Retail Distribution Review

Written evidence submitted by Derek Gair, GDC Associates

Past FSA Chairman McCarthy stated 'Retail Distribution Model is Broken' a statement flawed and without foundation - so started RDR

I do not detail every word of evidence that upholds my view, the detailed comprehensive evidence will doubtless be submitted by others. I will nonetheless refer to any particular study I rely on by name/date. Please note much of that evidence was commissioned by FSA itself to try to justify RDR. I will concentrate on consumer detriment brought about by implementation of RDR particularly Commission and Adviser qualifications

Commission

I refer to Oxera study June 2009, Charles River Assocs 2002 and 2005 & FSA RDR document DP07/1 - No evidence of widespread commission bias.

10-12 years ago, before the tenure of FSA, consumers had a good savings ethic a large proportion of consumers had some form of long term savings, pensions of some sort and a Life Assurance policy. We now have what is commonly referred to as the largest savings/pension/protection gaps for 30 years-during a period when the adviser population fell by 60-70% - coincidence? A common reason cited by FSA is lack of confidence. In my view the lack of supposed consumer confidence is the result of regulatory interference in free markets and endless retrospective reviews of past business NOT widespread adviser greed and bias. Perhaps the most important question is how will the gaps be closed? It will NOT be as a result of lump sum investments from those that can afford them. It WILL be as a result of the ordinary man in the street starting to save regularly into long term savings/pension plans, that was precisely how the consumer who has pension plans and savings amassed his lump sum in the first place. Most money in the system is 'old' money, there is little new money in comparison.

The ordinary regular saver will NOT pay fees every study confirms this (the most recent being KPMG September 2010). Specifically, the vast majority of the population will not pay fees for advice and as a result of RDR become virtually extinct having no access to investment advice they can afford. The woeful take up of individual Stakeholder Pension Plans clearly shows people don't buy pension plans and given little or no financial advantage from an adviser's point of view, little point or financial viability in selling one. Removing distribution costs(commission) from regular savings plans removes distribution - is it coincidence savings ethics in the UK were highest when advisers had such an incentive? It is a provable fact the most efficient way of distributing such products is through IFAs who hold the majority of the distribution and a fraction of the complaints. If there was provable commission bias, as the FSA suggest, it is reasonable to assume this would not be the case.

This fundamental point is key or the next decade will result in larger gaps and the removal of quality advisers who cannot or will not submit to a system so intrinsically flawed as to be considered inept.

The last decade has seen mass erosion of sales of regular premium savings plans to the extent that they have virtually disappeared a massive market on its own. In order to work a long term savings plan must discourage early encashment. Whilst outwardly attractive, the ISA regular savings plan will not do its job because it can be cashed at any time - that is precisely what happens-to the extent that there is NO long term savings ethic - the result of the savings plan not being sufficiently penal to discourage premature encashment. Neither does it offer advisers sufficient incentive to advise/sell. A major part of RDR-closing the gaps, engagement with the industry and better consumer outcomes cannot possibly work as a result.

Salesman isn't a dirty word, in order for an adviser(IFA) to succeed, he advises, but having advised and found the 'problem' he must also be in a position to sell the solution. Advice in isolation seldom resolves problems (paid for by commission or fee). There are numerous examples where IFAs advise with little prospect of a resulting sale. In such cases it is often the case that cross-subsidisation is only possible as a result of commission. A solely fee based adviser cannot be in such a position. Generally, products and the sale thereof solve problems.

FSA's consumer research 65A conducted by BMRB February 2008 is damning:

'Consumers do not generally think about how people are paid'

'Consumers were not at all concerned with details of how the advisers was paid'

Commission is cited by FSA as the reason for so called 'mis-selling', there are indeed differences in the amounts of Provider paid commission. For the argument to hold water there needs to be provable bias and a marked difference in the level of complaints. Hector Sants referred to a link between commission share and market share in his letter to you, assessing consumer detriment of £18M annually. Surprisingly FSA's own study stated 'it is often argued that providers offering higher commission will buy market share. There is no evidence of this' and complaints against IFAs are less than 3%.

Sensible financial products allied to competent advice solve consumer's problems. It is no coincidence that over this period the marketing allowance or commission has eroded to the extent that it is no longer financially viable for an adviser to deal with such matters as those on a regular premium basis. Nor is it financially viable for the typical consumer- the one who is under-pensioned - to pay the relevant fee for such advice. The result-even greater reliance on the State. Demographics show that it will be increasingly difficult for the State to fund pensions and means-tested benefits in future years.

The comment within the Charles Rivers Assocs study says it all

' The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation'.

