banning commission is going to benefit consumers and it is my belief that if, as Mr Sants predicts 20% of IFA' s leave, we will see a corresponding decrease in savings and investments in the retail market.

This will harm the country’s economy because if the retail investments see reduced capacity industry and commerce will find it even more difficult to obtain capital for investment.

Mr Sants and his RDR team seem determined to see the RDR come to fruition despite ·the opposition of the IFA sector and it seems the only realistic motivation behind it is to reduce the IFA sector to the lowest common denominator and make IFA services only available to the wealthy, whilst placing the major channel of retail investment firmly in the control of the Banks, Building Societies and Direct Sales Forces for Life Offices.

In the wildest stretches of my humble consideration I could not imagine a more consumer unfriendly and consumer detrimental approach to the problems we have encountered. The times scales are too short and the banning of commission is just plain daft, has no consumer benefit and will discourage consumers from seeking professional advice.

January 2011 337

Written evidence submitted by D Frost, Norwood Financial Services

May I firstly thank you and your colleagues for putting our case so eloquently in the House last week. It was gratifying to see so many MP's giving up their valuable time to support us especially during an evening.

I had already written to Mark Garnier prior to the debate so I will try not to dwell at length on the main points of contention. Instead I enclose two letters addressed to the FSA I wrote on this subject in May 2004 and December 2007. These letters cover all of the issues you discussed in the house and yet I did not even receive the courtesy of a reply to either letter.

I do not understand how a regulatory body can make so many mistakes and yet still dictate guidance on a subject they do not understand. They are clearly not fit for purpose. The main regulatory issues over the past few years have all been very badly handled. Equitable Life, the Pensions review, Endowments and not to mention the Banks debacle. How do these civil servants remain in their jobs? If one needed to highlight a problem we have in this country it is paying highly for failure and incompetence.

Finally, could I address the issue of qualifications. I have been in this industry for over thirty-five years; hold two professional financial qualifications (the ACIB dip, and ALIA dip.) and I will be seventy-two in April 2011. What can a civil servant tell me about finance? On that final point I find it interesting that Hector Sants holds professional qualifications in Psychology and Philosophy. How dare he tell me that I have to take more examinations to continue running my business. How would he feel if I told him he could no longer hold his post at the Bank of England with his degrees and had to sit further examinations to remain in office. I can just imagine the repercussions.

December 2010 338

Written evidence submitted by Laurence Frazer

There are two clear points I wish to make in regard to the RDR:

1. Examinations 2. Charging Structures

By way of background I am an Independent Financial Adviser in Belfast and have been so for the past thirty two years. I run a small family business employing myself, wife and eldest son. I can safely say that nothing that has been thrown at me during this time has unsettled me as much as the proposed RDR.

I am a business graduate, a professionally qualified small business counsellor and a professionally qualified IFA. When I took my degree I did so while holding down a full time job and I attained it in the same time as full time students.

Incidentally I paid the fees for it. Likewise I have paid personally for all my professional qualifications.

The last thing that I need at the age of 57 is to start to re-qualify for my job. I shall not be doing so and no other profession has ever been made to do this as far as I know. I can certainly see why it may be appropriate for new entrants to be required to sit a higher level of exams rather than the existing ones. However, the lack of grandfathering thus the lack of recognition years of experience will only lead to a weaker industry and a poorer standard of service for clients.

The proposals also ignore the systems which are already in place. To give you an idea - I am inspected by my network twice a year during which time I have to prove my competence, I have to undertake refresher tests and I also undertake significant amounts of Continuing Professional Development each year. To put it mildly I feel this is sufficient.

Further I would like to encourage members of the committee to examine the differences between the actual Level 4 tests available now and those which are now deemed to be insufficient. I struggle myself to notice the difference. I have come to find this out as David our son has been working in the business for several years and we are paying for him to sit the diploma exams. He is a Masters graduate and he is quite disillusioned in respect of his future when he sees the inequitable cost burden being thrust upon us, the lack or proportionality in regulatory decision making, in addition to decisions made by the FSA which will definitely not work when applied to our client base.

