Retail Distribution Review

Written evidence submitted by JP Loveland, Hanover de Broke

Executive Summary

· The cost to Independent Financial Advisers (IFA’s) of the proposed RDR is currently estimated to be in the region of £1.7 billion and this figure is likely to rise

· This cost will fall directly on the investor and consumer at a time when the UK has the lowest personal savings ratio in the G20 with widespread pensions underfunding

· The UK currently suffers from the largest savings, retirement and protection gap in its history. RDR will draw £1.7 billion or more directly out of the net savings and pensions pool

· At present IFA’s hold 65% of the market share but only 2% of complaints made relate to IFA activity whereas Banks account for 61% of complaints made (source ‘FOS’)

· Alleged mis-selling is estimated to amount to £250 million (source ‘FSA’)

· Complaints against IFA’s are going down every year but complaints against Banks are rising

· RDR will result in at least 30% and perhaps as many as 50% of experienced IFA’s being forced out of the industry leaving a core of only 10,000 fully accredited advisers with a further 10,000 qualified only to provide restricted levels of advice

· The independent and specialist advice gap created by RDR is likely to be filled by ‘simplified’ advice services provided by Banks targeted at servicing the mass market and based on models which generate personal recommendations based only on a limited assessment of a customers financial circumstances

Introduction and background

Hanover de Broke Private Clients LLP is a financial advisory business serving high net-worth individuals and private clients. Launched in 1998 as Hanover Financial, Hanover de Broke now manage over £100m of client’s assets.

Hanover de Broke’s clients are drawn from some of the oldest families in England as well as the Judiciary and several of the country’s leading QCs. Legal and other professionals feature prominently in our client list as do senior company executives and many ordinary people who are happy to engage us on a commission only basis. Many of these clients have been with the firm for more than 20 years.

Hanover de Broke Private Clients LLP is managed by me, JP Loveland as Principal Partner and I have been advising private clients on their financial affairs since 1984. I have invested heavily in both time and capital to build up my business over this period. I have worked tirelessly over the last 27 years to build a worthwhile business only to see it now threatened by the RDR.

Against this background I am happy to have an opportunity to make this submission to the Committee.

Submission

1. Cost-benefit: Currently the projected cost to Independent Financial Advisers (IFA’s) of the proposed RDR is in the region of £1.7 billion for the first five years. The cost of RDR is likely to rise further and will fall directly on the consumer and investor at a time when this country has the lowest personal savings ratio in the G20 and the highest levels of personal debt with widespread pensions underfunding. RDR will therefore draw £1.7 billion or more directly out of the net savings and pensions pool in the UK.

The UK currently suffers from the largest savings retirement and protection gap in its history.

The FSA have suggested, based only on assumptions and extrapolation, that alleged mis-selling amounts to £250 million p.a. The Financial Ombudsman Service (‘FOS’) has stated that in 2009 only 2% of complaints in this area related to IFA activity whereas 61% of complaints related to the activity of Banks. At present IFA’s hold 65% of the market share. In the past five years the proportion of complaints against IFA’s has gone down every year whilst the proportion of complaints against the Banks has risen year on year.

2. Impact: RDR will nevertheless impact the IFA community disproportionately with the Association of Independent Financial Advisers (‘AIFA’) suggesting that 30% of IFA’s will chose to leave the financial services industry as a result. This would amount to up to 10,000 experienced IFA’s in good standing leaving the profession and it has been suggested that it will be many of the most successful and hardest working IFA’s who will be forced out by the joint burden of the cost of implementing the new scheme of RDR regulation and meeting the proposed new level of qualification. Ernst and Young have estimated that the number of IFA’s might be reduced by as much as 50% by RDR leaving a core of only 10,000 fully accredited advisers with a further 10,000 qualified to provide only restricted levels of advice.

RDR is a fundamental and far reaching intervention into a well established market and such an intervention should meet a stringent cost-benefit test and must be justified by overwhelming evidence of harm to consumers balanced against the appropriateness and proportionality of the proposed solution. The FSA is trying to impose on the industry an advice process and a particular business model that fails to recognise or understand the reality of what the investing public want. This Government should move the regulators away from a prescriptive approach to regulation toward an approach that allows the well established independent financial advice industry some freedom to develop their own business models based on principles of fair open and honest advice to customers.

