Supplementary Written evidence submitted
by the Institute of Financial Planning
Further to our giving evidence to the committee
on 19 October we are responding as requested with an outline of
how we think regulation can work more effectively in the area
around the provision of professional financial planning and advice
to consumers.
The original objectives of the RDR set out in
the FSA's Feedback Paper1 of November 2008 were to:
1. improve the clarity with which firms describe
their services so that customers understand the services they
are being offered;
2. introduce new, higher professional standards
for advisers;
3. address bias in adviser recommendations by
reforming the system of commissions based remuneration; and
4. ensure that where independent advice is offered
it is truly independent.
We believe that points 2 & 3 are satisfied
by the current proposals however we have concerns around points
1 & 4 which we expand on below.
According to cp 09/18, the RDR was set up with
the following broad objectives which we completely support:
— 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;
— remuneration arrangements that allow
competitive forces to work in favour of consumers;
— standards of professionalism that inspire
consumer confidence and build trust;
— 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 and which does not inhibit
future innovation where this benefits consumers.
Again looking at these broad objectives we fear
that the first two and the last of these points are not being
best served by the proposals. Regarding the last point, we believe
that the growing regulatory burden on firms is stifling innovation.
It is time that proposals were aligned completely with consumer
needs in an understandable way rather than continuing to protect
vested interests.
We believe the first paragraph of our response
to cp 09/18 continues to set out our position clearly:
"The IFP believes that this Consultative
Paper makes good progress towards achieving the original objectives
of the Retail Distribution Review. Professional standards will
be improved, commission bias will disappear and the consumer will
potentially be better served. We remain concerned that this important
initiative is still predominantly focussed on `products' and distribution.
It is not positioned to be concerned with `advice' which not only
adds value for consumers but will ultimately be the reason why
consumers take action."
Building on our evidence given at the hearing
on 19 October, we continue to have concerns over the following
key areas:
— Clarity regarding firms describing their
services.
— Industry vested interests overriding
the interests of consumers.
— A focus on products rather than process.
— A lack of emphasis on the need to educate
and engage the public.
In our original responses to the RDR we suggested
that the fiduciary responsibility of the planner is far more important
as evidence of "independence" rather than just a focus
on which products they are selling. The IFP would prefer to see
the removal of misleading adjectives used to describe the service
provided, and more straightforward and consistent descriptions
to be used aligned with the key points below.
Clarity and honesty are the critical factors
for disclosure, so as to ensure that consumers can make informed
choices as to the status of the firms they are happy to engage
with. There are a small number of key variables that consumers
need to be aware of when selecting a source of "advice"
and these are (in broad order of importance) as follows.
1. SERVICE OFFER—ONE
OFF SALE
V ADVICE
AND ONGOING
SUPPORT V
FINANCIAL PLANNING
(a) A one off sale would be a single interaction
to resolve an issue that does not involve any follow up. This
would be paid for by a single one off fee/commission and no further
contact would be required and therefore no further fee/commission
payment would be made.
(b) Advice and ongoing support would be
where a client has a need for advice on setting up a service like
a trust, or setting up a product like a personal pension that
may require ongoing review, and therefore may have ongoing contact
and further fees/commissions payable.
(c) Financial Planning would be a full lifetime
holistic service involving building recommendations (including
products if required) to fulfil a clients life goals following
the six steps of financial planning…
(i) Establish and define the client-planner relationship.
The Financial Planner should clearly explain and document the
services that he or she will provide to the client and define
both his/her and the client's responsibilities during the Financial
Planning engagement. The Financial Planner should explain fully
how he or she will be paid and by whom. Client and planner should
agree on how long the professional relationship should last and
on how decisions will be made.
(ii) Gather client data, including goals. The
Financial Planner should ask for information about the client/s
financial situation. Client/s and planner should mutually define
the client's personal and financial goals, understand the time
frame for results and discuss, if relevant, how the client/s feel
about risk. The Financial Planner should gather all the necessary
documents before giving advice as needed.
(iii) Analyse and evaluate financial status.
The Financial Planner should analyse the client/s information
to assess their current situation and determine what they must
do to meet their goals. Depending on what services client/s have
asked for, this could include analysing assets, liabilities and
cash flow, current insurance coverage, investments or tax strategies.