For a young newly married graduate who, along with ourselves, has not received a pay increase in 3 years to have the FSA using the increased fees applied to our business to fund lavish Christmas parties. Despite the regulator's statutory duties to retain market confidence, increase public awareness, maintain consumer protection and protect whistleblowers it intends to keep its reports into HBOS secret and out of the public domain. This is in spite of the clear conflict of interest it has in relation to HBOS as James Crosby a non-Executive Director of the FSA since 2004 and its Deputy Chair between 2007 and 2009, retained the position of Chief Executive of the bank until 339

2006 and was supposedly instrumental in the sacking of the whistleblower Paul Moore, head of Group Regulatory Risk at HBOS, after he raised concerns over the banks rapid expansion.

This illustrates the point that many of my fellow IFA's seem to share which is that there is one rule for the banks, who have been able to either lobby at the top of the FSA or are both the regulator and the regulated, whilst the legitimate concerns of the IFA industry have been widely ignored. Unfortunately this seems to be the case with the RDR.

Given the FSA's track record and its membership at board level one cannot help to feel that there is an ulterior motive behind this, or at the very least a lack of concern for consumers and many IFA's who have given large portions of their lives to the industry. Would the committee at some point in the future consider looking at the merits of a stronger prohibition on regulators in the UK working for groups they supervise during or for a period after their employment?

Indeed I am already inspected by my network twice a year during which time I have to prove my competence, I have to undertake refresher tests and I also undertake significant amounts of Continuing Professional Development each year. To put it mildly I feel this is sufficient.

This brings me to the second point which is in relation to the remuneration structure which is being forced upon us and our clients, many of whom have already voiced objections. What is astonishing is that whilst IFAs will have to mandatorily charge fees, regardless of the consumers wishes, based on the regulator's fears of commission lead selling, banks are exempted. This is despite the commission driven selling scandal of PPI policies. This ignores the fact that IFAs produce more business accounts than banks and make up less than 2% of consumer claims. Surely this is the wrong way round I The FSA should concentrate on sorting out the banking system and leave what is working alone.

With regard to how we are paid at the moment, we as independent financial advisers must advise that we offer our services either by payment of a fee, by commission or by a combination of the two. It is then up to the client to decide how to proceed. People are happy with the choice we offer and many would not be able to afford our services if we did not go down this route.

That said if we only had high net worth clients then fees would be both practical for the clients and also most likely would be preferable to them in most cases. However, I would imagine that like us the vast majority of IFAs operating regionally would have a much more varied client bank. By forcing this structure upon the industry the regulator will be denying access to independent financial advice for many middle income people. This would have the disastrous effect of dramatically reducing our client base.

Indeed many industry experts are already encouraging us to dump our less well of clients. I refuse to do so and none of us got into this business to serve a narrow target market. One of the joys of the job is the ability to meet a wide range of people from varied backgrounds and affluence and be able to help them all.

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Through these new regulations the only alternative for many people would be the banking industry, which is exempted from having to charge fees, despite its record of commission driven selling scandals. I believe this would result in people not getting proper advice consistent with their needs rather they would be sold products based on decision trees. This does not reflect the complexity of many people’s situations. Speaking from experience far from opening up the industry to many more consumers it is shutting the door in the face of many who can benefit from independent advice and forcing them down a one sales path.

The actual cost of the RDR which is well in excess of one billion pounds is a profligate waste. The IFA system is not broken, people are happy with its proposition of choice in remuneration, but it may well be if this is implemented.

I trust that you will note my comments and act upon them. I am certain that my grandfather who was shot in the war would turn in his grave if he knew how the FSA was operating in Britain in 2010.

January 2011

341

Written evidence submitted by Mrs McCartney, Independent Financial Adviser

There are two issues which I wish to discuss:

1. Examinations 2. Charging Structure

I am an Independent Financial Adviser in a rural area and have been in financial services for 29 years. I look after around 400 clients, many of which are elderly. As a member of a network I have to prove my competence by having supervisory inspections, undertake refresher tests and maintain a log of CPD through study and attendance at seminars and workshops. I feel that this is sufficient and as I am in my late fifties the last thing that I need is to re-qualify for my job and will not be doing so.

When the standards for entrance to the nursing profession were raised to degree level for new entrants all of the existing nurses who had qualified under the old system were not struck off on a given date if they failed to re-qualify. Can you imagine the headline - "10,000 Nurses Struck off the Register." There would have been a public outcry! Instead as in other professions they are able to continue to practice by maintaining CPD.