Qualifications

FSA states consumer mistrust and adviser mis-selling is linked to advisers not having attained QCF4 level qualifications this is the basis of RDR proposals on increased qualifications. I rely comments amazingly contained within FSA's own publication titled : Firm level Predictors of Consumer Loss through Poor Financial Advice-April 2008:

'Surprisingly, we find no relationship between the share of advisers who passed the qualification exam or the share of competent advisers'

Whilst no right minded, principled and moral adviser argues against raising standards, most keep themselves up to date as a matter of course, ongoing CPD as practised in every other trade and profession is the best way of doing so, NOT cliff edge examinations threatening expulsion from a profession for which they are already suitably qualified, authorised and regulated. Why require advisers with 20, 30 or even 40 years of unblemished service, loyal clients and huge experience do an exam proving only that they can pass exams. There is no evidence anywhere that indicates incompetence and qualification are linked. The requirement that all existing, authorised, regulated advisers be qualified to level 4 or that they will be de-regulated and de-authorised is simply and morally wrong on every level and questionable legally. Leaving aside questions of legality, it is the consumer detriment and lack of access to their trusted long term adviser that will be most worrying to you - RDR proposals in reality remove millions of consumers from the advice process - most worryingly this is NOT contested by the regulator or any independent study/survey

Wide ranging research of chartered bodies, trades and professions confirmed none required existing practitioners re-qualify when entry level standards were raised. All required those same existing practitioners follow a CPD programme.

Furthermore, FSA consumer research(76) found consumers had high levels of trust in their existing adviser. Consumer research published by FSA in 2008(65a) conducted by BMRB found consumers saw advisers being above average in terms of being a trustworthy profession and on a similar footing to other professional occupations.

In 2010 FSA published its annual consumer confidence paper finding 98% of IFA clients were confident the advice received was appropriate-confidence had risen by 17% over the year. There is no lack of confidence in IFAs advice regardless of whether 'qualified' to level 4. In fact there never has been.

All currently authorised advisers are required by FSA to hold specific qualification and obtain permission to advise in specific areas of expertise. If FSA are concerned about 'inappropriate' advice, the existing permissions mechanism together with CPD seems a much more sensible approach and avoids mass extermination of hugely experienced advisers who deal in relatively uncomplicated areas of general financial advice. Advisers don't need to know everything, they need to know where to find out what they don't know and apply the resulting information, the same way as referring to expertise in every other trade or profession. As an IFA with 30 years experience, I have access to expertise in virtually every field of financial services. I don't necessarily need that expertise myself. I would rightly rely on a specialist in a particular field far more than I would someone holding themselves out a 'jack of all trades'. ( GPs would not carry out brain surgery, Surveyors cant build your house any more than builders can act as an architect and Solicitors will refer to Barristers - there are limitless examples of referral).

Numerous studies conclude the proposals fail to match the original intention of RDR and that they will result in the deprivation of mass-market advice. Yet FSA rely on an outdated study (Australian Securities & Investment Commission) of just 124. This study is not representative of the UK market, being filled with inaccuracies- 8% of the study group were rated 'poor' purely because they failed to provide a general guide to the customer(nothing to do with the advice aspects whatsoever) - 15% of the overall score was based on the adviser supplying generic regulatory booklets NOT the quality of the advice. It is also true to say that the advisers were judged on providing a comprehensive financial plan not typical of day to day financial interaction with clients who generally require relatively simple financial advice and products to satisfy those requirements.

In a free market the consenting adults involved in the transaction decide who/how and what they wish to deal with, there should be no place for a regulator other than to regulate when things go wrong (FSA's Amanda Bowe stated that when she headed up RDR). It flies in the face of every freethinking individual to be told what to do for his own good by a regulator. The requirement for advisers to act in good faith and professionally is entrenched in existing FSA guidelines and rules

Those consumers wishing to deal with fee only qualified level 4 advisers have wide access to such already. If indeed fee based level 4 advisers ARE the way, those advisers NOT conforming will disappear anyway and all their clients will migrate in their masses- the reality of a free market. Strange then that mass migration has never started if indeed the FSA are correct in their summation about what is best for the consumer and that the model is broken! To coin a phrase, 'you cannot buck the market'.

The distribution model is not broken, every shred of evidence proves that. FSA ignored independent evidence and studies (much commissioned by them), and the submissions and representations made as a result of the so-called 'consultations' by the majority of advisers themselves. FSA and the individuals tasked with RDR pay no price for failure-the consumer pays that price. RDR is a hugely costly mistake leaving millions without access to advice and ensuring those left are saddled with massively increased costs. The pensions gap(estimated at £318Billion by Aviva in September 2010) savings and protection gaps will get markedly bigger resulting in strain on the public purse (they may become 'un-closeable') I urge you to encourage FSA(CPMA soon) to consign this monumental mistake to history.

January 2011