Retail Distribution Review

Written Evidence submitted by Merlin Financial Consultants

Merlin Financial Consultants is an Independent directly authorised adviser based in Holborn, London.

The firm was formed in 1988 and employees 12 people.

Executive Summary

Merlin Financial Consultants supports the overall objectives of the Retail Distribution Review and applauds the many adjustments that the Financial Services Authority have made as a result of their consultative process. However, this organisation does retain some serious concerns over the method and timescale of the implementation of some of the proposals.

A transparent and fairer charging system

1.1 In 1988 the founders of the firm had a dubious view of the balance of remuneration within the commissions system and given the comments of Gordon Borrie, on behalf of the Office of Fair Trading, at that time about the Lautro Commission rates being a cartel, they were not confident of the longevity of the system and therefore doubtful of it providing a reliable base for the new ongoing relationship that the company and its consultants would have with their clients. As a result the firm decided at that time it would offer the client the option of remuneration for advice and or implementation by means of fee, commission, or a combination of the two.

1.2 This firm believes that the method of remuneration needs to be agreed with the client as early in the advice process as it practical. We see that a fee based upon a disclosed method of quantification is acceptable and that a properly disclosed commission is just another form of fee. However, it must be recognised that commission is often preferred by the client due to the VAT rules and the preference for not having to actually get their chequebook out.

1.3 We strongly believe that the term Independent should be retained by all those firms who offer a whole of market solution and should have no connection to the method of remuneration.

A better qualification framework for advisers

2.1 We support the aim of higher standards but we have severe reservations about a number of the proposals contained in the review.

2.2 We would not though support that an AFPC exam qualification is the only benchmark by which these higher standards can be achieved or that it is the right entry level.

2.3 Recent years have demonstrated that in the narrow area of technical knowledge an exam qualification attained does not provide the guarantee of quality desired. A G60 pensions qualification provided little assistance with the obscurities of the implementation of pensions simplification, or a taxation and trusts tick did not enable you to deal with the arrival of the pre-owned asset tax.

2.4 A standard needs to be achieved and then more importantly developed and constantly updated. This development and update needs to be delivered to the practitioner in "digestible bit size chunks" and appropriate tests on the subject matter taken rather than the concept of a full blown study course and exam to reach a new standard.

2.5 Continuous knowledge development based upon a commercial level of knowledge is what is required and this needs to be provided by a Financial Advisers Professional Body.

2.6 It offers a route of flexibility and constant update that the current totally confusing range of static qualifications does not.

2.7 However, a good adviser needs a considerably wider skill set. It has been historically said that the job was 10% technical knowledge and 90% understanding people. Those percentages may now be slightly different but the concentration on the technical will not ensure the Professional Adviser that is being desired.

2.8 We strongly support the concept of grandfathering with adequate support that the adviser has undertaken viable continuous technical knowledge development. Retention of large quantities of minor information for regurgitation at speed in a tightly set timescale in an examination does not provide a viable measure of the skill sets required.

2.9 We think grandfathering supported by the commercially orientated knowledge development indentified in point 2.5 would avoid a set timescale of implementation of a higher level by a certain date but would introduce the concept of constant upgrading.

2.10 We agree with AIFA that without a professional grandfathering process considerable numbers of knowledgeable and experienced "Professional Adviser" will exit the sector. This fall in advisors numbers may be sufficient to create a reduction in the overall size of the sector to bring its viability into question.

Greater clarity around the type of advice offered

3.1 Clive Briault in his speech at the Cazalet Consulting Conference on the 2nd November 2007 adding to the Sir Callum McCarthy Gleneagles speech, was puzzled by why new and inventive business models were not being brought to market and at the same time questioned the unrealistic long term strategies of many, and in particular major, financial advice groups along with the profitability of many providers.

3.2 The answer to this lies in the market uncertainty created by a consistent lack of continuity of objective for what is the correct retail environment.

3.3 The original thinking behind polarisation rules were immediately abandoned within months of being introduced and the concept of clear separation of Independent and Tied was immediately lost in allowing banks to be able to promote themselves as either trading style and small intermediaries to continue by joining networks.

3.4 The independent sector, without the networks, would have been better positioned to create its own professional body with the potential of developing its own requirements for good practice and code of conduct.

3.5 The unclear positioning of the banks and networks under polarisation enabled them to perpetuate the upfront commission model, crucial to the short-term business profit stance of the bank and the network provider that otherwise would have withered.

3.6 It is not just a coincidence that the level of complaints to the Financial Ombudsman Service created by the IFA sector, which accounts for some 60% of the market for retail financial services, generates only some 14% of the complaints.

January 2011