As Peter Hamilton, a barrister specialising in financial services wrote in Money Marketing on 25/06/09 in an article entitled "FSA needs to treat its own customers fairly" - "It is one thing to impose new rules on new entrants to the IFA profession, it is quite another thing to disqualify someone who is currently qualified."

As things stand, on 31st December 2012 I can advise my clients and on Ist January 2013 I will be deauthorised and lose my livelihood - as will thousands of other IFA's. My 400 clients will have no adviser - as will millions of other clients. The FSA say that this is acceptable. I think that it is deplorable!

With regard to how we are paid, as Independent Financial Advisers we offer the client a choice of paying by fee, commission, or a combination of both. People are happy with this choice and many middle and lower income clients choose the commission route. After 1st Jan 2013 when fees only are introduced many of these people will be unable to afford independent financial advice.

I can understand that the regulator wants to increase the exam for new entrants to level four but why not leave those at level three where they are and make a mandatory disclosure to the client stating that you are a level three or level four adviser. The client can then choose which level of adviser with whom they wish to do business.

So in summary- By imposing the RDR in its current form thousands of IFA's will lose their livelihoods and millions of clients will be left not knowing where to turn as their trusted adviser will have been deauthorised. By only allowing fees as payment for advice millions of middle and lower income customers will be excluded from obtaining independent financial advice. I trust that you will note my comments and act on behalf of the advisers and the public before it is too late.

January 2011 342

Written evidence submitted by W H Ireland Ltd

As some of our staff are now starting to take their level 4 qualifications in order to comply with the RDR, in light of their experiences, we must write to protest at the scope of the exam requirements. The 'one size fits all' strategy adopted by the FSA has led to an exam syllabus that in many cases is entirely irrelevant to the candidates. There is considerable disquiet that no recognition will be given to a professional who has had 30 years of experience, and is being expected to take a similar exam to an individual with no experience, starting out in the industry. To expect an individual in their 50's or 60's to be able to cope in exam conditions as well as someone in their early 20's fresh out of University, is clearly unfair. The wealth of experience accumulated over many of years in the financial services industry is not something that can be tested by an exam.

We know from our trade association, APCIMS, that they lobbied the FSA very hard in the months leading up to the RDR decision, on the basis that stockbrokers/investment managers should be treated differently from the IFA community, the majority of whose regulations the RDR covers. It is clear from the scope of the exam that APCIMS views should have been listened to.

With the FSA regulating 2,700 firms it is difficult for them to tailor make specific exams for specific firms. The result of this is that we have the exams that will lead to individuals becoming Jack of all trades and master of none. Where is the relevance or an investment advisor, who has specialised in giving advice on the stock exchange for over 25 years, being asked to study a syllabus that requires them to then become an expert in other branches of finance such as pension, mortgage, and insurance products. In a company such as ours we have specific professionals who are qualified to give this advice and it would not be something that an investment manager would attempt to do.

The main thrust of the FSA argument for its examinations is that the quality of advice where packaged products are concerned needs to be improved. For the majority of investment managers, the only time they would deal with anything that could be termed as a packaged product would be in giving advice on collective investments such as investment and unit trusts. From our understanding of the situation from APCIMS, it is because of this area of overlap that investment managers are being bought into the RDR whose aims seem to be more relevant for the wider IFA community in general.

Assuming that some form of 'grandfathering' is not on the agenda, we would ask once again that consideration is given, not just to a lower level of examination for those individuals who have had many years unblemished careers in the financial services sector, but also that some differentiation is made between financial advisors and investment managers/stockbrokers.

January 2011 343

Written evidence submitted by Chris Dodd, Independent Financial Adviser

I am hoping the Committee will take some note of my submission. Having been an adviser in the financial industry since 1972, and an IFA since 1988, I feel I have something to offer.

My concern is that the FSA are trying to fit everyone, including clients, into a round hole.

Sadly this is not possible. My reasons are as follows.

1. I have several hundred clients and I know that very few would be able to pay for financial advice. My clients have been very happy with me receiving commission and appreciate I am extremely fair and normally take only half my entitlement. The RDR will abolish commission and create a barrier between those who can afford advice and the majority of people who cannot. A possible solution may be to reduce maximum commissions payable by providers.

