Retail Distribution Review

Written evidence submitted by AXA UK

AXA UK is one of the largest insurers in the UK and markets a broad range of products and services for individuals and businesses. Products are distributed primarily through brokers, intermediaries, corporate partners and direct to consumers. AXA Wealth, AXA Insurance and AXA PPP healthcare form part of AXA UK which in turn is part of the AXA Group, a worldwide leader in financial protection. AXA’s operations are diverse geographically, with major operations in Europe, North America and the Asia/Pacific area.

1. Executive Summary

1.1 AXA believes that the Retail Distribution Review (RDR) will deliver a more transparent and fairer charging system for customers who choose to pay for financial advice. It will remove commission bias, a feature that currently means there is a potential conflict of interest and furthermore, the new framework around advice will provide much greater clarity around the type of advice being offered to customers.

1.2 The RDR was launched in June 2006. Through a comprehensive consultation process providers and advisers alike will have known from the outset both the parameters and timeframe being contemplated by the Financial Services Authority (FSA) for the implementation of the RDR. Since over four years have now passed we are surprised that fundamental questions around whether there are better ways of delivering the desired outcomes are now being asked. We believe the RDR will deliver the better outcomes for consumers needed to restore trust and we do not feel that the industry will be well served if either the timescales for the introduction of the RDR are delayed or the proposals are somehow watered down.

1.3 One of the outcomes of the RDR may be the creation of an ‘advice gap’ which will have the potential to disadvantage some consumers who may find it difficult to access suitable advice, because some advisers have walked away from the new regime rather than undertake the necessary qualifications. For this reason AXA has called for a simplified advice service that would sit above basic advice and below full advice. While we understand this is not a simple process to define and implement, we believe more could be done by all parties to find a solution.

2. A transparent and fairer charging system

2.1 There can be little argument that commission payments have helped to perpetuate product bias and spurious buying behaviours across providers, advisers and consumers. Many customers continue to believe that advice is free and on the basis that products and services that are given away freely are often perceived as being of little or no value, we need to move away from this as a basic concept. Customers would expect to pay for the services of a lawyer or accountant; we need them to expect to do the same for financial advice. Commission payments have a material impact on the performance of a particular product - a fact that is not widely understood by consumers. Fundamentally a charging system based on commission is unlikely to offer the same degree of transparency as one based on paid advice.

2.2 Recent mystery shopping exercises continue to show that payment by commission leads to a conflict of interest and by removing the potential for commission bias to distort buying patterns, the RDR will also deliver a transparent and fairer charging system. Historically, it has been widely acknowledged that the commission system has, in part, created a culture of product bias, and resulted in a long list of mis-selling issues, that has significantly damaged the reputation of the industry.

2.3 AXA completely agrees with the ban on commission payments; indeed this has increasingly been our model of operation, particularly since the acquisition of Winterthur, which was built on a fee-based system, and the launch of Elevate, our wrap platform business, both in 2006, which has been developed as a new model, open and transparent proposition, costing already around £40 million in investment spend.

2.4 Furthermore, the current model is clearly letting down consumers. Hector Sants, in a letter of 13 December 2010 to the Treasury Select Committee’s Chair noted that the annual cost to consumers from the sale of "unsuitable products" amounted to somewhere between £400 – 600m. Developing the framework for a market in regulated products in which consumers pay for advice upfront thereby enabling them to receive the best products for their circumstances, rather than that of their adviser, is essential to tackling this problem. This should also lead to a more efficient regulatory structure which may provide the potential for a regulatory dividend.

3. A better qualification framework for advisers

3.1 AXA has noted that many Independent Financial Advisers (IFAs) have already reached the necessary qualification standard so as to be able to give full investment advice under the new regime. We fully expect this number to rise significantly before the end of 2012, particularly in the knowledge that qualifications can be obtained by techniques that are not solely reliant on written examinations – a feature that may well deter a number of experienced practitioners.

3.2 In order to raise standards, restore trust in the financial services industry and turn independent advice into a recognised profession, whereby advisers are treated with a comparable level of professionalism alongside the likes of architects, accountants and the teaching profession, it is only right that they should be required to adhere to a common set of professional standards set at a meaningful level. The RDR’s implementation is essential to achieving this. The requirement to obtain a general qualification would put IFAs on a similar footing to, as mentioned, architects who must meet the standards of the Architects Registration Board on an annual basis in order to maintain their registration or teachers who must obtain a PGCE to practise and are consistently reassessed by external regulators.

3.3 AXA would therefore not welcome any relaxation to accommodate ‘grandfathering’ whereby mature advisers with long (and unblemished) service in the industry would be able to offer full advice without need of the necessary qualifications. This is because professional standards need to be raised throughout the UK and, similarly, we would not advocate any relaxation in standards that would allow advisers in rural communities to operate within a different qualification regime.

3.4 Fundamentally the reason for not creating provision for grandfathering is that the changes heralded by the RDR have been in the public domain since 2006. By the time the RDR’s provisions take effect IFAs and other advisers will have enjoyed 6 ½ years notice. This is ample time for advisers to obtain the necessary qualifications needed or plan their exit from the industry.

3.5 AXA would assert that the RDR is a huge opportunity for the industry to demonstrate that some of the practices of the past should have no place in the profession, and that those who may be arguing out of self-interest to preserve the status quo, which we believe leads to significant consumer detriment, are in the minority. AXA believes if we hold firm to the principles of the RDR then it will create a powerful legacy for future generations of consumers requiring independent financial advice.

4. Greater clarity around the type of advice being offered

4.1 AXA believes that there continues to be a genuine lack of understanding around the type of advice being offered and to whether this advice is truly independent, covering the full range of investment options or restricted (for example advising on products from one or a limited range of product providers).

4.2 Whilst we do believe that greater thought could be given to a simplified advice regime, AXA supports the clear separation between Basic and Full advice. The obligation on advisers to ensure that customers are aware of the differences will go some way to correcting the current issues in the marketplace.

4.3 What is more important is that the advice can be trusted. From the 2006 baseline survey of financial capability we are aware that 70% of consumers do not seek advice from a professional adviser but it is worrying that 40% of consumers who have used an adviser say that they do not trust financial advice. The fact that 40% do not trust advice they have received serves to bolster the case for qualifications and the removal of the proven biased commission regime. Clearly the current model is providing a disservice to those consumers who do use it.

5. Basic, simplified and full advice

5.1 AXA believes that further consideration should be given to the concept of simplified advice. One of the impacts of the RDR might be to push a number of advisers ‘upmarket’ to serve the needs of the higher net worth customer. With the needs of the basic advice customer relatively well served by the existing infrastructure (albeit recognising that the launch of the National Financial Advice Service – previously known as Money Guidance – has been put back a year because of budget cuts) this will potentially create an advice gap. AXA has supported the idea of a simplified advice concept although little progress has so far been made.

5.2 A solution must be found that provides a trusted advice model for those on lower incomes or for those with less sophisticated financial services needs. AXA is keen to see more focused consultation to identify a workable solution that is simple for customers to understand, cost effective for firms to administer and in keeping with the principles of the RDR.

January 2011