Retail Distribution Review

Written evidence submitted by Threesixty Services

We are well aware that you will have received many submissions around two of the core issues of RDR – Qualification benchmarks and the removal of commission. Both of these areas are important and each will have an impact on the availability of advice within the Financial Services sector. Compelling evidence has not been presented that either increased qualifications or the removal of commission will have a material effect on the standards of advice available for consumers or that alternatives – such as grandfathering with robust CPD or commission caps – would not be at least as effective as the FSA’s proposals.

That said, there is no compelling evidence that the FSA is wrong, it is even possible that the benefits they believe will arise from these changes will achieve the desired outcomes and that the loss of access to advice is a price worth paying. It should be noted, however, that an original desired outcome of the RDR was improved access to financial advice – that objective has since been, quietly, dropped and will certainly not be met by the core proposals.

The vast majority of responses you receive are likely to cover these two aspects in great depth and we would like to raise two other issues which we believe are key to the debate but which appear to be lost in the noise created around commission and qualifications.

A. Status of Adviser Firms

1. Definitions of Advice.

The RDR proposes that there will be two main types of financial advice in the post-RDR world: Independent and Restricted. The term ‘Restricted’ is one which the FSA presented following research where they claim to have presented the non-independent options to consumers along with a series of different descriptors. Consumers found the term ‘restricted’ to be the one which reflected most accurately those alternatives.

The FSA’s quarterly Consultation Paper – CP 10/22 – shows 6 main types of restricted advice with a further 3 possible models depending on the extent of any contractual relationship with one or more product providers.

We believe that having 9 separate business models with just one descriptor is flawed and will cause consumer confusion.

2. Basis of the Definitions

These definitions are supposedly definitions of ‘advice’. In fact, the most relevant difference between two key models is the range of products which an adviser is compelled to consider for his/her clients. It is important to emphasise the word ‘compelled’ at this point since all adviser models would be ‘able’ to consider the full range of products

Our concern here is that many current IFAs will be forced to adopt a business model which would currently be described as ‘independent’ but which will fall within one of the new ‘restricted’ models post-RDR. The model in question is example E in the FSA’s draft disclosure statement from CP10/22 – enclosed as Appendix 1.

We believe that this will cause consumer confusion and, through the inability of consumers to differentiate among the 9 models of ‘restricted’ will drive many of them to the much more restricted models offered by product providers and bancassurers.

3. Relevant Products

This problem is caused by the FSA’s decision to amend the current definition of whole of market – requiring IFAs to consider the whole range of Packaged Products – to one which requires IFAs to consider the whole range of Retail Investment Products (RIPs).

The additional products which an IFA would be required to ‘consider’ and ‘understand’ include, for example, Structured Investment Products and Unregulated Collective Investment Schemes. These investments, and others in the new definition introduce the potential for significantly more risk than Packaged Investments with the potential for very poor consumer outcomes. In the last 15 months the FSA has published reviews of the quality of advice around both Structured Investment Products (Quality of Advice on Structured Products – October 2009) and Unregulated Collective Investment Schemes (Unregulated Collective Investment Schemes: Good and Poor Practice Report and Unregulated Collective Investment Schemes: Project Findings – July 2010. In both instances the FSA’s findings were such that it would have been reasonable for them to propose the introduction of much stricter restrictions around advising on these products.

Instead, of imposing additional restrictions around such products the FSA proposes rules which will compel IFAs to (a) consider them for use with their clients and (b) to understand how they work.

(a) The FSA has confirmed that ‘consider’ in this context does not mean that an IFA must consider these products as part of every recommendation which he/she makes. Some sort of corporate consideration identifying client types which might be suitable for each investment would seem to suffice. However, it is not possible for a firm to decide that, following consideration, it does not operate with any clients for whom these investments would be suitable and thus elect not to use them and, for example, exclude them from their PI cover. Such an action, while fully informed and commercially sensible (the cost of PI cover for many of these investment types is expected to escalate following the RDR) would force a firm to adopt the ‘restricted’ descriptor – see e mail from FSA enclosed as Appendix B

(b) The FSA has stated that it does not want a two-tier qualification system where ‘restricted’ advisers require a lower level of qualification than ‘independent’ advisers. Thus all advisers are required to obtain a level 4 qualification from a list approved by the FSA. The FSA has published learning outcomes it requires from a level 4 qualification and all the available exams are based on these.

A knowledge of Unregulated Collective Investment Schemes, Structured Investment Products or others of the products added by the introduction of RIPs is not a requirement of any of the new qualifications approved by the FSA and it is thus difficult to see how an adviser is expected to demonstrate the competence required of him/her in order to be described as an ‘Independent’ adviser.

All of the evidence gathered by the FSA, including the anticipated introduction of European regulation around PRIPS suggests that, far from encouraging advisers to actively consider a range of investment types which the FSA recognises as higher risk, regulation should be introduced to control and restrict advice in these areas. It is worth adding that a firm which is ‘restricted’ in the post-RDR world will not be restricted from considering these products for its clients, it will simply not be compelled to do so.

B. Grandfathering

The FSA has stated that it will not permit the ‘grandfathering’ of existing advisers, irrespective of their expertise and the length of their experience. While we have no strong views on this issue and are fully in favour of greater qualifications amongst advisers it is worth pointing out that this approach is contrary to that adopted when other professions have been created or remodelled with Nursing being the most recent example.

This refusal to permit grandfathering is not only contrary to examples in other professions, it is contrary to the FSA’s own practice and as such is inconsistent. Any industry or profession deserves to receive consistency from its ‘regulator’.

1. CP10/22

In CP10/22, the FSA proposed removing the transitional provisions which have allowed some individuals to rely on the T&C grandfathering provisions introduced at the time of ‘N2’ (30 November 2001).

2. Policy Statement 10/18

The FSA states in PS 10/18 that these transitional provisions will remain in force allowing those individuals who were grandfathered into the FSA T&C regime on 30 November 2001 to remain grandfathered in. Had the FSA been consistent in its approach these individuals would have needed to take an appropriate exam within 30 months.

An approach as inconsistent as this is clearly going to add to confusion and will not improve the reputation of the industry/profession.

Overall we believe that the original objectives of the RDR were positive and should have been welcomed. The detail which has emerged over the last two years is considerably less welcome.

There can be little doubt that the process will result in a reduction in adviser numbers (detailed evidence has been submitted to you by others on this point - Capital adequacy increases coupled with the change from commissions to fees will be a contributory factor in this process, it Is not simply related to the question of qualifications) and that the cost of compliance will lead to increased costs for clients wishing to receive advice.

We believe that many of these changes will result in fewer consumers having access to true independent advice and will force them to rely on advice from bank and insurance company sales forces where, statistically, a good outcome is less likely.

January 2011