Retail Distribution Review

Written evidence submitted by Sesame Bankhall Group

Our credentials

1. Sesame Bankhall Group is the UK's largest intermediary distributor and supports over 3,000 adviser practices encompassing more than 12,000 independent financial advisers (IFAs) and mortgage brokers. The group was formed in 2009 and has origins dating back over 20 years. We have three distinct distribution brands:

· Sesame operates the UK's largest network of 1,400 appointed representative IFA firms. Sesame has headed the annual list of the 'Top 100 Adviser Firms', published by FT Business publication Financial Adviser, for the last six consecutive years.

· Bankhall is the market-leading support services business for 1,900 IFA firms that are directly regulated by the FSA.

· PMS operates the largest mortgage club for directly regulated mortgage brokers and has over 3,000 regular users of its services.

2. Services provided by Sesame Bankhall Group’s brands include compliance and regulatory support, access to a comprehensive training and development programme, in-depth product research, preferential professional indemnity terms and access to the latest technology to enable advisers to write business safely and efficiently.

3. Sesame Bankhall Group has a footprint that covers all areas of the UK advice market (mortgages, protection, general insurance, pensions and investments) and a business model that services both network appointed representatives and directly authorised IFA firms. Unencumbered by a narrow or one-sided view of the market, we believe we are ideally placed amongst distribution groups to give a balanced view of the challenges facing advisers and clients.

4. Our group has won a series of top industry awards that provide independent recognition of the high quality services and support delivered to IFAs and mortgage brokers across the UK. This includes ‘Best Network and Support Services’ provider and ‘Best Mortgage Network’ at the Money Marketing Financial Services Awards 2010, along with ‘Best IFA Network’ at the Professional Adviser Awards 2010. Sesame Bankhall Group is a wholly owned subsidiary of Friends Provident.

A trusted profession

5. The reputation of IFAs remains resolutely positive. Independent studies prove that people who receive professional financial advice recognise the benefits and trust their IFA. The FSA has acknowledged this.

6. The advice profession is dominated by small adviser practices that deliver a valuable role in local communities by enabling millions of people to benefit from professional financial advice. We believe it is imperative for consumers that we create an environment where that service can continue in the future.

7. The results of a 12-month independent research study in 2009, commissioned by Sesame and conducted by NMG Financial Services Consulting, demonstrated the value of professional advice and the high regard that clients have for IFAs, with 97 per cent of people happy to recommend their adviser to friends and family. This is reinforced by research by the Financial Services Research Forum that IFAs are the most trusted financial services institution. Furthermore, Ombudsman data consistently shows that IFAs have far fewer complaints than any other part of the industry.

8. We are currently rolling out an online client service assessment tool for advisers to use with their customers to help evidence quality of service through the use of a robust feedback mechanism. Based on the pilot conducted the average customer score based on a range of indicators was 8.30 out of 10, which is well above the benchmark of 7.50.

Our view of the FSA’s Retail Distribution Review (RDR)

9. As the UK’s largest distributor, Sesame Bankhall Group supports the drive towards higher professional standards and greater transparency, as these are the right foundations upon which to build consumer confidence. However, the success of the RDR hinges on the benefits to the British public outweighing the costs of delivery. Sesame Bankhall Group believes that the RDR has lost sight of some of its key original objectives and the net result threatens to be detrimental to consumers, the financial services industry and the wider UK economy.

10. Instead of the FSA delivering on its original objectives, including widening consumer access to financial advice, we have RDR proposals that will reduce access, reduce the number of advisers and cost the industry £1.7 billion. These are costs that will ultimately be passed on to customers.

11. The FSA’s own RDR cost benefit analysis predicts that we will lose 25 per cent of adviser firms. Importantly, over one in 10 people (11 per cent) who currently have access to financial advice will lose out in the new RDR world.

12. Indeed, the RDR is already having an impact. Whilst the overall number of adviser firms in Sesame’s network remained stable in 2010 taking into account joiners and leavers, it is noticeable that of the firms that did leave, 40 per cent said that it was a direct result of the RDR.

13. This anticipated future trend has been backed up by a series of independent studies. One study conducted in 2009 (Aviva 2011, using Deloitte unserved customer data 2008) estimated that the number of IFAs would fall from nearly 26,000 to c.23,400 by the end of 2015. Furthermore, the number of customers served through IFAs is estimated to drop from 5.38 million to under 2 million per annum in 2015. This is due to a combination of less overall firms, with each of those firms serving fewer customers on average than they do today due to the demands of the RDR.

