Retail Distribution Review

Written evidence submitted by Beverley Davison, Highclere Financial Services

CONSUMER DETRIMENT

What is consumer detriment?

The FSA’s Principles of Good Regulation state; "The restrictions we impose on the industry must be proportionate to the benefits that are expected to result from those restrictions."

Lord Hunt of Wirral stated, "The public must benefit from the RDR or there is little point to it . " 1

The FSA measures consumer detriment as the amount lost by consumers due to poor advice. There is another form of consumer detriment - the amount lost annually by consumers failing to take financial advice.

When we assess the consumer detriment figures provided by Hector Sants in his December 2010 letter to Andrew Tyrie we find a specious calculation of the loss to consumers due to poor advice. What we do not see is the consumer benefit figure resulting from consumers taking good advice. We cannot begin to assess such a figure but one needs to consider those millions of consumers whose spouses are financially independent due to them being advised to buy life assurance and those consumers who are able to live above the subsistence line because they were urged to save within a pension plan or ISA.

A far more relevant question would be, is there any specific segment of the market, such as the bancassurance sector, that is responsible for consumer detriment?

Additionally, one has to consider the loss to consumers caused by a substantial reduction to the numbers of advisers post RDR. We will not make the FSA mistake of guessing or embellishing figures and apportioning them to theoretical behaviours, however it is manifest that the loss to consumers caused by departing advisers will be colossal.

This view is widespread and below we highlight comments made by respected organisations regarding negative RDR outcomes.

RDR Outcomes

During December 2008 the Financial Services Consumer Panel told the TSC that financial advice would be less widely available in the post-RDR world. This viewpoint was buttressed by the CoreData Research study 2 from September 2010 which revealed that advisers are already offloading mass market clients. "The trend is being driven, in part, by hard-up investors either unwilling or unable to pay fees".

During June 2009 management consultants, Winchester White, found that 64% of product providers believed the overall cost of advice would increase. 3

During July 2009 NMG Financial Services Consultancy calculated a 20% adviser exodus. 4

Origen Financial Services blamed the RDR for redundancies announced in October 2009. 5

During February 2010, Fitch Ratings 6 stated that the RDR would result in fewer consumers exercising their open market option in respect of annuity purchase and in December 2010 the Investment Management Association stated, "Overall costs would go up". 19

A July 2009 NMG Financial Services Consulting survey, "Found no evidence to suggest the RDR will improve the accessibility of advice to consumers" 4

The FSA readily acknowledges that the RDR will adversely affect both consumers and advisers. The ‘Impact on Market Structure and Competition’7 study, prepared by Oxera in June 2009, informed, "The post RDR landscape is likely to feature fewer small independent IFAs…this may lead some consumers to experience reduced choice." This publication also quoted a Datamonitor study; "There is a growing concern that there are not enough young advisers entering the industry."

There is a consensus that the proposals will destabilise the market and assist the bancassurers in obtaining a greater share of distribution. It is therefore relevant to remind the Committee that it is these self same banks that historically have provided, and continue to provide, the most complaints and subsequent escalation of complaints, to the Financial Ombudsman Service.

Complaints to the FOS 09/10

Figures from the FOS Annual Report 2010

Complaints about mis-leading advice – January-June 2009

Figures from the FSA

These complaints must be also be assessed in terms of the distribution figures as confirmed by the FSA.

The Office of Fair Trading stated, "Datamonitor suggest that the main reasons for IFAs acting as such a major sales channel appear to be a lack of effective competition from other distribution channels and the demand from consumers for independent advice." 8

The RDR will alter the equilibrium in favour of the banks , as HBOS representative Paul Shelley outlined , " C onsumers would not be able to access independent financial advice once the retail distribution review was introduced, but the bancassurers sector would pick up some of these customers ." 9

The FSA makes much of consumer confusion due to complex financial products and attempts to blame the adviser and not the convoluted product design. Equally , they explain that consumers are confused by the multitude of advisers – independent, tied, multi-tied, etc – ignoring the actuality that they who spawned this confusion by removing the simplicity of polarisation. Polarisation offered a black and white approach, you were either an IFA or tied.

