Retail Distribution Review

Written evidence submitted by Adviser Alliance

Effect of the RDR on Qualifications

Adviser Alliance is a not-for-profit body run by independent financial advisers aimed at achieving balance within financial services regulation for the benefit of both consumers and advisers. This submission focuses primarily on the question of qualifications.

Independent financial advisers perform a function that no other body can or does by advising and selecting the most appropriate products from the whole of the market. This despite the greater financial rewards available from being ‘tied’ to a product provider. In choosing this path IFAs have made a moral rather than a financial decision.

IFAs are a disparate group. Some are general practitioners whereas others specialise in one or more niche areas. All-encompassing qualifications cannot be considered sensible for such a diverse collection whereas Continuing Professional Development (CPD) enables the individual adviser to tailor the learning to his precise needs.

The RDR represents yet another FSA initiative, following in the footsteps of Treating Customers Fairly (TCF), light-touch regulation, depolarisation, the ‘menu’ and others too woolly to mention. The TCF initiative, which has been running for over five years, has yet to be analysed and we know of no extensive research establishing its success or otherwise. The pursuit of yet another initiative, when the fruits of TCF have yet to be established, seems bizarre.

The enormous cost of the RDR, originally estimated at £1.275 bn for the initial 10 years, has since soared to a potential £3.55 bn. Many commentators consider that even these astonishing figures represent an underestimate.

Mandating that all advisers qualify to QCF4 level makes for an excellent sound-bite and will naturally appeal to those who do not fully understand the issue. Superficially it seems difficult to argue with but the reality is that the outcome will prove horrendously counter-productive. The unintended consequences thwart the proposed outcome that consumers be encouraged to engage with the industry.

Hector Sants believes a 20% adviser exodus a price worth paying, a display of insouciance which has inspired industry outrage. Given the current economic climate we consider this view contemptible - it will leave millions of consumers without access to advice. FSA research, carried out by Oxera1, indicates that most of the orphan consumers will not seek any further advice. So, far from encouraging consumers to engage with the industry, the RDR will disenfranchise millions of consumers and exacerbate the current pensions gap of £318bn (Aviva estimate, September 2010)

We submit that the distribution model is not broken and should not be subjected to a costly upheaval leaving millions of consumers without an adviser. We would remind the Committee that the £3.55 bn cost will be passed on to consumers to their ultimate disadvantage.

The prospect of taking further examinations has persuaded many older advisers, with over twenty or thirty-years experience, to leave the industry, albeit unwillingly. A figure of 20% is accepted by the FSA, although numerous independent surveys have placed a figure of between 20% and 50%.

1. Figures provided exclusively to Financial Adviser by Matrix-Data Solutions showed there were 32,000 advisers in 2008. However, this plunged to 30,198 in 2009 and currently stands at 28,714. A 10.3% reduction as at June 2010. 2

2. Robin Stoakley, Head of Intermediary Business at Schroders said, "I do see up to 30 per cent of the IFA market leaving". 3

3. TISA Director, Malcolm Small, "How many will leave? Perhaps 40% of the adviser market will go as a result of the RDR".4

4. Deutsch Bank, "There has been industry talk of 30% or even 50% of IFAs exiting the industry post 2012, which is not impossible" 5

5. Rachel Vahey, head of pensions development for Aegon, stated, "The way that the RDR is panning out is that it will restrict access to advice". 6

6. Financial Services Skills Council director, Sarah Thwaites, who previously headed the FSA Training Dept, stated, "The danger is that if too few existing advisers meet the new qualifications level or the industry does not find it cost-effective to offer advice to the mass market, the very important aim of achieving good consumer outcomes may be lost." 7

During early 2010 we carried out extensive research which involved contacting twenty three chartered bodies. We asked whether their rules required existing practitioners to ‘requalify’ when entry-level standards were upgraded. Not one body answered ‘yes’. When asked what, if any, ongoing development programmes were utilised, every respondent, apart from the teachers, confirmed that members had to follow a focused (CPD) programme.

Significantly, nurses are currently being transitioned to degree status but this uplift only applies to new entrants, existing nurses will be grandfathered across.

During November 2009 the FSA published a report by Jackie Wells & Mary Gostelo titled ‘A Summary of Existing Research’ 8. This study looked at problems of trust and reputational damage within other industries and at the consequent changes.

It advised that the medical industry reacted to the Shipman saga and other negatives by introducing ongoing CPD. The Institute of Actuaries, reeling from the meltdown of Equitable Life, increased its monitoring, upgraded its CPD programme and made revisions to its examination process, although this only applied to new entrants.

We can see that by insisting all existing advisers meet a QCF4 status the FSA is operating outside of established convention.

During October 2008 a JP Morgan Asset Management survey disclosed the following; "In the recent Retail Distribution Review, strong emphasis was placed on raising the perceived professionalism of financial advisers by among other things, raising their level of qualifications, strengthening the role and membership requirements for professional bodies and correlating prudential requirements to a firm's professionalism and resources.  Yet among the consumers surveyed, these considerations play a minor role when selecting an adviser. Only 19% of respondents say evidence of professional qualifications and experience would encourage them to use financial advisers more, and only 10% say they are concerned about an adviser's lack of knowledge or expertise." 9

This argument was strengthened by the FSA’s own research, carried out by the Personal Financial Research Centre (Consumer Research 76). This survey revealed that 75% of consumers trusted their adviser regarding pensions, with 71% being the figure for investments. The same survey found that 84% of pension purchasers and 87% of investment purchasers expressed high or medium financial confidence.