(iv) Develop and present Financial Planning recommendations
and/or alternatives. The Financial Planner should offer Financial
Planning recommendations that address their client/s' goals, based
on the information you provide. The planner should go over the
recommendations with their client/s to help them understand so
that they can make informed decisions. The planner should also
listen to client/s' concerns and revise the recommendations as
appropriate.
(v) Implement the Financial Planning recommendations.
The client/s and the Financial Planner should agree on how the
recommendations will be carried out. The planner may carry out
the recommendations or serve as the client/s' coach, coordinating
the process with them and other professionals such as lawyers,
accountants or stockbrokers.
(vi) Monitor the Financial Planning recommendations.
The client/s and the Financial Planner should agree on who will
monitor progress towards the client/s' goals. If the planner is
in charge of the process, he or she should report to the client
periodically to review their situation and adjust the recommendations,
if needed, as their lives change.
2. INDEPENDENT
OR RESTRICTED
(a) We would argue Independent means that
the person/entity giving advice free of any commercial agreement
restricting their choice of product or provider.
(b) Restricted advice has taken many forms
and in the past, many firms who have chosen for commercial reasons
to restrict their offering to consumers have attempted to disguise
that restriction in order to maximise their commercial gain. Whilst
firms must be free to make such commercial decisions, this must
be disclosed in a open and honest way, so consumers can consider
what type of firm to form a relationship with. This disclosure
must be written, and must be given early on in the relationship.
The regulator should be especially aware of the tendency of these
firms to use "weasel words" (adjectives) to hide their
true status, and these should be specifically forbidden. Examples
of these are: "Best of Breed" and any implication of
"whole of market"—say in fund choice through a
single product provider "bond" wrapper, for example.
(c) All advisers should be able to offer
a Financial Planning service irrespective of how they are accessing
products. We should at all times start with all advisers being
able to act in the client's interest and establishing their needs
before moving to the world of product and suitability.
3. PAYMENT BY
FEE OR
COMMISSION
(a) Product sales would generate a commission
which is payable on the taking up of a product however this should
be at a clearly disclosed level prior to any product being selected
and the client should have a fee option provided.
(b) Advice and Planning should be by fees
agreed by the customer up front but as per the current proposals
some/all of this could be taken in the form of commission. All
"costs" should be disclosed up front so that consumers
can clearly compare offers.
So the hierarchy (in ascending order) could
broadly be:
Once the variables have been agreed we would
suggest consumer research take place to confirm how each different
offering can be described effectively in way that consumers recognise
and understand.
Many of our members are IFAs and we clearly
believe that truly independent advice is better than restricted;
however we have a range of consumer research from around the globe
that clearly shows consumers value the "planning" relationship
most in terms of bringing them peace of mind about their future.
Much has been talked about simplified advice
and simple products to better serve the mass market. This is an
area that is completely unresolved. There is an expectation that
simple products will excite the consumer and encourage them to
take action. Products alone do not give people the context that
everybody, irrespective of their wealth position, wishes to feel
personally engaged with. Martin Lewis for example has built up
an extremely loyal following from people who trust his integrity
and believe that he is acting in their interests. Quite rightly
the consumer reacts with sceptisism when a bank or other similar
organisation suggests that they have created a product which is
in the customer's best interests.
If we are ever to establish a means for the
mass market to access Financial Planning, the profession needs
to start with the consumer to properly understand their needs
and then overlay the process to make it a compelling proposition
for them to consider. Much around Financial Planning can be done
by the individual if they are engaged and motivated to get involved.
Most are too frightened or worried that they will end up with
something that they do not need or can't afford or that the government
will eventually help them out.
As for education there is also a huge amount
to be done here. Ensuring again that the material presented is
interesting and understandable is crucial. It must also be delivered
by people who understand the subject itself and it must be relevant
for the audience. Regulation has indeed stifled plain English
and an ability to properly communicate with people at a level
they understand and in a way which encourages them to take action.
As stated earlier it has also stifled innovation in the right
areas.
Financial Services is generally poor at communicating
with its consumers. A lot could be learned from the work done
by the retail industry with their customers, for us to better
understand consumers' requirements and to focus on areas such
as behavioural finance to engage more with people in an attempt
to build confidence and trust in the process itself.
The IFP are members of the Financial Planning
Standards Board Ltd. (FPSB) which is a non profit association
that manages, develops and operates certification, education and
related programs for financial planning organizations so that
they may benefit the global community by establishing, upholding
and promoting worldwide professional standards in financial planning.