In 2008 the OFT carried out a nationwide survey to identify consumer detriment across all services. Their research found that 28% of complaints were regarding household matters, with 25% due to household appliances. Financial services was coupled with professional services and provided just 14% of complaints. 10

Hector Sants letter of 13 December 2010 to Andrew Tyrie

Hector Sants quoted four distinct areas providing consumer detriment. Until now the FSA figures have not been subjected to a forensic scrutiny.

The largest detriment figure suggested was £92m p.a. due to investment bonds being recommended rather then equity ISA’s. The Charles River Associates (CRA) research10 identified that only With-profit and Distribution bonds had provided identifiable consumer loss and FSA calculations have failed to take account of the substantial changes that have occurred since the detriment was noted.

During 2005, sales of these bonds totalled 433,000. The latest statistics available from the FSA Product Sales data confirms that 2009/10 sales were 71,439 – a reduction of 83.50%.

Additionally, an Oxera report 7 compiled for the FSA, confirmed that between 2005 and 2007 the average commission differential between unit trusts and investment bonds had fallen from 1.66% to 0.36%. All else being equal this provides an annual detriment figure of £2.50m. What is more, only 93% of bond sales are advised and only 49% of this figure results from IFAs.

The 2005 CRA research on behalf of the ABI 11 revealed, "We compared the RIY on unit linked bonds and that on ISAs. We found that there was no evidence that products on which there is high initial commission paid (unit linked bonds) have a higher reduction in yield…this is consistent with the evidence found in our work for the FSA in 2001."

Hector Sants letter also claimed up to £18m p.a. detriment from a 2005 pension analysis indicating a link between commission share and market share. This conclusion is refuted by the 2002 CRA survey 12 which stated, "It is often argued that providers offering higher commission will ‘buy’ market share. We did not find evidence to support this."

The FSA has also used the 2007 ‘average commission’ figure of 5.58%, a figure that is no longer accurate. At the time of writing we accessed the adviser comparative portal known as The Exchange in order to assess the maximum pension commission currently available. One provider is able to make a 6.50% payment, whereas the others varied from 5.04% to 1%. Additionally, according to FSA product sales data 13, over the past four years advised pension sales have fallen by 27% from 721,176 to 526,837. The point we make is that whilst there may have been detriment of up to £18m the fall in sales and the dramatic reduction to commission levels serves to provide a more likely figure of £2m. Also, if high commission did produce mis-selling, then subsequent commission-rate reductions will have removed such detriment.

The relevance of this scrutiny is that the FSA has attempted to justify the loss of 20% or more of the adviser population by suggesting a counterbalance reduction to consumer detriment. The figures provided by Hector Sants are flawed as they are out of date and fail to reflect the current market conditions. We might add that if an adviser attempted to use 5-year old data to justify an investment of £1.7bn he would, quite rightly, be subject to FSA enforcement.

The FSA also places weight on the thematic pension review 14 carried out in December 2008. This review comprised assessments of just 30 firms and the basis of assessment makes it impossible to accord weight to the observations. The review excluded switches into stakeholder pensions, group personal pensions or group SIPPS thus robbing the review population of balance. A ‘poor’ rating was given to those files where the only failure was an inability to point out the need for future reviews.

The FSA holds the 2003 Australian study 15 in great esteem, however it revealed that the advice provided by advisers offering a choice of fees and commission was marked as higher than that from fee-only advisers.

Ernst & Young 16 has warned that product bias will increase as a result of the FSA’s restricted advice channel. Director of financial services Robert Wood said many people will choose the restricted advice route over the independent channel. He said; "An unintended consequence of the RDR is that product bias will increase as a result of high numbers becoming restricted. We could see a second round of bias returning to the market."

As an epilogue to this inventory of horrors we quote the FSA’s Peter Smith17 who admitted in March 2010 that the FSA has no contingency plan. " If consumers still do not want to engage with it then we probably will have to do something else . "

15-year Longstop

The Limitation Act 1986, as amended by the Latent Damages Act 1986, set out time limits for claims for negligence, maladministration and other transgressions. Parliament debated and decided that there would be an overall cut-off point of 15 years from the date of the act or omission. Claims after this period could be refuted using the 15-year timebar.