2. The RDR requirements, as they stand, are extremely unfair on the older IFA. It creates a 'cliff edge' scenario whereby someone like myself will be, after thirty years’ service, disqualified from practicing on 1st January 2013. I see no reason why someone like me should take a raft of expensive exams for a few more years service. The rules as they stand could be contravening human rights and could be an illegal restraint of trade. This is another matter and I do not wish to cloud the issue further. My solution, which I think should be seriously considered, is to allow the older IFA to be grandfathered in some way. Important criteria such as time in the industry and complaints history would be a fairer way to judge the quality of an IFA. Incidentally, most IFAs use, and pay for, good technical advice which is on hand at all times. If I am not sure of something I will seek technical advice immediately.

3. Lastly, I would like to ask the Treasury Select Committee to discuss the lack of a 'long stop' rule for IFAs. I gather we are the only profession that can be subject to a 'stale' claim twenty or thirty years in the future. This is grossly unfair and IFAs should be brought into line with other professions.

January 2011 344

Written evidence submitted by Julian Ellis

Introduction

1. The purpose of this document is to give my views on the Retail Distribution Review ("RDR") that is been undertaken by the Financial Services Authority ("FSA").

2. The RDR has three main considerations:

• Professional Standards including a code of ethics • Disclosure of a firm's scope of advice {independent or restricted} • Commission bias

3. In addition there is a separate proposal to increase the financial resources requirements of personal investment firms which is outwith, but in conjunction with the RDR.

4. This memorandum considers each point in turn.

Executive Summary

Professional Qualifications

5. That the new qualification requirements are implemented without grandfathering. However, where a qualification existed prior to RDR compliant qualifications and that legacy qualification meets the Level Four standard requirement, the existing qualification should be considered an appropriate qualification without the specific need to gap fill.

6. I welcome the code of ethics.

7. The timetable for advisers to meet the Level Four requirement should continue as outlined by the FSA in its RDR timetable. That is 1st January 2013 for existing advisers and 30 months for new advisers.

8. The new RDR compliant qualifications are not fit for purpose in that some of the material being examined is completely irrelevant to financial advisers and to the outcomes for consumers.

9. I would support the introduction of higher qualifications as a minimum as I do not believe that the Level 4 requirements as set out by the Financial Services Skills Council ("FSSC") are adequate.

Disclosure of a firm's scope of advice

10. That this element of the RDR is brought in to force in its entirety on the 1st January 2013.

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Commission Bias

11. That the basis on which commission is to be removed is altered to allow product providers to provide factoring services on commercial terms to advisory firms.

Reasons for my conclusions

Professional Qualifications

12. The current requirements are the equivalent of an 0 level. This is an unacceptably low level of requirement.

13. If we want to be seen as a profession this level must be raised immediately.

14. Advisers have been aware of the need to take additional qualifications since June 2006 giving over six years for advisers to reach the required level. Although the precise requirements were not set down until more recently, advisers could have taken action prior to now.

15. There is an ongoing requirement for Continuing Professional Development ("CPO"). This should be linked to the needs of the adviser in his business and not to the qualifications.

16. Of the advisers within my firm who have attained the required Level 4 qualification but need gap filling to attain competent status in 2013, the CPO required may not be relevant to their specific need. For example, knowing their way round the F5A handbook is my job for the firm and not that of advisers.

17. Except for the adviser who is to retire, those advisers who have not reached the required Level 4 qualification accept that this is through their own failure to take exams over time and they recognise that they must attain the new Level 4 qualification.

18. Generally, the advisers who say they are experienced and do not want to take qualifications can be assessed using the alternative assessment process.

19. I have taken three of the new Level 4 qualifications. The first, which should have taken two hours, was less than an hour. The second, which should have taken an hour, took just under 15 minutes. The third which is recognised under the new RDR compliant format but was taken in the old style took the full two hours. The old style took between two and three hours. While this does not in itself indicate the amount of learning required, I am concerned that the qualifications have not yet been designed to meet the industry's needs.

Disclosure of a firm's scope of advice

20. There is no doubt that customers must be aware of what a firm does and with whom.

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21. This should have been clear from the previous disclosure rules but the quality of the disclosure requirements and documents drafted by the F5A did not provide clarity for customers.

