Retail Distribution Review

Written evidence submitted by Royal Bank Scotland

Executive Summary

§ RBS Group (RBS) continues to be in broad agreement with the intended outcomes of the FSA’s Retail Distribution Review (RDR) where these will secure demonstrably better outcomes for customers in terms of providing greater clarity on the nature of services they are accessing, the quality of the advice they receive and the way they pay for such services.

§ For our advisers who are yet to attain the required qualification level, RBS is fully committed to supporting them on their journey to securing the necessary level of professionalism by 31 December 2012.

§ We support the RDR objective to end commission-based investment advice and an end to product provider influence on adviser remuneration.

§ We however continue to have significant concerns over an unintended consequence of the RDR, namely an adverse impact on customer access to advice. We believe this will stem from two primary sources: an anticipated reduction in the number of advisers in the industry and the costs firms will incur in delivering advice, which will ultimately be passed on to customers, potentially moving advice "up market". This will in turn reduce access for less affluent customers who will continue to need such financial advice.

§ These concerns have already been raised by RBS during the formal consultation process with the FSA. RBS has met with the FSA and the Financial Services Consumer Panel (FSCP) several times to discuss our proposal for creating a Simplified Advice model designed to meet the simpler needs of less affluent customers for protection, retirement, savings and investments solutions . We propose that t he FSA should consult specifically on the issue of Simplified Advice, how it can be delivered, the appropriate product sets it should encompass and the professionalism require ments with a view to changing the rules to allow for the development of a commercially viable advice service.

§ As the FSA’s consultation on particular aspects of the RDR will continue well into 2011, the implementation period for firms is also becoming increasingly challenging. The FSA’s announcement on 16 December 2010 that they have delayed publication of the Professionalism Policy Statement has reinforced our concerns. RBS would welcome consideration to be given to extending the implementation timescales for certain requirements, such as transactional sales data and Continuous Professional Development (CPD).

1 Introduction

1.1 RBS Group (RBS) welcomes the opportunity to provide written evidence to the Treasury Select Committee on the RDR.

1.2 Our NatWest and RBS brands serve more than 1 3 million current account, savings and mortgage customers in the UK . T h ere are a significant number of customers wh o may turn to us for financial advice and nearly half a million customers did so in 2010. We recognise we have a responsibility to our customer s to ensure we behave in a helpful, transparent and fair way when they do seek advice from us .

1.3 We have been an active participant in the FSA’s RDR discussion and consultation process since its launch in June 2006. We worked closely and constructively with the relevant trade bodies, the FSCP and the FSA themselves in delivering changes to the advice sector which would achieve the intended outcomes.

1.4 RBS supports the intended outcomes of the FSA’s RDR where these will secure better outcomes for customers and provide greater clarity on the nature of services they are accessing, the quality of the advice they receive and the way they pay for such services.

1.5 Whilst our comments here focus on paid for advice which is the focus of the RDR, we also recognise that some customers depend on access to free money advice to help them deal with financial difficulty. We are the largest funder of the money advice sector and the largest funder of the Money Advice Trust. This funding trickles down to many advice agencies that are helping people on the frontline. For example, we fund the Wiseradviser training which 90% of all debt advisers go through.

2 The RDR will reduce access to advice

2.1 The RDR was meant to encourage greater savings and investment and increase consumer access to advice. The FSA, in Discussion Paper 07/1, articulated six main outcomes they wished to achieve from the RDR including, "a market which allows more consumers to have their needs and wants addressed."

2.2 However, since the start of discussion and consultation on the RDR, we have raised significant concerns about the indirect implications of the FSA’s proposals. As they stand, market research* indicates that the proposals will have a detrimental impact on access to advice for a significant proportion of the population, in particular the less affluent with relatively straightforward financial planning needs.

2.3 This reduction in access will be caused by an anticipated reduction in the numb er of advisers in the industry together with the increased cost of delivering advice which will have to be paid for by customers, which will in turn reduce access for less affluent customers or those who are unwilling to pay.

