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23/08/2007 - The RDR – Three Steps to Clarity or Confusion?

Will consumers find the three new categories of adviser suggested in the RDR three steps to clarity or three steps to confusion.

If we start by looking at Primary Advice. I was always taught that if something looked like a duck, swam like a duck and quacked like a duck then it probably was a duck. Primary Advice we are told will provide less affluent consumers with standardised advice, less choice, no restrictions on charges, lighter regulation and more limited rights of complaint to the Ombudsman. In a nutshell a charter for big institutions to sell more expensive products to the less well off whilst providing less choice, less protection and fewer rights. By no stretch of the imagination should this be termed Primary Advice, indeed I doubt if such a description would pass the FSA’s own test either for TCF or for advertising which was not misleading.

Primary Advice is clearly Secondary Advice however, on the assumption that such a name would be unacceptable to the FSA as few would want to associated with it we could call it either limited, narrow range or restricted advice. Even better I recommend we abandon the current “basic advice” regime which everyone agrees has failed and rename Primary Advice “Basic Advice”. I believe this would be a much more honest description of what is outlined in the RDR whilst giving it a realistic chance of working successfully.

The next suggestion to consider is General Advice. I believe that General Advice offers the worst of all worlds to both consumers and advisers. Indeed I have a lot of sympathy with the suggestion in the RDR, supported by the ABI and others that this may only be a short-lived stop gap solution during the transition period as we move into the new world envisaged by the RDR. In reality however I believe that if the categories of Basic (primary) Advice and Professional Advice are properly structured one can fairly ask why any, resources time or money should be spent on the General Advice category at all.

I turn now to the category into which the vast majority of current IFAs should fall, that of the professional financial planner. We see much ill informed comment about IFAs so at the outset I believe it is important to remind ourselves of some facts. Firstly we know the market share of IFAs is comfortably above 60%. Secondly we also know from research that two thirds of IFA clients are C1 or below. What these two facts mean is that IFAs have a substantial market share and serve a wide cross-section of the community. Nonetheless having a significant market share and serving a broad cross-section of consumers does not of itself indicate customer satisfaction or absence of consumer detriment.

We therefore need to examine some further evidence to establish whether IFA advice is good or bad for the consumer. I would suggest there can be no more independent and unimpeachable source for such evidence than the Financial Services Ombudsman. All things being equal one would expect the complaints to the Ombudsman to reflect market share i.e. in the case of IFAs, somewhere in excess of 60%. Indeed given the greater capital resources of the banks and insurance companies, which we are told is so important when compared to IFAs, and their supposed willingness to settle complaints without recourse to the Ombudsman it would not be at all surprising to find that complaints about IFAs to the Ombudsman were in fact a bit higher than their market share.

In reality the FSO review for the period April 2005 to March 2006 like the previous year shows that complaints to the Financial Services Ombudsman in respect of IFAs represented just 14 out of every 100 complaints. This compares to 26% in respect of banks and 45% in respect of life insurance and investment providers. In a nutshell the IFA sector has over 60% of the market for retail financial services yet generates just 14% of complaints.

Against this background it is clear that there is no justification whatsoever for the great majority of the present IFA sector not to be grandfathered into the professional financial planner category. For this not to happen would disenfranchise the vast majority of their clients and cause huge market disruption for no material gain whatsoever. Clearly this should not be on a no change basis as we all want to support and encourage the growing trend towards professionalism which is already self evident in the advisory sector.

It is worth noting that it is only about a year since the status of Chartered Financial Planner was awarded by the Privy Council and already some one thousand financial advisers have qualified for the designation, with many more working towards it. Grandfathering should therefore only be available to individual advisers who have been advising for a minimum period of three years with a good complaints record and who opt to work under the Customer Agreed Remuneration principle. In addition they should be required to join their professional body and agree to be bound by its code of ethics and disciplinary code. They should not, of course, be given any designation or qualification they have not earned. It would also be reasonable to expect new entrants to achieve more testing levels of qualification than are currently required thereby encouraging an ever more highly qualified and professional financial advice sector.

Such a structure would enable us to dispense completely with the “General Financial” adviser category whilst delivering a robust and increasingly professional top tier of “Professional Financial Planners”. Equally the renamed “Basic Advice” level would enable the Banks and others not able or willing to provide a full service to consumers to offer their customers “basic advice”. I believe such a solution would deliver real clarity to consumers whilst minimising market disruption and avoiding the unintended consequences which some of the RDR’s current proposals would bring.

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23/08/2007 - The RDR – Three Steps to Clarity or Confusion?