Commission Bias

22. The F5A (and previous regulators) has for many years considered charges as being the most if not only reason for or against a product.

23. Charges form one part of a reason why a particular product could or should be recommended.

24. The FSA has only ever collated information from adviser firms where a product has been taken up by a customer. It has never asked or collected information on cases where no product has been sold.

25. The FSA's own research indicates that many people would like the adviser charges to be deducted from the policy.

26. On some occasions it is in a customer's financial interest to have the charge paid out of the policy.

27. The rules on charging will have unintended consequences which may also be detrimental to the savings market. For example where a customer is taking full income draw down and he wants the fee to come out of the product, how will it be treated for tax purposes?

28. How will HMRC consider a pension contribution where the fee is deducted from the product?

Some comments on the letter dated 13th December 2010 from Hector Sants of the FSA

29. The letter quotes the alleged cost to consumers as a result of unsuitable sales. From personal experience, I have seen occasions where the FSA has alleged a sale was unsuitable or that it was not clear that the sale was suitable only for the FSA's conclusion to be proved wrong. Therefore can the statistics be relied upon? (Subject to confidentiality the evidence of the FSA's failure can be supplied).

30. While the letter highlights consumer detriment, no where does it put the cost into proportion by comparison to consumer benefit.

31. Regulation itself has impinged on the savings market by increasing costs and reducing the industrial branch type of financial products. These provided those who had little money with a very effective way of saving.

January 2011 347

Further written evidence submitted by Chris Dodd, Independent Financial Adviser

I have outlined below evidence and actual factual information highlighting the major flaws in the RDR proposals as put before Parliament. I feel this is the last opportunity to make these important amendments. A great deal of their assumptions has been made using outdated reports and this gives a totally inaccurate picture.

a) The distribution model is not broken but the detriment caused by the banks is making IFAs appear to be guilty

b) IFAs have 80% of the pensions market and banks 6% but if we look at the redress paid under the Pension Reviews we can see that 88% was paid by the banks and insurers and 12% by IFAs. c) The RDR will cost £1.7bn yet the FSA says that the saving on reducing consumer detriment will be £250-£500m p.a. These figures are wrong because they are based on a mix of2005-2007 new business and average commission figures. My estimate is around £50m p.a. d) The professionalism argument is being promoted by reference to an eight year old Australian survey of 124 firms. The survey was flawed, in any event, because any firm which failed to give out a Terms of Business letter was marked 'poor' regardless of the quality of their advice.

The imposed cull of qualified IFAs, particularly the older ones who will not take a whole raft of time-consuming and expensive examinations, will prevent the average person from being able to afford sound and impartial financial advice. This is something which I have personally encountered many times from interviewing my clients.

The proposed' cliff edge' scenario whereby those IFAs who have not taken the new examinations will be thrown out of work on the 1st January 2013 has got to be amended in some way and I would suggest some form of 'grandfathering' for those IFAs who have been in the business for many years and have an unblemished record.

January 2011 348

Written evidence submitted by A J Mathers, Mathers, Harrison & Co

There is no doubt in my mind, that the FSA have got the RDR very wrong. They (the FSA) say that it is acceptable to lose up to 30% of IFA firms, as a result of the RDR. This would be a great injustice to those IFA's throughout the UK and to their clients, who will lose a long standing (in my case) trusted adviser. Where will these clients go? - well, probably to the Banks, and we all know their track record, and what they are capable of getting up to?

How can that be sensible or right, how can that be seen as progress? The FSA seem hell bent on destroying Independent Financial Advice, and forcing out quality IFA firms, who have done a great job over many years for their clients. The FSA seem to have no idea about client relationships or how small businesses like my own work in the 'real world'.

George Osborne has said that the FSA are 'not fit for purpose', and were 'asleep on the job', during the great banking crisis, and he is keen to replace the FSA? Many of the senior managers at the FSA, have, or are about to leave the FSA, and it would appear that they were in some way responsible for the RDR. The RDR will be a total disaster, IFA's will be forced out of business, and clients will be seriously disadvantaged. Overall higher standards are a good idea, however the FSA have not consulted on this matter in depth or bothered to take IFA views and they have therefore 'frozen out' experienced IFA's, who see no alternative other than to retire.

