02/01/2008 - RDR: A Response From Simply Biz
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Introduction
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Professionalism
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“Grandfathering”
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The Step Change (Our Vision)
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Tiers (Advice or Sales)
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Generic Guidance
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Customer Agreed Remuneration
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Conclusion
We believe the FSA’s RDR to be a major opportunity for the Regulator and the profession to work together to create a stable, practical and consumer centric framework for the financial services sector as a whole. As such it is an opportunity not to be wasted. Simply Biz has therefore played a full part in the active debate which has been taking place during the past six months. We have also proactively worked with the countless IFA’s with whom we have daily contact to ensure that they have had as much information as possible about the RDR and its objectives.
In framing our response to the RDR we have therefore directly involved the firms for whom we act. This has included regular email communications to all firms on the various issues and the progress of the debate as well as countless individual discussions both face to face and by telephone. We have also delivered live web based Q & A’s. These have proved to be the most successful we have ever run, with many hundreds of active participants and most of our member firms viewing the resulting information. In addition, the RDR was a main topic at all of our 25 regional meetings which covered the whole of the
2. Professionalism
It is widely recognised that within financial services in general and in the IFA sector in particular, a real drive for increased professionalism is already taking place. The seeds for this were sown in the early seventies when the Life Insurance Association (LIA) led the way in the provision of examinations and the establishment of qualifications for financial advisers. This was often against the wishes of product providers who saw such requirements as inhibiting their ability to recruit salespeople and/or increasing costs. Nonetheless this journey towards increased professionalism has not only continued but in recent years has gathered momentum both from IFA’s themselves and from the interest and involvement of educators and regulators.
The merger, two years ago, of the LIA and the Society of Financial Advisers (SOFA) proved an important milestone on this journey. This merger was the catalyst which enabled the Privy Council to award the merged entity, the Professional Finance Society (PFS) under the auspices of the CII, the status of Chartered Financial Planner. This has given a real boost to the drive for professionalism as many advisers of all ages attain and aspire to enhance their status through the achievement of advanced qualifications.
3. “Grandfathering”
We are confident therefore that there is a real appetite amongst independent financial advisers for a “step change” in the professional development of the sector and the recognition that the RDR presents an opportunity for this to be achieved. This support is however subject to one critically important caveat as regards the transition. This is that this “step change” does not prevent current advisers of good standing who qualify in all other respects, but have not achieved a particular qualification, from continuing to serve their clients. For this not to be the case would be an absolute travesty of fairness and justice. It would also be contrary to the practice of the other professions which historically have always “grandfathered” existing practitioners of good standing whenever standards have been raised for new entrants. We do not believe our view or that of the firms we represent to be an isolated one. Indeed we understand that a recent survey by the Association of Independent Financial Advisers (AIFA) found that whilst the majority supported higher qualifications and the drive for greater professionalism, the vast majority (75%) also supported the “grandfathering” of current advisers. The same survey found that if “grandfathering” was not permitted, over 25% would leave the profession.
Our own considered view is that depending on the length of the transition period, the shortest being three years and longest being ten years, between 10% and 30% of today’s advisers would leave the profession. Not only would this be wrong in principle but at a time when a key public policy objective is to narrow the “savings gap”, it would be a blunder of enormous proportions to deprive possibly several million consumers of the services of the experienced and trusted advisers they currently rely on.
It should be noted that numerous surveys have found that there is no evidence of material or systemic consumer detriment being caused by the IFA sector. Indeed the Financial Ombudsman Service Annual Reports clearly show that in a career of over thirty years, the average independent adviser “may” have between three and five complaints and that one of these “might” become a claim and if it does that claim is unlikely to be for a significant amount. Against this background, it is clear that no useful purpose would be served by preventing current practitioners from continuing to serve their clients. It is however right and proper that we raise the bar for new entrants and encourage all current advisers to further increase their professionalism.
We believe that without “grandfathering” the negative impact on the sector would be such as to seriously damage the interests of consumers. It is readily accepted that the IFA sector currently represents a market share well in excess of 60% and also that two thirds of all IFA clients are CI or below. This means that at present the IFA sector is successfully serving a large part of the market and covering that market in depth. A further glance at the Financial Ombudsman’s Report would also show that despite a 60% plus market share, IFA’s represent only 14% of complaints. We accept that no market is perfect, including the distribution of financial services, and that, wherever practical, improvements should be made, however we reject completely the suggestion that the “financial services distribution” market is broken or causing serious or systemic consumer detriment.