14. People will still benefit from professional financial advice, and that is very important, but it will become the preserve of the wealthy. The mass market will find itself underserved, or even worse, not served at all. Nothing within the current RDR proposals leads us to believe this advice gap will be serviced by other means. 

15. The RDR has evolved to become a set of proposals focused on minimising the risk of mis-selling. As a result, we face the unintended outcome where the only growth area will be regulation itself. An intrusive supervision regime designed to address the failure of regulation in the banking sector will have far-reaching and unintended consequences elsewhere.

We believe that by addressing the following areas the RDR will result in better outcomes for consumers:

Time for a more progressive regulatory agenda

16. The current trend of ever-decreasing circles – where fewer Independent Financial Advisers (IFAs) service fewer people – could still be reversed and the UK’s savings ratio improved if the regulator was given a more progressive mandate by the coalition government. Britons need to save more, which is why the regulator should be handed a new statutory objective to improve the UK’s savings ratio. A more progressive and constructive approach would be entirely consistent with the shift away from the State towards private provision.

17. We need to stimulate and grow the UK’s regular savings market by making it easier for people to save. Product design is one important element, but it needs to be combined with a regulatory environment that provides tangible incentives, along with a strong advice profession that encourages and guides people. It could help to break the cycle of spiraling debt and benefit millions of people for generations to come.

18. This more progressive regulatory approach should also extend to the more straightforward regular savings products, so that the appropriate level of regulation is matched against the appropriate risk. An example of this is an Individual Savings Account (ISA), which currently requires the same level of fact find, suitability letter, research and Financial Ombudsman Service (FOS) liability as advising on a complex pension case for a company director.

19. This involves hours of work that in many cases will be uneconomical for an IFA to provide in a RDR world on terms that are acceptable to the client. For example, on a £10,000 investment involving four hours paperwork, an IFA would typically charge between £150 to £200 an hour. (It should also be noted that if this was on commission terms then it is the equivalent of 6 per cent to 8 per cent, which the FSA may consider excessive).

20. The key point is that reducing the regulatory burden on more simple, straightforward products would see sales and take up increase, thereby delivering a much-needed boost to the UK savings ratio.

Professional standards and qualifications

21. Higher professional standards offer an opportunity to build greater confidence in the advice profession, but to achieve that goal thousands of advisers have to balance the needs of their clients today, whilst undertaking additional work to not only meet the new higher standards, but also review their business models for the future. For many firms this involves a tremendous amount of work that should not be underestimated.

22. This task has been made more difficult as a result of the economic turbulence of recent years, which no one could have predicted when the RDR was first announced in 2006.

23. This has been compounded by a lack of detail from the FSA in a range of RDR related areas, including qualifications, which has made it difficult for advisers to undertake thorough planning. Despite the RDR first being announced in 2006 and the stated implementation date now less than two years away, we still await the final rules on professionalism, which have once again been delayed.

24. It is precisely due to this lack of meaningful detail from the FSA – at a time when the regulatory environment itself is becoming more intensive and intrusive - combined with the day to day commercial pressures on all businesses that have risen so sharply since 2006, that is at the root of so much understandable anxiety that exists within the advice profession in relation to the RDR.

25. Despite these significant challenges, progress has been made. Our group’s customer base is very broad and reflects the wider UK financial advice profession. Seventy-three per cent of our members are either already at diploma level or are clearly working towards diploma qualifications, demonstrating the commitment being shown by our profession.

26. However, despite this progress, we remain concerned about qualification requirements that could see significant numbers of experienced and competent advisers leave the industry prematurely. This is happening already and it will have a detrimental impact on clients who benefit from the quality advice that IFAs provide. It would also mean that the RDR itself would fail to deliver one of its original key objectives.

27. What we need is for the FSA to work with us and show greater flexibility. Every experienced, competent adviser who successfully crosses the RDR finishing line benefits hundreds of people through continued access to impartial professional advice. Multiply that number and we are talking about millions of people who stand to benefit if we get it right, or lose out if we get it wrong.

28. Competent, experienced advisers who can clearly evidence that they are committed to a learning programme that will take them to QCF Level 4 should be allowed more time to complete their work. The FSA does not have to abandon its principles. Its aims and objectives can still be achieved, indeed strengthened, because it will deliver a more positive outcome for the British public.

29. Neither are we asking for the FSA to set a precedent, as it would be entirely consistent with the recent move to delay plans to extend the approved persons regime that forms part of the Mortgage Market Review.