I have run my business for almost 41 years, and I am selling my business. I am 62 in February. Although I have taken many examinations in my career, I am too old to revise and take many more. The FSA know what my track record is, and yet they want to force me to take further exams, even though I would be nearly 64 at the time of the RDR coming into force?

Due to FSA incompetence, it is tragic that thousands of IFA's (and their employees) are going to be thrown on the scrapheap, because of the previous Governments desire to destabilise Financial Services in the UK. Common sense dictates that the RDR in its present form must be amended, in order to give decent, experienced IFA's, and their clients, a better chance of surviving in the future.

Finally, I would like to say that the '15 year longstop' which IFA's had under the Limitations Act 1980, but have now been denied it since the passing of the Financial Services and Markets Act (Dec 2001), should immediately be reinstated for IFA's, in the interests of natural justice and fairness for all under the law. The law must be for every UK citizen, and for every type of small or large business.

How can it be right that when I do retire, I have to endure 'unlimited liability' for the rest of my life? That cannot be right, and therefore must be put right, retrospectively back to December 2001. Again the Labour party, the Treasury and the FSA are the conspirators behind this spiteful act, and I would ask that you bring this gross injustice to the FSA, in order that they in turn can instruct the Financial Ombudsman Service to stop looking at cases, longer than 15 years from the outset, that they currently allow through at the moment.

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The evidence over the past dozen years is overwhelming that IFA's have, by far, the lowest number of complaints recorded against them, (the banks have the most) and yet IFA's are continually picked on by the FSA and the RDR, by example is a process that will greatly affect IFA's more than any other sector. IFA's have been treated very unfairly by the FSA, and all we ask for is a 'level playing field' to work on?

The number one priority must be the '15 year longstop' for IFA's, and I trust that you and your committee will press this hard with Mark Hoban MP and the FSA.

January 2011 350

Written evidence submitted by J P Morgan

Retail Distribution Review ("RDR") - Global Private Banking Perspective

We are writing in response to the UK Treasury Select Committee's "call for evidence" in relation to the Financial Services Authority's ("FSA") RDR proposals.

We have reviewed and considered the detailed provisions set out in the March 2010 Policy Statement (PS 10/6) as well as in the more recent Consultation Paper on Platforms: Delivering the RDR (CPIO/29 - November 2010). In October 2009, we wrote to the FSA outlining our concerns with these proposals from a private banking perspective as part of the RDR consultation process. We attach a copy of that letter for the consideration of the committee [not published] . The recent House of Commons debate on the RDR (29 November 2009) concentrated on the impact the RDR will have on the UK IFA market which we appreciate is the primary focus for the new regulations. We understand the need to enhance the training and competence of UK financial advisers and to mal

We now think it is timely to focus on the impact that the RDR will have on the clients of UK-based private banks and wealth managers. For private banks or wealth managers with an international sphere of operation, who have a major presence in the UK or who have chosen to locate their European headquarters in this country, we feel that there are a number of potentially damaging unintended consequences that will occur as a result of the proposals in the RDR on advisor charging.

Our client base, in common with other UK-based private banks, consists of high net worth ("HNW"), individuals and families. Our clients typically are highly mobile and have multiple relationships with private banks around the world and may ovvn homes in a number of countries. Our clients typically have high levels of financial sophistication and employ professional financial advisors. Their financial needs, the types of products they seek and the terms under which they are prepared to pay for advice are very different from the average UK consumer.

Our clients will typically compare services and pricing of different private banks across multiple jurisdictions. All other factors being equal, such clients would be as happy dealing with a private bank in Paris, Geneva or Singapore as with a UK-based private bank. Generally speaking, our clients are attracted to the UK as a financial centre, due to its well developed capital markets, the security of the banking sector, and the level of service and expertise they receive in London. However, we are concerned that the RDR proposals will place the UK-based private banks and wealth managers at a considerable disadvantage to their non-UK based competitors in other EU member states and beyond.

