Retail Distribution Review

Written evidence submitted by Mark Thompson

I want to submit my input to the RDR debate having been given the opportunity and thank you for taking the time to consider it.

Adviser Charging & Qualifications

Adviser charging is a key driver for RDR. Consider the following scenarios and ask are clients being left in a better position after a given advice process has happened.

Currently the advice can be paid by a fee and/or commission or commission only.

In the case of commission regarding ‘Designated Investments’, a RIY (Reduction in Yield) is given in the illustration, this is a potential reduction in value if the initial investment, as a direct result of charges, including commission to the Adviser and is shown after a given projected time-span, for example 10 years.

What is not quoted or given, is the comparison when exactly the same charge is levied in the form of a fee, I would ask, why is a projection not given of the fee being invested for the same time period?, what it would be worth, if they had not received advice and it had defaulted to a Deposit-based contract. (In addition the prevailing tax bands of a nil to higher rate tax-payers could be applied were this is relevant).

What’s the point? & what’s the difference?

The point is that the client retains a wider payment option. You could mandate the requirement of payment to contain a ‘minimum fee payment’ along with a ‘maximum commission payment’, with the balance being from fee or commission. This is a viable alternative.

In this case all IFA’s /Advisers would have to have a fee proposition without removing the commission option.

The difference is that the fee charging is seen as an absolute default position, but ‘fee-charging’ has the same disadvantages as ‘commission only’ sales when greed prevails and the customer is not treated fairly. In both cases if the clients interests are secondary then it is open to abuse.

For the record, I am an IFA, I offer a Fee only, Fee & Commission, and Commission only at my initial meetings with existing and new clients.

I welcome greater transparency and the RDR debate has given greater focus to my fee-based proposition.

However, let’s look at a couple of scenarios,

1) If an Adviser charges £70 per hour and takes 16 hrs to complete the advice circle and another charges £140 per hour and takes 8 hrs and the outcome is the same. Has one adviser charged too much per hour? , is the other too slow?

Neither, it is a perception, as the client has the same end result with exactly the same end cost.

2) If they currently had received part/total payment as a commission or as a fee is the client better or worst off, no, its perception again.

In both cases the outcome is based on a large element of trust. This is difficult to accurately measure, however in the new regime what is there to stop fees being abused as much as commission.

The additional shortage of Advisers will create an opportunity for ‘fee hungry’ advisers to name their own price and will be one of the outcomes of this ‘new era of advice’. (There is some condescension from a few fee-based advisers, but I wonder how they would feel if the FSA branded them with the above title). So not only will the amount of adviser reduce but the number of people receiving advice will reduce as they will see initial costs as too prohibitive.

Qualifications –

Another part of the RDR process is around advice. I welcome further knowledge, but it must be relevant and of use in its day-to-day application.

What is the industry going to achieve by a year end 2012 deadline. Mr Sants states that 20% + is OK to be got rid of. Also for the record I intend to continue in the Industry.

If those persons have never had a complaint (or complaint upheld against them) and are advising, (in the broadest sense), the ‘middle-market’ of the client population, what is the problem?

I do not have an issue with qualifications but the lost to the industry is just dogma when Hector Sants states that a large section of adviser can go. Will people at Level 4 qualifications be as positive if and when the required minimum goes to Level 6.

I do have a problem with the CII’s approach that an exam only option being the preferred choice. If someone is better at exam technique does not correlate to better advice?

If somebody can memorize study texts does this mean they are automatically better at applying that information? , taking into consideration that it can be sourced with additional technical support if required in a real consultation with a client.

If someone has just completed their full-time education and can complete an exam more quickly are they better at giving advice as opposed to someone who cannot complete an exam as quickly and does not get the pass mark through lack of time to complete the full examination paper?

For too long AIFA & the CII have been speaking on my behalf without my permission and I would encourage this review to question the endorsements that these organization claim to have.

What percentage of the total IFA community, support the RDR process in its current form? Where is the current evidence to support this assumption?

The CII’s & AIFA’s should be asked for the statistics supporting these statements.

An alternative is to have a ‘declaration of advice’ provided/available to the client, stating that you have FSA approval for a range of products for Level 3, an additional column showing the aforementioned with the same for Level 4 and also Level 6. Long term care, Equity Release and certain Pension transfers would need additional licences were applicable.

The client would have a clear summary of the range of advice the adviser can advise on, and what happens if they cannot, simple.

This sets the scene for qualifications & advice, after which you carry on with the rest of the client agreement.

The question that should be answered is - What range of products could current ‘level 3’ advisers give advice on after 2012?

This way you give the incentive to expand your advice offering through further CPD and/or exams without losing 20 to 30% of advisers.

Another alternative is to extend the deadline, why 2012? There is quite a lot of support is for an extension of the self imposed deadline, which is a clear FSA ‘own-goal’

I have read other IFA’s comments and whether anti or pro RDR, there is a consensus of opinion on this point and this should be pursued further.

Conclusion

The Regulator has embarked on a dogma that has not been properly challenged.

It keeps saying that they have made mistakes and have learnt from them, but no accountability exists, just ‘a learning curve’. This is a great escape clause, and when RDR has failed the public, there will be no comeback.

The cost for RDR, The FSA, and upheld complaints should be calculated in direct relation to the number of relevant contracts advised/sold as the client is the ultimate payer.

The cost of enforcement is a major cost passed unto the client and I have seen no accurate analysis to date to see if this is correct or disproportionate to the perceived risk.

The IFA channel for distributing advice has a very good track record in comparison to other channels, most notably the Banking Industry this is to be found in the FOS complaints statistics.

A large part of the public will be excluded from receiving good independent advice. If they receive advice and it is wrong, then they can complain and are already protected. However the logical outcome is that the RDR process, in its current form is badly flawed. It is on course to directly achieve the opposite of one of the RDR principles, namely to increase the opportunity for as many people as possible to receive advice.

I listened to some very wise words years ago which stated the following, ‘…if you are going to criticise something make sure you have a better alternative’.

The RDR project has so far failed, and I hope that these points are constructive, clear and concise.

January 2011