Retail Distribution Review

Written evidence submitted by Richard Bryant APFS, Director, Bryden Johnson IFA Ltd

I write to you in the hope that my words will add some additional weight to the growing calls for the RDR to be revised.

I run a small IFA company employing 8 people and hold Chartered status. I have been in the field of Financial Advice for 23 years and in addition to my high level of qualification, I feel I have a wealth of experience of what clients want and need from their IFA. While I am in sympathy with the aims of the RDR in terms of increased professionalism and clarity, I am concerned at the underlying assumptions and the potential for unintended consequences and impact on the independent sector.

I understand that following the recent parliamentary debate, the next step for the Treasury Select Committee is to request evidence that the current policy constitutes the best way forward, and whether alternative strategies should be considered. I therefore have set out my points below, and would be more than willing to present evidence in person to the Committee.

Executive Summary

· The assumptions underlying the RDR are not supported by evidence

· Yes to qualifications and increased professionalism

· The case for commission

· How the RDR will slant the playing field towards the banks

· Misinformed use of the word "misselling"

· Suggested solutions

Assumptions behind the RDR

1. A quote from Lord Turner in 25 November 2010 edition of "Money Marketing":

FSA Chairman Lord Turner said reduction could be good for consumers. He said: "Some exit of capacity from the industry, which is therefore an exit of administrative cost, may be in the interest of consumers. It is a cost which is being absorbed."

2. If, as is generally accepted, the RDR leads to a loss of capacity, then surely in the first instance this is much more likely to lead an increase in charges.

3. For this to translate into "an exit of administrative cost" , then it seems to me Lord Turner must have assumed:

· this loss of capacity will be mainly the poorer quality firms

· and those firms by dint of their lack of professionalism cost more to regulate

· and that this will eventually translate into lower overall regulatory costs

· which the surviving "good guys" can then pass on to the consumer.

Four assumptions. The whole premise of his argument fails if any one of these four fails. It would perhaps then be appropriate to ask for the evidence behind these apparent assumptions.

4. And even if all these apparently unsubstantiated assumptions do come to pass, how long does he think this will take to translate into something which "may be in the interest of consumers"? By my mathematics, 10,000 cowboys gone saving £10,000 per year each would still take 17 years to save the £1.7bn cost of the RDR.

My position and evidence

5. Let me take a few sentences to explain my position and, I think, that of a lot of the more professional financial advisers as we look forward to the potential disaster that is the RDR.

6. As you may assume, with Chartered status, I am unlikely to have any objection to increasing the level of qualifications. Indeed I think this is long overdue; I would suggest that any adviser who thinks that in-depth financial planning is compatible with a level of qualification equivalent to the Financial Planning Certificate, deserves the wake up call that is surely coming. MP Mark Hoban’s comparison with a McDonald’s qualification, while somewhat insensitively phrased, does at least appear to have the merit of truth. Some flexibility around transitional arrangements for experienced advisers could perhaps be added, but I do agree with the main point here.

7. No. It is the other side of the RDR which causes me concern. Our business works on introductions from other professionals, who are in the main solicitors and accountants. At present we give our clients the choice of fee or commission. This latter could be factored or initially charged. It may surprise you to know that the vast majority of clients presented with this choice prefer to pay by commission, and most usually given the choice, factored commission. It may further surprise you that some of the people most resistant to paying fees include lawyers, which is astonishing when you consider they are probably operating in the most fee-based profession of all. The RDR is about to remove that choice.

8. Lord Turner also seems to make the assumption that it is the poorer firms who will be put out of business. While I am sure this is true, it will also have the effect of massively slanting the playing field in the direction of the banks.

9. The FSA refer glibly in the RDR reports to "Vertically integrated organisations" and mention safeguards that are planned to prevent abuse, but with two years to go we have seen nothing concrete. For instance, what is to stop banks continuing to market their current range of Structured Products, where commission is costed-in over the life of the plan, and simply hiding this commission in some other part of a vast organisation? In comparison, we will only have access to fee or initial charge options. The rate of return on the plans we can offer may be better, but how many bank clients will manage to find an IFA to tell them this? And given the FSA’s current lack of action on dual pricing in the mortgage market, I have no confidence that they will have the will or ability to prevent abuse and bias.

