03/07/2008 - RDR Anniversary Article – From Ken Davy
After a confusing start a year ago the RDR now appears to be moving in a very positive direction which should prove of real benefit to consumers. Indeed if consumers understood the arguments they would be writing to the FSA in droves urging them to hold their nerve in the current “advice versus sales” debate.
In its Interim Review the FSA favoured a clear demarcation between “advice”, which would have to be professional, independent and transparent, and sales, which would basically be all other forms of distribution. This solution has the distinct advantage of being simple and wholly in the consumer’s best interests.
What I find depressing is that after 20 years of regulation there are still those who want to muddy this clear distinction. In reality of course the position is straightforward, an Adviser by definition is independent and represents the client. Everyone else, whether tied or multi tied represents the product provider. They must apply TCF and not sell an unsuitable product however the fact remains that they cannot provide independent advice and the clients have a right to be made aware this basic fact.
To those who argue that status is unimportant and that whether you act for the client or the provider is irrelevant I simply ask, if that is the case why object so strongly to clients being given the basic facts about status. The irony is that for all the attempts over the last 20 years to avoid this clarity of status the reality is that the market share of the IFA sector has grown from under 30% to well over 60% today. A clear case of consumers voting with their feet. It is also important to note that based on the latest information from the Financial Ombudsman, IFAs only account for 4% of complaints despite having a 60% plus market share.
Of course I am not saying that the IFA sector is perfect, far from it, however we can see some real clarity in the definition of an IFA emerging from the RDR Interim Report. For advice to be independent, the adviser must be professionally qualified and free of any obligation to place business with any particular provider or group of providers. In addition any remuneration must be agreed with the client without the involvement of the product provider.
These simple definitions are critically important not just in themselves but also as the key differentiators enabling the FSA to separate independent advice from other forms of distribution. In other words any distribution model which cannot meet this simple yet critical criteria will automatically fall into the “sales” category and be disclosed to the consumer accordingly.
Once that definition is accepted it does not matter whether distributors describe themselves as money doctors, partners or sales consultants, the potential client will know they are not “Independent Advisers”. Equally whether or not the process leading to the purchase of a product involves assistance, guidance, advice, or anything else becomes irrelevant as the potential client will have been made aware that he is not receiving advice which is independent.
I would add that this argument is not intended to be either anti bank or anti multi ties. Once we have this clearly defined and simple regime I believe we will see a host of simpler and potentially lower cost distribution models emerge in competition to the traditional IFA.
The final element of the debate relates to remuneration. I deliberately use the term remuneration as the argument between fees and commissions has long since become sterile. It is clear that for advice to be independent any remuneration must be agreed with the client without the involvement of a product provider and perhaps one day all clients will be happy to pay that bill directly to the adviser. That day is however a long way off, therefore to avoid the RDR solution ending up like a hospital operation which is perfectly executed but kills the patient, a degree of pragmatism becomes absolutely essential. What this means in practice is that the adviser in agreeing his remuneration with the client must also be able to agree that it can be paid from charges added to the product. For this not to be permitted would be devoid of logic and result in untold and unnecessary damage being done to an IFA sector which by any measure is already delivering an important service of real value to consumers.
Ken Davy
Chairman
Simply Biz