Retail Distribution Review

Written evidence submitted by Investment and Life Assurance Group

1. Executive Summary

1.1 We welcome the Committee's decision to re-examine this issue and the opportunity to put forward our views on FSA’s objective to create a transparent charging system, clarity around the types of advice open to consumer and increase the professional standards of advisers, or consider if they could be achieved in other ways.

1.2 In their discussion document DP07/1 (June 2007), FSA set out the six outcomes it sought to achieve its aims. However, we feel the evolution of RDR is flawed and falls well short of these intentions. The only area where we feel that real progress has been made concerns qualifications, although this remains a huge issue for advisors.

1.3 Whilst it is good that professional standards for advice would be raised, there appears to be widespread agreement (including from FSA) that the availability of advice will reduce.  Advice will be unaffordable for the ‘mass market’, creating isolation and forcing this group to make decisions alone. This cannot be a good outcome for customers and would be extraordinary given that RDR has been driven by a regulator who has been promoting an expectation to ‘Treat the Customer Fairly’ several years.

1.4 Whilst we are aware that that some firms and ABI have been working on simplified advice (which could address the needs of the mass market), we do not believe that a solution is imminent. In any case, in order to make simplified advice work firms need certainty that such a process will not fall foul of future regulatory or FOS actions; we are not aware of any comment on this aspect from FOS / FSA to date.

1.5 Moreover, there are current EU consultations (MiFID and IMD) that might restrict execution only / non advised distribution. If this should this happen, how will the mass market access to investment products other than via unaffordable fee based advice? Presumably their only option would be cash deposit accounts?

1.6 We also do not think that RDR will significantly increase confidence in the financial services industry and suspect it may well not be understood in any level of detail by most of the population.

2. FSA Outcomes

Our view on the downsides of RDR's evolution against the FSA’s outcomes are illustrated below:

An industry that engages with consumers in a way that delivers more clarity for them on products and services

2.1 It is difficult to see the division of advisory services (independent, restricted etc), delivering any improved clarity for consumers. In particular those not already engaged with the industry, who must be drawn into and attracted to the products and services on offer.

A market which allows more consumers to have their needs and wants addressed

2.2 Indicators continue to suggest that a significant number of advisors will leave the industry, and the FSA has indicated that a 20% reduction is acceptable. It is difficult to see this outcome being achieved, certainly in the short to medium term. We think that it is highly questionable whether there is justification for the acceptance of the exit of such a large proportion of advisors from the market.

Standards of professionalism that inspire consumer confidence and build trust

2.3 Despite recognizing the long period to conclude what "professionalism" actually looks like (in terms of qualifications), in general we think there is overall agreement that this is a good outcome. However, we are not aware of consumer views on what would generate confidence and trust.

Remuneration arrangements that allow competitive forces to work in favour of consumers

2.4 We do not think there can be any doubt about the downside and negativity of commission, but are doubtful that the payment of fees will be acceptable to the population as a whole. The leap from commission to fees is too severe, and will alienate the mid to low markets. Consideration should, perhaps, be given to imposing maximum commission agreements to ensure a level playing field with penalty for both provider and advisor if levels are exceeded. This would serve to focus attention firmly on products and service.

An industry where firms are sufficiently viable to deliver on their longer term commitments and where they treat their customers fairly

2.5 High level comparative analysis of FOS complaints data suggest that there appears to be greater likelihood of IFAs delivering the service expected than, say, banks. Whilst acknowledging that there is evidence that banks have controls over their sales force and have sales compliance in place, it is clear that some bank sales practice has created some very poor outcomes (eg PPI).

A regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers

2.6 We appreciate that the Review was intended to generate debate on the proposition that distribution of financial services is in some way broken, and that there have been

examples where distributors have clearly acted with little or no regard for the consumer. Whilst we have no wish to defend such practices, it remains our view that, whilst RDR outcomes are laudable, we do not yet see comprehensive delivery of them.

January 2011