Also in 2008 the FSA published Consumer Research 65a, conducted by BMRB. Amongst its conclusions were the following;

§ "Consumers saw advisers as being above average in terms of being a trustworthy profession."

§ "Consumers believe accountants, solicitors and bank managers to be the most trustworthy and professional occupations, with financial advisers not being far behind."

During September 2010 the FSA published its annual consumer confidence paper. When questioned, 98% of IFA clients expressed confidence that the advice provided was appropriate to their needs - this contrasted with only 83% of bank customers. The research also confirmed that consumer confidence in their adviser had risen by 17% over the year, highlighting perhaps that the general state of the economy translates into positive or negative consumer views.

Harris Interactive released the result of its consumer survey in October 2010. This highlighted that the consumers trust of IFAs was a mere 4% behind that of Chartered Accountants.

These unrelated items of research verify that there is no specific lack of confidence in independent financial advisers, although there may be a general lack of confidence in the industry as a result of the banking crisis, bankers bonuses and various company failures. There is also a widespread realisation that the FSA has proven inept at regulating financial institutions.

Within annex 3 of DP07/110, the original RDR discussion document, sat the following statement, "On the whole we understand that those who sell products in the UK are not viewed as professionals. This also appears to be the case in other countries. In some respects, however, the lack of professionalism does not appear to be such an issue."

A December 2009 study by CWC Research11, in association with BNP Paribas, concluded that the qualification proposals fail to match the original intention of the RDR and that the drift upmarket would deprive the mass market of access to advice.

The FSA has made much of a study carried out by the Australian Securities and Investments Commission in February 2003 12. They claim that this survey proves that higher qualifications equals better advice.

The Australian study fails to survive a forensic scrutiny. Firstly, the number of financial plans examined was 124, which is a worryingly low number on which to base a programme of major upheaval. Secondly, the accuracy of the assessments was fatally impaired by the automatic marking down as ‘poor’ those advisers who failed to provide an Advisory Services Guide brochure, which happened in 16 instances. Additionally, 15% of the overall score was structured around the adviser supplying certain regulatory information rather than the actual provision of advice.

A third error surrounded the requirements being studied. Advisers were judged on the provision of a comprehensive financial plan involving the investment of a sizeable lump sum. This is not typical of the UK retail financial services industry where the vast majority of ‘everyday transactions’ are based around more simple and individual requirements such as purchase of a pension, the buying of an ISA or the arrangement of mortgage finance.

An FSA platform investigation of twelve firms 13 is also being used as evidence. No quantitative research exists which, given the RDR’s four-year incubation period, suggests an inability to locate any evidence of worth.

To support this we refer to FSA publication Firm-level Predictors of Consumer Loss Through Poor Financial Advice – April 2008. 14

"Surprisingly, we find no relationship between the share of advisers who

passed the qualification exam or the share of competent advisers".

Unsurprisingly, the FSA has been mute regarding this conclusion.

Hector Sants December 2010 letter to Andrew Tyrie offered the FSA’s negative experience of grandfathering mortgage brokers as reason why grandfathering should not be condoned. In truth the analogy is poor, mortgage brokers were new to regulation and it is not surprising that many have been found wanting. By contrast, financial advisers have been regulated since 1988 and have been subject to the various regulatory initiatives, compliance procedures and continuing professional development changes for many years.

In attempting to implement the RDR proposals the FSA uses arguments predicated on financial advice becoming a profession. This we believe to be an inappropriate ambition, surely the aim is for advisers to act professionally rather than be a professional?

Those advisers who deem it appropriate to suggest higher competence by the passing of additional examinations are free to do so. This has always been the case. If an adviser wishes to establish a niche or advertise that he/she is super-qualified then we say fine, this is excellent for them in positioning their business model. However it is entirely inappropriate to force the entire adviser population to re-qualify. A leading financial services barrister considers that such a proposal is illegal and breaches the Human Rights Act. 15

Sants argues that the industry developed the qualification standards. The ten-person RDR committee tasked with this comprised four individuals whose companies sell examinations, five industry directors and an FSA representative. This group was put together with the firm intention of producing qualifications and could never have been considered impartial or even relevant given that not one is a practising adviser.

In September 2007 Amanda Bowe, who then headed the FSA’s RDR team, stated, "We don’t think we should be making the decisions for the industry". Of course, this is precisely what the FSA is doing. Intruding on commercial transactions between consenting adults and reducing the consumers choice whilst declaring that the medicine is for their own good.

Amanda Bowe also stated, "We have a statutory responsibility only to intervene in markets when the market itself is failing to function in a manner consistent with our objectives and where our intervention can deliver benefits that justify the costs – that is after all the role of regulation."

There is no failure of function, the mis-selling episodes of the 1980s have been eradicated and the bad apples have been driven from the industry.

The RDR reduces consumer choice, reduces the adviser population and consequently the potential for greater engagement with the industry. Increasing costs are passed on to consumers and the public is confused yet further by the introduction of yet another type of adviser. Far from enfranchising the consumer these proposals will consign him to inferior advice or no advice. Is this the outcome that UK plc wants?




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