Retail Distribution Review

Written evidence from St James’s Place Wealth Management

Introduction

1. This paper sets out comments from SJP on the three specific outcomes that the Financial Services Authority (FSA) seek from the Retail Distribution Review (RDR). We would be happy to meet with the Committee and provide further detail if it would be of assistance to the Committee.

2. By way of background, SJP is the leading provider of face to face wealth management advice in the UK with 200,000 clients and £27bn of assets under management. Readers of the Daily Telegraph recently voted that SJP was the Best Wealth Manager in the UK in 2010, the third time in the last four years we have won this award.

Executive Summary

3. Whilst we support some of the desired outcomes of RDR, most notably greater transparency, as recently set out by Hector Sants in his letter to this committee, we believe that some of the underlying data cited in support of RDR is, at best, flimsy. We have seen no substantive evidence to support the view that the desired outcomes will be achieved by RDR in its current form.

4. In particular, we believe there is a real danger that RDR will not achieve its objectives unless a focus is retained on total costs to clients rather than disclosing ‘unbundled charges’ which consumers will find confusing and hard to compare, as has been seen in other markets. The RDR demonstrates an unhealthy obsession about adviser charging the outcome of which is simply driving the market to re-engineer with no consumer benefit. Ironically, total charges could increase.

5. The RDR discusses the concept of a "level playing field" across the market. In reality such a level playing field does not and cannot exist due to the very different business models from sole traders through to large, well capitalised adviser firms and banks. Simply assuming rules for small firms can be applied across very different business models is disproportionate both in terms of application and also in terms of costs. It is also inappropriate and flawed. We believe that one of the key lessons from the recent financial crisis is the need to ensure the rules are able to effectively to cope with differences in business models, and not to rely on a ‘one size fits all’ approach.

6. We welcome the drive for better qualified advisers but believe that the RDR’s proposals are in danger of "throwing out the baby with the bathwater" in terms of the need for experienced, competent, professional advisers to cease working by January 2013 unless they have passed all the required exams by that date. We believe that such individuals should be allowed to continue to practice with appropriate supervision and responsibility taken for their advice.

7. We would welcome the opportunity to discuss these points with the committee.

Detailed Comments

8. Hector Sants, Chief Executive of the Financial Services Authority, advised the Committee that the Retail Distribution Review had three specific outcomes:

· A transparent and fairer charging system

· A better qualification framework for advisers

· Greater clarity around the type of advice being offered

We comment on each of these in turn.

9. A transparent and fairer charging system

9.1. We welcome the FSA’s desired outcome in this area but do not believe that the current approach to the RDR will achieve this. Indeed we believe that the RDR rules will lead to lack of transparency in total costs and increased levels of overall charges.

9.1.1. For the majority of investment products today, a single, comparable cost measure is disclosed to all clients called the Reduction in Yield (RIY). The calculation method is prescribed and used by all firms and enables consumers to compare costs.

9.1.2. The RDR rules lead to separate disclosure of the cost of the advice, the cost of the investment itself and, if relevant, the cost of the platform used to access the investment in a way that will make the total cost less visible. There may no longer be a combined RIY disclosure and consumers will struggle to understand the total cost payable for their investment. Whilst the components will be set out separately, how will the consumer understand the total costs and be able to compare them, as the example below highlights:

Investment A

An advice charge of 3% upfront and 0.5% each year
An investment charge of 1% each year
A platform charge of 0.5% each year

Investment B

An advice charge of 6% upfront
An investment charge of 1.5% each year

Which investment has the lower charges – A or B? Whilst this can be calculated (and it depends on investment growth as well as time invested), it simply isn’t an easy comparison and transparency is lost.

Today’s disclosure would show a RIY for A of 2.3% and an RIY for B of 2.1% - a straightforward comparison.

Unbundling of charges will lead to lack of transparency and consumer confusion, as we have seen in other markets and industries (eg airline ticket pricing).

Lack of transparency in a market may lead to charges increasing to the detriment of consumers.

For the RDR outcomes to be achieved, we believe it is essential that total charges (for advice and product) are disclosed to clients in a simple and comparable form, such as the current RIY approach or an appropriately considered evolution thereof.

9.1.3. The present rules enable companies to use their resources to structure the charges to the client in a simple and transparent manner.

The RDR rules will force a return to "old fashioned" product structures from the ‘90s with upfront charges for clients. As Hector Sants acknowledged in his letter to your Chair on 13 December, the retail investment market has seen significant problems with mis-selling and associated consumer detriment, some of which has arisen due to these very product designs the RDR will mandate.