Improvements can be made and in particular we believe that the RDR can and should become the catalyst for further accelerating the sector’s drive for professionalism. This will encourage more people to qualify for and join the profession which in turn will enable the “step change” we set out below to be achieved whilst retaining the many current experienced advisers of good standing through the transition period and beyond. It is perhaps worth noting that in recent research it was found that over 65% of IFA clients have had a relationship with their IFA for over eight years and almost 30% for over 15 years.
4. The Step Change (Our Vision)
We believe that to the extent that the RDR has focussed on Chartered Status as the ultimate benchmark of the financial services profession it has been right to do so. Unfortunately this bold, even visionary objective, has largely been overtaken by the practicalities of the transition and a confused range of tiers, a matter we address shortly. Nonetheless it is a worthy goal and one which we believe should be retained as a clear longer term but achievable objective.
Our vision of the future therefore is one which ensures that within six years every client of an “adviser” will be confident they are being advised by someone who is a member of a professional body and qualified to the equivalent of Diploma standard or above or that the advice is being overseen by an adviser or Compliance Officer of Diploma standard or above.
Furthermore we believe that this should be but a staging post to the time when Chartered Status becomes the accepted benchmark. The timing of this is difficult to predict however we visualise the majority of firms achieving Chartered Status within the next 10 to 15 years. By definition this means a significant acceleration in the number of individual advisers achieving Chartered Status. Indeed peer and consumer pressure could well shorten this period considerably as the benefits of enhanced professionalism feed through into increased commercial success and the expansion of the sector. Our firm view however is that this will be achieved more effectively through encouragement and market forces than by regulatory dictat.
To ensure that the “step change” we all want to see can be achieved without undermining current advisers of good standing, there should be certain minimum requirements in addition to the present FPC to enable a current adviser to continue to give advice beyond the end of the transition period.
From the date of the new requirements coming into force:
a) They must be qualified to at least the current minimum level and properly authorised by the FSA with the appropriate permissions for the areas of advice they wish to give.
b) They must be of good standing with the FSA with no regulatory or other proceedings outstanding against them.
c) They must be and remain members of good standing of an appropriate professional body.
d) They must have agreed to adhere to their professional body’s Code of Ethics.
e) They must have agreed to be subject to the disciplinary code of their professional body in addition to their obligations under their FSA authorisation.
f) They must have agreed to undertake Continuing Professional Development in accordance with the requirements of the FSA and/or their professional body.
g) They must agree to have all their advice overseen either by a colleague or an internal or external Compliance Officer of Diploma standard or above until such time as they achieve Diploma status or equivalent themselves.
It is self evident that individually and collectively these additional requirements of a current adviser are significant enhancements to today’s requirements and therefore in no sense could this be considered “grandfathering” in the traditional sense or as applied by other professions. Nonetheless, we see them as an appropriate compromise to ensure the delivery of the “step change” whilst properly permitting current advisers to continue serving clients.
Clearly from a certain date, all new entrants to the profession will be required to achieve Diploma standard or its equivalent before being authorised to give unsupervised advice. The above requirements will of course also apply to them.
One final point in relation to the above is whether or not the FSA has the power to make membership of a professional body mandatory. Should it not prove possible this would not negate the above as we would recommend that the FSA sets a significantly higher fee and gives a substantial discount to individuals who are members of a professional body.
We do not believe that the suggested tiers and descriptors set out in the RDR will be of benefit either to consumers or the sector as a whole. The watchword should be “simplicity” and the key differentiator which needs to be understood by the consumer is whether the proposition being put to them is sales driven (product pushing) or based on advice from someone who has a duty to act in their client’s best interests. Whilst the sales approach does not necessarily lead to a bad outcome for the consumer, the key difference is that an “independent adviser” must at all times represent the best interests of the client whereas the salesperson represents his own or the provider’s interest.
To put this into context, whilst advice often leads to the sale of a financial product the objective is to provide information and guidance to the client whether or not the outcome results in the sale of a product. For the salesperson, the objective is simply to do whatever is most likely to result in the sale. The descriptors should therefore focus on making this difference between “sales” and “advice” clear to the consumer. It is difficult to conceive simpler descriptors than those of “advisor” and “salesperson” it should then be the task of firms themselves under TCF to clearly describe and position themselves by status and qualification in their chosen marketplace.