FPSB works in conjunction with its members to develop and promote
rigorous international competency, ethics and practice standards
for CFP professionals in member territories to ensure that consumers
looking for qualified financial planners understand and value
CFP certification. The FPSB produced document (enclosed) titled
"Regulation and Oversight of the Financial Planning Profession"
explains why use of the titles such as Financial Planner should
be protected by law. Also enclosed is the FPSB document "The
state of the Financial Planning Profession in the `Post-Trust'
Era" which looks into the future of Financial Planning globally.
The current regulatory focus on products in
extremely unhelpful in educating the industry and consumers about
the need for sound financial planning. As described in Martin
Lewis' evidence to the committee, for many consumers the absolutely
best piece of advice for them is to reduce their borrowing before
undertaking any saving. In many cases consumers should be encouraged
to take such non product related actions before giving consideration
to using financial products, another example being the setting
up of wills. However where a company/individual adviser is remunerated
by, or has targets related to, product sales it will be unsurprising
that they conclude that a product is the answer and it is vitally
important that some process of fact finding is completed to assess
properly whether clients should be taking out a product. It is
vital that consumers are better educated and we would wholeheartedly
agree again with Mr Lewis that the lack of financial literacy
as a compulsory element on the national curriculum is a failure
on behalf of government. It may be worth looking at compulsory
education for consumers before undertaking major financial decisions
as has been brought in elsewhere in the world.
One further point that I would like to cover
is the claim that consumers will not pay fees. We support the
concept of customer agreed remuneration as described within the
RDR, where the customer understands the cost of the service/advice
up front but where some/all of this may be paid by commission.
Fees may be described in a number of ways ie not only £cost
per hour, but what is essential is that these fees don't vary
dependent on the product or product provider selected, and that
the consumer is fully aware of them up front. We again have a
weight of evidence from around the globe to show that where, as
in the case of Financial Planning, the customer understands and
values the proposition, that they will happily pay fees. We would
argue that many of the issues some existing advisers are raising
with fees and the unwillingness of consumers to pay them are a
factor of a product based proposition. A proposition that is focused
on products will be difficult to explain to a consumer in terms
of fees, however, a proposition based on the six steps outlined
above can easily be explained and broken down to reasonable fees
for each stage. Looking at this from a consumer's point of view,
which of these makes the most sense?
(I) "I will take a full factfind on your
personal circumstances, I will review all of your existing products,
I will recommend the most appropriate products and provider of
each product from across the market place but you don't have to
pay me anything unless you buy the product I recommend and even
then you don't have to pay me anything as I can be paid a commission
by the product provider. I'll then continue to get paid by the
product provider as long as I am your adviser whether you need
or receive any advice from me in the future."
(II) "I will take you through the six steps
of Financial Planning and will tell you up front how much each
is going to cost. I will work with you to really understand your
future goals, gather all of your financial information and recommend
a plan of action that has the best chance of achieving your goals,
and this may or may not involve products, and will agree with
you annual fees for reporting and meeting with you to keep you
on track with your goals."
Finally, regarding concerns expressed by many
IFAs and linked parties over the impact the RDR will have on access
to independent financial advice, we do not support the view that
the requirements to pass an appropriate level 4 exam by end of
2012 will lead to consumer detriment. The industry has had an
issue with an ageing population of advisers for some time now
and it's very interesting that the vast majority of examples given
of those intending to leave the industry are in their late 50s
or in their 60s. They were going to leave anyway, and it remains
our opinion that the level 4 is the minimum that should be required
to practice and that the timescales given to pass the qualification
should be sufficient for anyone who is committed to proving that
they possess the appropriate levels of knowledge and skills required,
especially those who have many years of experience in the industry.
The issue of an ageing population of advisers
is something the industry needs to address and only by increasing
the professionalism and status of the profession will we attract
new entrants and/or increase the numbers of graduates taking financial
services related degrees. While there may be a short term blip
(one we were going to have anyway given industry demographics)
this will be resolved in the medium to long term only by increasing
the professionalism of the industry which ultimately should increase
the public's trust and confidence in the service that is provided
to help them.
We welcome any further opportunity to expand
on the points above in order to find a way to resolve the major
issues facing UK consumers' financial future.
ENCLOSURES:[54]
FPSB: "The state of the Financial Planning Profession in
the `Post-Trust' Era"
FPSB: "Regulation and Oversight of the Financial
Planning Profession"
54 Not printed. Back
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