Under the proposed changes to the advisor charging rules, regulated firms will no longer be able to accept trail fees from funds, even if they are appropriately disclosed to clients. If RDR has the effect that the global funds industry moves to develop RDR 351

compliant products, then we can see that a key step forward will have been achieved in terms of fees transparency. However, we believe that there is a considerable risk that the majority of non-UK funds will not restructure their products in line with RDR and clients are unable to invest in such funds. This will have the effect of limiting the range of products available to UK-based investors. Alternatively, the funds could retain such fees in relation to UK clients, thus making the funds more expensive for a UK client than a non-UK client. As this regulation will affect UK clients only, UK based private banks will need to apply different fee charging schedules to UK clients to those outside the UK.

It is our expectation that our clients will simply seek these products through alternative means, such as via a non-UK private bank, particularly those clients wishing to invest in hedge funds and private equity funds. These are generally offered on a global basis and UK investors are only a small proportion of the global offering. It may be the case that these product providers offer no RDR compliant solution and, therefore UK-based clients are tillable to invest in them. These are niche products, sought after by HNW clients, and we feel that they should be exempted from the products in scope for RDR. As the FSA acknowledges, the RDR proposals in relation to advisor charging are super- equivalent to those stipulated in the applicable EU legislation and no other EU state has transposed MIFID requirements in this manner to date.

The extent of the problems being created by RDR for a global private banking group, such as JP Morgan Private Bank is laid out in an Annex to this letter. Please note that the figures contained in this Annex are market sensitive, and we would be grateful if you could treat them as confidential [not published].

In addition to the restrictions on fees, which will lead to restrictions on fund offerings to UK clients, there will be substantial costs associated with developing operating systems that capture the changes proposed under the RDR. These new systems will need to distinguish between clients in scope for RDR, typically clients based in the UK, and those outside the UK, and therefore out of scope. The FSA has failed to provide a clear definition of clients in scope, so firms are obliged to take a conservative view. This is a particular problem when dealing with clients who only stay in the UK for part of the year.

We feel that the needs of the UK private banks and wealth managers and their clients have not been given due consideration by the FSA. Furthermore, we are finding it difficult to fully comprehend and assess the consequences of RDR due to a lack of clarity in a number of areas, including the following:

• Whether discretionary client accounts are in scope for RDR; • What is the range of investment products captured by RDR; • What is the definition of "Advice" in the context of RDR, and how can this be distinguished from a client relationship which is purely "execution-only"; • How the advisor charging elements of RDR can be accommodated in a private banking relationship.

The lack of clarity on these points and the clear disadvantages faced by UK-based private banks means that any planning for the RDR is extremely difficult and costly in terms of management time. We also face a change in IT systems which will cost 352

upwards of £2m. This cost will be replicated across the various private banks in the UK. Hence, the overall unintended consequence of RDR will be to drive global private banking business from the UK to other more flexible jurisdictions.

As a potential solution, an exemption from the adviser charging elements of RDR should be applied in relation to HNW clients as those clients are able to understand more complex products and charging structures. These clients should be given the freedom to elect to stand outside the new regulations.

The RDR is designed to protect UK consumers. The HNW client base that we service wants a full range of products and therefore should be permitted to opt out of the RDR protections in order have these available to them. We have attached a letter from Freshfields to the FSA on this point. We note that the FSA responded with the view that firms could "Opt Up" such clients to "Professional" status, thus eliminating the need to apply the RDR standards. However, this is not always possible, as the MiFID standards require a number of quantitative tests to be passed that do not necessarily apply even to extremely wealthy clients, for example, the requirement to transact more than 10 trades in a specific product per quarter, which is extremely rare in the case of Private Equity and Hedge Funds. The FSA is free, if it chooses, to apply a different standard, as RDR does not derive from EU regulation.

We would welcome the opportunity to discuss with the Treasury Select Committee solutions that would assist the UK in retaining private banking business which brings benefits in terms of revenue generation and employment and is one of the reasons why HNW clients choose to base themselves financially in the UK, which in itself, brings ancillary benefits to the wider UK economy.

January 2011 353

Written evidence submitted by Angus Low

I am 59 years of age and employed as a senior Advisor for a private client firm in Dundee which is regulated by the FSA, My individual FSA Registration Number is AXL00109. I am remunerated by Salary only and any commission received is rebated to my client's.