10. If I may, I would also like to take a minute to explain to you why in the real world I think it is that the vast majority of consumers prefer to pay by commission. I enclose a survey conducted recently, which shows where clients place the value as opposed to where people like myself spend most of our time. You will see that the overwhelming perceived value for the client is when advice is delivered which results in positive action that could improve their situation. It is also true that when clients come to see me for the first time, it is usual that they do not have any recent experience of the Financial Services industry, and any previous experience is often long in the past and less than positive. They do not know, therefore, what the task entails, and this makes it impossible to agree a realistic fee. The level and depth of detail we go into becomes apparent as the process unfolds and it later becomes clear to them what the benefits are from the thoroughness and rigour that we are able to bring to the task.

11. At this stage, possibly three meetings later, they are then prepared to agree a realistic fee or commission for the process. And factored commission is often the client’s choice.

12. (By the way, the part of the industry that truly dislikes factored commission are the major life companies; they must compete to offer a low lifetime charge whilst delivering the remuneration I request and agree with the client, and we are adept at finding good outcomes for the client on that basis.)

13. In short, it takes quite a long time to build trust. We can only do this one client at a time (and we do). The RDR will force us to charge by fee or initial deduction and remove the option most clients prefer, whereby the initial cost of advice is spread by some providers. It will deter people from seeking advice in the first place, and therefore limit our opportunities to change their perception.

14. Mark Hoban in his closing speech in the recent parliamentary debate cited pension misselling as a reason for RDR measures to remove commission. Several points arise here:

· Yes, processes and professionalism were lacking, but let us not forget that the main activity and problem here happened 20 years ago.

· It was somewhat encouraged by the government of the time – I remember government adverts featuring a man breaking out of the chains of his company pension scheme!

· Processes are now much more thorough for anyone giving advice in this area.

· Final salary pensions have since been forced to offer much fairer terms for early leavers, regulator-defined personal pension growth rate projections are much lower, life expectancy has increased, interest rates and Annuity rates have fallen, all factors which have moved the calculation against a transfer and in favour of keeping the final salary benefit; the pension review was conducted with the benefit of this hindsight.

· Advanced qualifications have long been necessary for any Adviser operating in this area.

· There is no evidence that the fee-based or initial charged advice would have helped

· Indeed the FSA’s own survey on commission conducted by Charles Rivers Associates found no evidence that fee based advice was better

15. I fear then that the FSA is heading in the wrong direction based on old and no longer relevant problems, plus some deeply worrying underlying assumptions.

Suggested solutions

16. Commission is largely transparent and has been for years. Limiting commission to a maximum would be one simple solution, and would affect most IFAs hardly at all. Likewise, removing some antiquated and potentially misleading practices such as enhanced unit allocation would help.

17. If you want to benefit the public through easier access to better advice, through enhancing the standing, professionalism and perception of our industry, it will not, in my opinion, be furthered by the measures in the RDR as currently constituted.

18. Yes to greater professionalism and better qualifications. Once that is in place, it should be brought to the public’s attention.

19. No to the proposed designations of independent, restricted and basic advice. It has taken 20 years for the general public to understand the difference between independent and tied, just as the FSA plans to change to something much less clear.

20. If professionalism is established in the minds of the public, and perception matches reality, what is wrong with clearly disclosed factored commission?

21. The RDR in its present form will almost certainly have the effect of driving clients into the arms of the banks, or attempt to do things themselves. On this second possibility, with a large population bulge heading for retirement and an ever expanding range of options, there is huge potential for a second misselling scandal, this time based on misguided or incompletely informed self-selection.

22. The banks will not find it hard to conceal factored commission within their "vertically integrated" structures. IFAs will have no such option and a much valued and mostly dedicated and professional sector will shrink still further. There is already probably a shortage of IFA capacity, and young, well qualified entrants are few and far between.

23. The banks are already responsible for the vast majority of the complaints, whereas the proportion of complaints generated by the IFA sector is tiny by comparison.

24. Do you really think therefore that the RDR will deliver its core targets?

December 2010