As an alternative to “salesperson”, we would not be averse to descriptors which incorporate the essence of the service being delivered and therefore what the consumer can fairly expect to be delivered as follows:
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Instructed Purchase (Today’s Execution only)
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Assisted Purchase (The consumer asks to buy, take out or start a pension/ISA etc and simply wants to know which one they should choose)
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Advice (The adviser takes responsibility for analysing the client’s needs and recommending the solution).
6. Generic Guidance
In view of the likely adoption of Otto Thoresen’s work on Generic Guidance, which we warmly welcome, we would in time expect his recommendations to have a positive impact on the financial capability and knowledge of consumers. This should include assisting consumers to recognise the fundamental difference between selling and advice.
Agreeing the form, quantum and source of all advisers or salespersons remuneration with the consumer is likely to be a useful addition to the overall transparency of financial services. The reality is that in any commercial transaction it is self evident that there are costs to be met and payments to be made. To suggest that clients of financial advisers do not recognise this fact is disingenuous. The introduction of Customer Agreed Remuneration (CAR), as envisaged in the RDR, should enable the relevant payments to be made either directly by the client or via the product provider in a manner which is robust and transparent. Most importantly it should also put an end to the sterile debate about fees and commission. To be successful we believe it is an essential requirement of CAR that it is applied to all financial products regardless of the distribution channel or tier.
Notwithstanding the above, we have a real concern that however desirable total transparency might be there is a real danger that in its quest for detailed disclosure, the FSA might find the waters muddied to the disadvantage of the consumer. We believe that the two most meaningful items of use to the consumer are firstly the Total Expense Ratio (TER) or Reduction in Yield (RIY), secondly the clear declaration of any potential conflicts of interest. Dealing with the first, we find it astonishing that TER or RIY, operated in a similar way to APR, would not be the preferred method of disclosing a product’s costs to the client with of course any additional fees being charged being also disclosed.
Whilst the detailed information of how the various underlying charges and costs are made up should be available to the adviser, and to the client on request, in most cases it simply confuses the client and distracts him from the key information. On conflicts of interest, we believe the approach adopted by MIFID has much to commend it in that the client should be made clearly aware orally and in writing, of any potential conflicts of interest howsoever arising.
Finally on remuneration, we have seen a suggestion that consumers should be able to instruct product providers to redirect trail or renewal income to themselves. We find this proposal nonsensical and completely counter productive as far as building a more robust independent sector is concerned. IFA’s are increasingly foregoing initial commissions to focus on building long term relationships with their clients and the recurring income this generates. Clearly if they are not being properly serviced, a client should be free to choose another adviser and redirect any trail or renewal to the new adviser. However for a client to be able to redirect it to themselves would create an unacceptable moral hazard, the only result of which would be to force advisers to re-focus their attention on initial commissions to the detriment of all the main public policy objectives.
Whilst we recognise that the debate has moved on, for the avoidance of doubt we confirm our view that it is inconceivable that the term independent could be applied to anything other than a practice or an adviser who is free to select products from the “Whole of Market”. The term is well established and understood within the marketplace by consumers. It would be confusing and completely counter productive to attempt to change this well established and accepted understanding of the term independent.
9. Conclusion
In responding to the RDR as set out above we propose a series of measures and actions which, taken together, will enable the FSA to achieve its declared objectives whilst maintaining all that is best within financial services distribution. We believe the combination of the “step change” in professionalism and a sensible transition process based on inclusivity rather exclusivity will be of real benefit to consumers whilst avoiding wholesale disruption to the sector. Add in a clear distinction between sales and advice along with improved financial information and transparent remuneration systems and you have the potential for a stable and vibrant professional financial services sector capable of serving more consumers more effectively. Indeed it is quite conceivable that within a decade or so, major progress could be made towards narrowing the savings gap with all the benefits this would bring to individual consumers and Government.
This prize is within the grasp of the financial services sector and the FSA. We sincerely hope that both will have the wisdom and courage to turn this opportunity into reality. For our part we would welcome the opportunity to discuss this response with you and stand ready to assist the FSA in its delivery.
Chairman
Simply Biz Services plc
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