Retail Distribution Review

Written evidence submitted by Sean Glorioso

Reshaping Retail Financial Services to Rebuild Consumer Trust

Themes

Part 1. Consumer Financial Services Advice Choice

Part 2. Financial Adviser Qualifications

Part 3. Retail Financial Services Industry Structure

Executive Summary

The spirit of RDR is to recapture consumer trust in retail financial services.

One of the themes is to offer consumers the choice of either accepting restricted or independent advice. The adviser will be suitably qualified to QCF level 4.

The structure represented of the financial services industry distribution of retail financial services taking account of the major distributors for example Retail Banks (Bancassurance), Wealth Management Firms, Network Platforms (i.e. panel of funds), Insurance Firms, Stockbrokers and other participants will result in a restricted advice monopoly when considering the application of EU Competition Law principles to the supply of a particular product and/or service.

The forgoing therefore means that RDR in principle offers no real benefit of choice given that the consumer won’t be in a position to access readily on national basis independent advice. This also therefore disenfranchises localised community Solicitors, Accountants and other Professionals including Trustees given the Trustee Act 2000.

Moreover the QCF Level 4 qualification therefore under a restricted advice label won’t have much practical application given that some restricted providers won’t facilitate a full product solution thereby rendering the qualification inappropriate for a particular adviser.

Changing the industry imbalance to the advantage of the consumer will only come about if serious consideration to the FSA enforcement powers to tackle poor advice is strengthened.

The RDR position therefore means that the restricted advice label will become the advice monopoly that will destroy the long term prosperity of the mass affluent consumer in that the consumer will continue to suffer from poor advice given that no real choice will be available on a national basis.

Part 1 . FSA RDR Stance on Consumer Advice Choice – Restricted or Independent

Part 1. A. FSA - RDR Definition: The Restricted Advice Choice Label

1.1 Restricted advice by far is the most predominate in market share.

1.2 Restricted advice equals a selected panel of products to provide solutions to consumer needs.

1.3 Restricted advice totals poor consumer outcomes given that it effectively sets up advantage for the distribution channel and adviser rather than to the advantage of the consumer.

1.4 Restricted advice does not provide financial needs solutions it pushes products on the consumer.

1.5 By way of example in answer to 1.4, Bancassurance sets out a single product that moulds to needs rather than tailor to specific consumer need. In some instances this is beneficial given that a particular product may benefit that particular consumer need but by in large each consumer need given their unique circumstance requires a combination or single product that predominantly falls outside the scope of the restricted panel of products.

Part 1. B . FSA - RDR Definition: The Independent Advice Choice Label

1.1 Independent adviser choice provides a wider scope to meet consumer needs given that it’s a whole of market choice.

1.2 The FSA register of dual qualified advisers i.e. those that are classified as stockbrokers as well as financial advisers and/or any research evidence available to the Committee will show that the Independent Adviser market share is a tiny fraction of the restricted adviser market share.

1.3 Independent advice acts as a far more positive consumer outcome given that it has the ability to serve each individual consumer need. The spectrum of whole of market products offers a wider and deeper product suit to meet the unique consumer needs.

1.4 The Independent advice label is the only single vehicle that can support Trustee responsibilities under the Trustee Act 2000.

1.5 Independent advice captures a larger consumer audience of needs than the restricted advice label.

1.6 Likewise the independent advice provided is a far more robust method of delivering financial advice given that it provides solutions to needs to a greater audience and it does not push product on a need that does not require the same.

1.7 The difficulty however in seeing growth in the Independent advice label to cater for a wider consumer audience lays in the industry structures particularly given the market share that Retail Banks (Bancassurance), Wealth Management, Insurance firms , Networks (panel of funds) control. Facts that the FSA can readily provide the committee.

1.8 The North American retail financial services sector is far more robust in delivering independent financial advice solutions to consumer needs examples may include some of Americas best known and largest financial services firms Wells Fargo, Edward Jones, and Merrill Lynch and in Europe AWD Holdings AG.

1.9 The Independent advice label will provide greater Long term Financial Stability to the Consumer and British Savings Market.

1.10 Further the interdependence of fairness and trust with the consumer will increase in ratio as the advice provided will serve the consumer need thereby forging stronger relationships of trust between adviser and consumer over the long term.

1.11 Further the mass affluent consumer will have greater scope to access financial solutions that meets their needs rather than product solutions that do not meet the consumer need.