We are concerned that these rules will stifle innovation and restrict competition and thus distort the market for retail investments.

We believe that the desired RDR outcomes can be achieved without restricting product design and reducing choice to consumers and that the rules which give rise to this should be amended.

9.1.4. The separation of charges between advice and product presents challenges in terms of tax treatment for clients. As yet we do not have clarity from HMRC.

For example, if an adviser receives an ongoing commission from a product provider today (say 0.5% pa), this is paid for out of the product charges and has no tax implications for the client.

Under the RDR rules, an equivalent payment would be a payment from the client to the adviser, facilitated by the provider. This is an instruction from the client to withdraw funds from his investment and pay an adviser which could have tax implications for the client in terms of chargeable events or gains.

In addition, for the provider of the investment product, this change will affect their tax computation as the payment will no longer be treated as an expense and may lead to providers increasing charges to offset the loss of tax relief on what was previously treated as an expense.

We do not believe that the details on these areas have been sufficiently worked through or clarified and urge rapid resolution of these aspects.

9.1.5. The RDR rules will only apply to firms which provide advice on retail investment products.

9.1.5.1. Firms which facilitate "execution only" services are outside the scope and often operate significant charges and receive substantial commissions.

We understand that many clients perceive some "execution only" services as providing investment recommendations.

We strongly believe that, if the FSA’s objective of transparency and a fairer charging system are to be achieved, all market participants must be within the scope of the RDR rules and disclosures.

9.1.5.2. The rules make no allowance for the very different business models which exist. For example, the risk of consumer detriment is very different with say an adviser in a bank with the full resources of the bank supporting the advice and responsible for it (and making it right if something goes wrong) compared to a sole trader adviser. We believe that the simple read across of the rules to all market participants is disproportionate and that the rules should be tailored to the different models which exist.

9.2. In summary, we do not believe that the outcome of a transparent and fairer charging system will be achieved by the current RDR.

With some changes to the current rules to ensure total cost disclosure and flexibility in product design we believe a better result can be achieved.

10. A better qualification framework for advisers

10.1. We welcome FSA’s desired outcome of better qualified advisers.

10.2. However, we do not believe that the consumer interest is served by a significant number of experienced and professional advisers leaving the industry purely because they have not passed the requisite exams by an arbitrary date.

10.3. We believe further flexibility is needed – for example experienced advisers who have made reasonable efforts to meet the qualification requirements by the December 2012 deadline should be able to continue to operate with appropriate supervision from a suitably qualified supervisor.

It would seem inconsistent to prohibit an experienced professional from operating in this way while a lesser qualified newcomer to the profession is advising clients under supervision.

We recommend that more flexibility is introduced for experienced advisers.

11. Greater clarity around the type of advice being offered

11.1. We do not believe consumers are terribly interested in the ‘type of advice’ being offered. They are only interested in whether the advice can be relied upon, ie can they trust the advice. The label used to describe the advice/adviser won’t alter that.

11.2. Simply because advice is labelled as "independent" or "restricted" does not guarantee a particular outcome. Indeed, the FSA recognise this in their approach to professionalism, rightly in our view, insisting that all advisers have the same minimum qualification, they also recognise that advice is not restricted for any adviser; it is the solution they use which potentially is. What is more important for consumers is the quality of the advice they receive and the financial resources and guarantees which stand behind it rather than the type of advice being given.

12. We believe the Committee should also be mindful of impending EU regulation which may overlap with some of the RDR scope. For example, the current consultation on Packaged Retail Investment Products (PRIPs). It is perhaps premature to proceed with RDR until we have clarity on EU regulation.

13. We have noted Hector Sants’ letter to your Chair of 13 December and, despite our support for the aims or RDR, the fact is, we believe this shows little evidence that RDR will work.

13.1. The underlying data is flimsy (the professionalism statistics on page 5 are based on a tiny sample of cases) and in places flawed (for example, page 2 cites an annual consumer detriment of £223m which simply does not follow from the preceding table).

13.2. We do not accept that RDR is necessary to avoid a reduction in cost to consumers through continued mis-selling. FSA has the powers and mandate to deliver this through its existing rules.

13.3. We do not believe there is any need for "dilution of the proposals", but do believe refinement is necessary to increase the likelihood of RDR meetings its aims.

13.4. As we explain in our summary, by insisting on unbundling costs and introducing more fragmented disclosure, the RDR will lead to more difficulties for the consumer.

14. We welcome the Committee’s call for evidence and reiterate our willingness to discuss in more detail should it assist the Committee’s work.

January 2011