3. Who will suffer as a result of RDR? Apart from IFA’s, the UK’s leading consumer champion, Martin Lewis of Money Saving Expert has said that "There is a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy." He went on to say "I’m not convinced that most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash."

At the moment consumers have a choice whether to pay for their financial advice by way of a fee or by commission. Since 1991 every IFA client has been given full written details of their advisers’ commission earnings and the overwhelming majority of investor clients have elected to pay by commission and the market share of the IFA sector has risen from 29% to over 65% based on a well understood and preferred regime of commission funded independent financial advice.

The regulatory process is already cumbersome and costly with the result that it is no longer cost-effective in many cases for those with limited funds to seek advice from an IFA. The cost of many financial products has risen dramatically and as an example of this, 30 years ago the annual management charge on a unit trust was usually in the range 0.25 – 0.375% whereas now 1.5% would be the norm. Much of this cost increase can be attributed directly to increased costs of regulation and there is little or no evidence that any of this will change under RDR which will add further layers of regulation on to an already over-regulated industry.

Without the considerable burden of existing regulation most experienced IFA’s could significantly improve the service they offer to customers whilst at the same time drastically reducing charges.

4. Who will benefit? The British Bankers’ Association (‘BBA’) expresses concern that RDR will cause the advice gap to widen but then goes on to say that it sees ‘simplified advice’ as key to servicing the mass market. The FSA’s RDR rules say the regulator will not look to create a new regulatory regime for simplified advice because of a lack of consensus in the industry about how it would operate but the BBA are clear in their submission that the development of a simplified advice service should be process-led and that "The service would be predicated on models which generate personal recommendations based on a limited assessment of a customer’s financial circumstances. It needs to be absolutely clear that simplified advice is limited to a certain type of product or product suite. It has to follow a proper process, people have got to be trained, but not to level four necessarily, and the process has to be agreed with not just the Financial Ombudsman Service but also the regulator."

It is not clear how consumers would benefit from a simplified ‘mass market’ approach to advice and personal recommendations based only on a limited assessment of a customer’s financial circumstances generated by Banks if that were to be the outcome of RDR. A ‘Which’ survey has concluded that surveys tend to show that IFA’s perform better than Banks. The main beneficiaries of RDR are likely to be the Banks and their insurance arms to which they are tied, as confirmed by the Chief Executive of HBOS.

5. Conclusion: The FSA embarked upon the RDR in 2006 with the intention of addressing three perceived areas of difficulty which I comment on below;

· A transparent and fairer charging system (The potential for advisers’ remuneration to distort consumer outcomes)

Charles River Associates (‘CRA’) a leading global consulting firm that provides economic, financial, strategy and business management advice to law firms, corporations, accounting firms, and governmental organisations ; commissioned by the FSA found limited evidence of product and provider commission bias in the market for UK retail investment products. They commented in 2009 that "It is often argued that providers offering higher commission will ’buy’ market share. We did not find evidence to support this." T hey also confirmed that moving to a fee-based model to the exclusion of commission would not lead to any benefit since consumers choosing to pay on a fee basis do not receive better advice than those opting for a commission basis and that therefore there i s no evidence that fee-based advice provides better outcomes.

· A better qualification framework for advisers (Improvement in advisers professional standards and qualifications)

It would not be unreasonable to ask aspirant new entrants to the IFA industry to pass examinations at the level now proposed by the FSA in the RDR but grandfather rights should be given to experienced existing IFA’s for as long as they can continue to demonstrate a current level of up to date knowledge and skills. The ‘cliff edge’ cut-off date for qualification under RDR of 31st December 2012 is probably not achievable for either the industry or very many IFA’s and should be extended and mitigated by grandfather rights. The burden in our current dire financial situation in the UK of having to fund the consequences of RDR for my business and to study and take exams to achieve the higher levels of qualification required by RDR whilst at the same time providing for my wife and family and earning a living is too much and I know that I am not alone in feeling this.

· Greater clarity around the type of advice being offered (Improvement in the clarity with which IFA firms describe their services to consumers)

Since 1991 every IFA client has been given full written details of their advisers’ commission earnings and this discipline will of course continue after RDR. The regulatory regime for financial advisers has increased in both scope and depth very considerably during my time in the industry and I believe that clients are now well served and well protected by a framework of regulation that does not allow financial advisers to deliberately mislead clients as to the nature and key elements, advantages and disadvantages of financial investments and products that are sold or about the type of advice offered and the levels of commission earned.

January 2011