Part 2. Financial Adviser Qualifications

2.1 FSA QCF Level 4 main outcome objectives;

2.1.1 Increase Professional Financial Adviser Standards

2.1.2 To achieve a more positive consumer perception outcome for Financial Advisers

2.2 An adviser qualification plays only a small part in the relationship wheel of trust between adviser and consumer.

2.3 The QFC Level 4 will achieve greater financial adviser literacy will it though create a better landscape of financial services delivery in that more consumers benefit from solutions that meet their needs rather than match the restricted provider’s sales volume targets.

2.4 The adoption of QFC level 4 will not deliver better financial services delivery to the mass affluent given that a great proportion of the retail financial services distribution platforms i.e. the Bancassurance models, other restricted providers will only seek to reduce the product options available to consumers thereby rendering a QFC level 4 qualification nonsensical for those advisers and therefore disenfranchising the mass affluent.

2.5 Smaller firms operating as pre RDR label classification of independent i.e. the Independent Financial Advisers are already well qualified and provide good advice evidence of this is prevalent in the numbers of complaints that the Financial Ombudsman Service (FOS) receives when compared with smaller firms and larger firms. Granted larger firms cater for a greater proportion of financial services delivery however an assumption if complaints are reviewed on an individual case by case basis against each adviser then surely complaint evidence on an adviser by adviser basis will show that larger distributors account for more complaints on an adviser per adviser basis than smaller firms.

2.6 The above 2.5 holds true when considering the type of advice being afforded through restricted compared to independent advice.

2.7 The prevalence of the restricted adviser advice model when reviewed in light of EU Competition law principles means that to large extent real financial solutions that meets consumer needs will in all probability not lead to the RDR vision of rebuilding community trust but create further imbalance and less choice for the consumer.

2.8 Further in support of all the above in Para 2. advisers will be qualified to QCF level 4 but few will fully utilize the qualification due to restriction of products when undertaking financial services delivery to the consumer.

2.9 If for example the Bancassurance model is used as a method to calculate as a proportion relative its overall market share and not considering complaints but delivery of financial solutions to meet consumer needs then it is evident that RDR will fail to reach its stated objective but rather it will disenfranchise smaller financial services firms that are already providing solutions that meet the needs of consumers. In other words the QFC Level 4 great in principle but poor in delivering financial solutions to the mass affluent market.

Part 3. Retail Financial Services Industry Structure

3.1 RDR classification of the Restricted and Independent advice label classification are two separate advice chambers.

3.2 The two advice labels are very different in providing a financial solution to meet the consumer need. Restricted provides almost a solvable solution to consumer needs but quite often is product focused whereas independent advice is geared towards financial solutions to meet the need rather than product driven.

3.3 The Financial Services Industry structure means that the FSA RDR definition of advice labels will follow that restricted advice will be far more prevalent in market share than independent advice.

3.4 If RDR objectives for fairer consumer outcomes are to be achieved then a thorough investigation of the impact of the two advice label choices should be considered in light of the principles that apply to EU Competition Law in that a single product and/or service monopolises the market to the determinant of the consumer.

3.5 The consumer choice between restricted and independent is a good choice however such choice should be available to the consumer on a national footprint otherwise the consumer will in effect have no choice but a restricted adviser label choice thereby rendering the RDR advice choice distinction futile.

3.6 RDR sights should be aligned to job creation to strengthen the Independent adviser label opportunity to service consumers nationally.

3.7 FSA financial oversight should have real teeth in application much to the same degree as EU Competition Law has on large organisations in such a way that the EU Competitions Law principles promote consumer confidence and organisational management engagement.

3.8 The FSA it seems is toothless in restructuring the industry for the betterment of the consumer given that the failure of poor restricted advice is not set off sufficiently by the risk reward ratio that firms apply to their financial advice risk policy setting.

3.9 Contrast EU Competition Law penalties for failing consumers with that which the FSA sets out in penalties for the systematic failures to firms that continually deliver poor advice on a wholesale basis.

3.10 Case in point in support of 3.8 above the recent (11/01/20011) FSA fine of under £3 million relating to RBS and Natwest failings in complaint handling methodology equated to less than the Chief Executives annual salary and incentives. Whereas EU Competition Law sets much large penalties on turnover which forces better internal firm management and risk return policy setting outcome for consumer fairness.

January 2011