Adviser charging and factoring

30. We support the separation of sales from advice and the removal of any perceived provider influence, but the reality is that whilst people seek out debt, they need to be persuaded to save.

31. During an era that has seen the UK savings ratio plunge from 12 per cent in 1992 to a little more than 2 per cent by the end of 2008, we now have a situation where the level of personal debts in the UK, including mortgages, currently stands at nearly £1.5 trillion.

32. We take issue with the FSA’s assertion that regular savings only constitutes a small proportion of the market and the impact of a ban on factoring will therefore be limited. Whilst some would have us believe regular savings are inconsequential, statistics suggest otherwise. According to figures from the Association of British Insurers, in Q3 2010, new regular premium investment savings and individual pensions together amounted to 14 per cent of the entire amount invested in investment savings and individual pensions. Indeed, for individual pensions business alone, there was an average of £820m invested in regular premium savings in each of the first three quarters of 2010. This represents an average of one fifth (21 per cent) of the total amount (regulars and singles) of new individual pensions business written in each quarter. 

33. Furthermore, the fundamental point is that the regular savings market should be far larger than it is today. We need to encourage growth rather than restrict it further.

34. Removing factoring support by product providers will have a further detrimental impact on consumers and lead to large parts of the mass market becoming disenfranchised.

35. The net result will be fewer people being able to access professional advice at the very time they need it most. We need to nurture and reinvigorate the UK’s regular savings culture, but if we continue down the current path then we foresee a market where the number of people who purchase financial products will fall.

36. This will be compounded by a greater proportion of people who purchase products on an unadvised and unprotected basis, which we do not believe will be a successful or healthy outcome for the British public.

FSA to deliver on regulatory dividends

37. The RDR represents an opportunity for our industry to enhance levels of professionalism across the board for the benefit of consumers, but this will only happen through the delivery of a robust package of measures. It is important that we have a joined up regulatory approach where new developments such as the RDR work in tandem with existing regulatory initiatives such as Treating Customers Fairly.

38. Using the more in-depth management information that the regulator now has at its disposal, we believe that the FSA should provide tangible incentives to those adviser firms that demonstrate the highest professional standards, in the form of a reduced regulatory burden and costs. These regulatory dividends would incentivise adviser firms and encourage the development and growth of quality financial advice, which in turn would improve peoples’ access to expert, impartial guidance.

A 15-year long stop to encourage growth

39. We fully support the FSA’s need to protect consumers, but we believe that the continuing open-ended liability from past business is an unfair and unacceptable burden on all professional firms. That is why Sesame Bankhall Group reiterates its call for the FSA to introduce a 15-year ‘long-stop’ time limit on complaints.

40. The introduction of a ‘long-stop’ time limit would strike the appropriate balance between safeguarding consumers’ interests, whilst also delivering much needed certainty to the advice sector and encouraging future investment, which importantly includes developing the next generation of IFAs. The carrying of indefinite liabilities undermines the sustainability of predominantly small businesses, which is the opposite of what the coalition government wants in these difficult times.

41. In summary our message is clear:

· We are a trusted profession that delivers a valuable service to millions of people in local communities across the UK. Collectively we need to improve the UK’s savings ratio by encouraging people to look after their financial wellbeing. To achieve this goal we must recognise the pivotal role of a strong and sustainable advice profession.

· The UK’s savings culture will be improved if the regulator has a more progressive agenda, such as a statutory objective to improve the UK’s savings ratio.

· The FSA’s original RDR objectives have evolved to a point where the benefits no longer outweigh the costs, which means the net result will be detrimental to the British public and the financial services industry. However there is still time for improvements to be made.

· The IFA profession will deliver higher professional standards and remove commission from investment products, but firms should be given more time to complete their work in light of economic turbulence that could not have been foreseen at the outset of the RDR in 2006, and which has had a deep impact on the financial services industry.

· Factoring should be allowed as a ban will stifle the growth of regular premium savings by making it uneconomical for IFAs to advise the majority of people, thereby restricting consumers’ access to impartial professional guidance.

· The FSA should work with the financial services industry to design new, simpler advice models that improve access to advice for ordinary people.

· As part of the move towards higher professional standards for IFAs, along with existing regulatory initiatives such as Treating Customers Fairly (TCF), there should be regulatory dividends to reward quality firms and encourage the development and growth of quality financial advice, which in turn would improve peoples’ access.

· We also believe that the introduction of a 15-year long-stop time limit on complaints would bring further investment into the sector, whilst continuing to safeguard consumers’ interests, by delivering greater certainty for all parties.

January 2011