I graduated with a 2.1 Honours Degree in Financial Services from the University of Abertay, Dundee in July 1998 after 4 years of full time study. I subsequently sat and passed the Chartered Insurance Institute Financial Planning Certificates to level three allowing me to perform duties as an Independent Financial Advisor.

Following the decision of the FSA to bring into force the 'RDR' I have been informed that the FSA does not recognise my Honours Degree in Financial Services as the degree course at the University of Abertay, Dundee was not on their recognised list of Qualifications. I have also been informed that the Financial Planning Certificates I passed with the Chartered Insurance Institute are also not recognised after December, 2012 and if I wish to continue in my profession I have to start again and re-sit all of the examinations to achieve the Diploma in Financial Services or alternative qualification with other recognised institutions.

As I am unable to retire officially until I am 65 years of age I find that at 62 I will no longer be able to perform any regulated functions unless I sit and pass the new qualifications.

Whilst I am not totally against sitting new examinations, I find it unacceptable that no consideration has been given to advisers in a similar position to me, who, after 4 years of study at University and subsequently passing the required examinations at the time, suddenly find that past qualifications and experience mean nothing to the FSA.

January 2011 354

Written evidence submitted by Richard Arnold Financial Management Ltd

I understand you are looking for factual based information to reflect upon in your review of the FSA's RDR.

The contentious elements of the RDR of which there are many, are largely based on unproven or out of date perceptions.

Mr Hoban's summary and justification at the House of commons debate on the subject was "the need to regain consumer confidence", citing the Pension mis-selling era, which was over ten years ago!. Much was learnt by both the IFA community and the role of regulation over these years and the vast majority of IFA firms have developed highly professional practices and have delivered superior and largely complaint free advice as the outcome.

Much of the current mistrust in financial services can be placed directly on the FSA and the Banking community following the so called "Credit Crunch". With complaints and distain at all time record highs against the Banks...

It is time that the treasury select committee to reject the notion that the RDR rebuilds trust in the IFA community. The current model, although not perfect, is capable of delivering sustainable advice during a period of serious economic recovery and a demand to minimise cost. This is both in the consumer interest and that of the Nation’s demographic financial models.

A period of reflection is required and a serious rethink of the powers of the FSA which they have repeatedly demonstrated does not resonate with common sense.

On a personal level I have always been uncomfortable with the repeated aspirations of the FSA to be a "world class regulator", when it should be that they aspire to "Regulate a World class Financial services industry. Much of what comes out of the FSA is indeed the wrong way round!

Evidence of maintained and growing consumer confidence:

• Online searches for 'independent financial advisers' reaches a yearly high of almost 120,000 in September • Online searches for 'independent financial advisers' increases by 15% since the start of the year • Online searches for 'IFA' increases by 22% since January 2010

Unbiased.co.uk, the professional advice website, reveals the volume of online search engine enquiries for 'independent financial advisers' reached almost 120,000 in September - an all time high for 2010. This surge in online Google searches has resulted in an overall increase of 15% since the beginning of the year.

There has also been an increase of 22% since the start of the year of those searching for an 'IFA' on Google. These figures suggest that consumers are becoming increasingly 355

aware of the 'gold standard' financial advice type and ensuring they include the keyword 'independent' when searching for financial advice on Google.

Karen Barrett, Chief Executive of unbiased.co.uk comments: "These figures paint a positive picture for the IFA brand. and the industry as a whole, as it appears an increasing number of people who are researching their financial advice options online understand that they need to include the word 'independent' to find an adviser who can access products from the whole of the market place.

1. The term 'independent financial advisers' has been calculated by grouping the following search terms:

• Independent financial planner • Independent financial advisor • Independent financial adviser • Independent financial advice • IFA Independent financial advisor • IFA

Total number of Google searches on these keywords in September 2010 = 118,870

2. Number of Google searches on the keyword 'independent financial advisers' in January 2010 = 103,010

Number of Google searches on the keyword 'independent financial advisers' in September 2010 = 118,870

Percentage increase = (118,870 -103,010) /103,010 *100 = 15.39%

3. Number of Google searches on the keyword 'IFA' in January 2010 = 74,000

Number of Google searches on the keyword 'IFA' in September 2010 = 90,500

Percentage increase = (90,500 - 74,000) 174,000 *100 =22.29%

January 2011