All UK citizens, including financial advisers, benefitted from the protection afforded by this defence until 2001, when the Financial Services and Markets Act 2000 came into force. FSMA does not state there is a longstop defence, equally it does not proscribe one. The FSA interpretation denies the use of the longstop with regard to complaints escalated to the Financial Ombudsman Service (FOS). In September 2003, John Tiner, then FSA Managing Director, noted, "General Counsels Division advises that the way in which Schedule 17, paragraph 13 of FSMA is framed suggests that Parliament intended the FSA to be able to set time limits which can differ from those in the Limitation Act." 18

A scrutiny of Hansard confirms that not only did Parliament not debate the removal of the longstop but it didn’t ever discuss or mention the longstop and without doubt Parliament displayed no "intention". Neither Parliament nor the industry was consulted on this summary removal of a legitimate commercial defence. The FSA and the Treasury has continued to maintain that such a removal is in the interests of consumers.

We cannot dispute this, neither would we dispute that a similar removal of the longstop defence for architects, civil engineers, doctors, surveyors and builders would benefit consumers. This is not the point, Parliament debated such matters and agreed that 15 years provided the appropriate balance between a firms liabilities and consumers rights. The Limitation Act has not been repealed or amended and we maintain that the FSA is acting ultra vires by dint of its actions.

Firms cannot be sure that a latent complaint will not arise, perhaps when the owners have retired. The FOS admits it has pursued the widows of dead advisers for financial recompense. Widows who are frequently incapable of defending, or even understanding, the nature of the allegation. No other Ombudsman body ignores the 15 year longstop.

The FSA ‘consulted’ on its reintroduction within document DP07/1 and despite an overwhelming majority of respondents supporting this they decided, within Feedback Statement FS08/6, that the proscription would remain.

We believe that an injustice has been perpetrated and that advisers human rights have been breached. We consider the reintroduction of a longstop defence to be a vital component in the restoration of balance to financial services.

January 2011

1 http://www.thepfs.org/downloaddata/RDR_position_pa p er_5.pdf

2 http://www.ifaonline.co.uk/ifaonline/news/1732336/advisers-offloading-mass-market-clients

3 http://www.ftadviser.com/FTAdviser/Regulation/Regulators/RetailDistribution/News/article/20090616/e5d0dbec-5 9c9-11de-bbc4-0015171400aa/RDR-will-increase-overall-cost-of-advice-providers-warn.jsp

4 http://www.ftadviser.com/FTAdviser/Advisers/Industry/IFAFirms/News/article/20090731/04edee68-7dc2-11de-9704-0015171400aa/Adviser-market-now-estimated-to-decline-by-20.jsp

5 http://www.ftadviser.com/FinancialAdviser/Advisers/News/article/20091022/cfb475ea-ba3f-11de-8529-00144f2af8e8/Origen-blames-RDR-for-pending-redundancies.jsp

6 http://www.moneymarketing.co.uk/pensions/rdr-could-reduce-omo-usage-further/1007229.article

7 http://www.fsa.gov.uk/pubs/other/oxera_rdr.pdf

8 http://www.dotecon.com/publications/crannexes.pdf

9 http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft99 2 .pdf

10 http://www.highbeam.com/doc/1G1-196421914.html

11 http://www.fsa.gov.uk/pubs/other/pol_res1.pdf

12 http://www.crai.com/uploadedFiles/RELATING_MATERIALS/Publications/Consultant_publications/files/pub_4152/pdf

1 3 http://www.fsa.gov.uk/pubs/other/psd_ri_05_10.pdf

1 4 http://www.fsa.gov.uk/pubs/other/pensions_switch.pdf

1 5 http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Advice_Report.pdf/$file/Advice_Report.pdf

1 6 http://www.moneymarketing.co.uk/regulation/ernst-and-young-warns-rdr-will-increase-product-bias/1016317.article

1 7 http://www.moneymarketing.co.uk/story.aspx?storycode=1022174&PageNo=4&SortOrder=dateadded&PageSize=10

1 8 http://www.ico.gov.uk/upload/documents/decisionnotices/2010/fs_50246664.pdf

19 http://www.moneymarketing.co.uk/investments/ima-launches-renewed-attack-on-city-fees/1024220.article