2.4 Our internal research has highlighted that customers are happy to research and analyse their financial situation online but prefer to seek the services of a financial adviser when making a decision due to the complexity of issues they face .

2.5 Our proposed Simplified Advice model uses a combination of face to face and on-line solutions to deliver advice cost effectively, focusing on the more straightforward needs of the mass market and covering the majority of our consumer base. It limits the solutions that can be offered, to include products that protect against events such as death or serious illness and investment products that meet the needs of the customer without putting capital at undue risk.

2.6 Simplified Advice would still align with the principles of the RDR in relation to the definition of advice but, given its focus on simpler needs, financial situations and solutions, we believe that Simplified Advice could be delivered with a proportionate qualification without the risk of detriment to the consumer.

2.7 W hilst RBS fully supports the increased professional requirement proposed by the FSA as we believe this is appropriate for full and holistic financial planning, we suggest that specific, proportionate qualification standards for Simplified Advice should be developed. These should be set at higher levels than current and retain core elements of the higher level qualification where appropriate, for example on regulation and ethics, but reflect the need to provide advice on a more straight-forward set of solutions.

2.8 We would encourage the Treasury Select Committee to explore the need for the FSA to distinguish between the qualification requirements for advisers offering different types of advice. .

2.9 We also note the HM Treasury’s consultation on "Simple Financial Products" which commenced in December. We particularly note the request for views on whether the new regime of simple financial products should be linked to regulated advice. In order to deliver a cohesive proposal to retail consumers, the HM Treasury consultation needs to reflect the need for Simplified Advice.

3 A transparent and fairer charging system

3.1 We believe that the introduction of Adviser Charging will deliver the FSA’s stated outcome of delivering a transparent and fairer charging system for customers seeking financial advice.

3.2 Adviser Charging will remove the risk of product bias stemming from the payment of product commission to Independent Financial Advisers which will deliver better outcomes for customers.

3.3 By moving to an environment where the cost of advice is more transparent, advice will become a commodity in its own right which will, in turn, require advisers to deliver advisory services that are valued by customers.

3 . 4 We are , h owever , mindful of the industry-wide market research * which has identified that a material proportion of customer s , particularly the less affluent , may not accept or b e willing to pay an up-front fee for professional financial advice. Therefore, the introduction of Adviser Char g ing may, indirectly, have an adverse impact on the number of customers accessing financial advice. The choice faced by these customers will either be to address their financial needs unsupported or do nothing ; n either is a desirable outcome.

4 A better qualification framework for advisers

4.1 We support the FSA’s drive to implement a step change in professional standards across the investment advice industry. This will be a key aspect in restoring customer trust and faith.

4.2 The proposed framework of appropriate examinations and CPD, combined with a requirement for investment advisers to hold a Statement of Professional Standing, will deliver a better qualification framework. These components are enhanced further by the focus placed on the understanding and demonstration of ethical behaviour by investment advisers.

4.3 On the basis that the FSA wishes to evidence a step change in the professionalism of investment advisers, this can be achieved through the attainment of higher professional standards through the appropriate examination route permitted under the RDR. We believe that this route will deliver the desired outcome of delivering a better qualification framework for advisers without the need for further interventions such as grandfathering.

4.4 Higher qualifications do not in themselves equate to increased professionalism and must be seen in a wider context of measures that will inspire consumer confidence and trust. RBS would like to see a consumer education programme involving the industry, consumer groups, trade bodies, professional bodies to promote this step change.

4 .5 T here is an increasingly important role for educational bodies , such as colleges and universities, Financial Services Skills Council, professional bodies and the FSA, to play in promoting awareness of the better qualification framework and standards of professionalism that will exist , and the range of career opportunities available , in order to encourage new advisers into the industry. We would see this as essential in mitigating the numbers of advisers anticipated to leave the industry and the potentially adverse impact on access to advice for customers .

4 . 6 W e have a robust learning programme for our existing advisers specifically designed to support them in gaining the required qualifications by December 201 2 .

4 .7 However, there are other ongoing challenges to the Dec ember 2012 deadline . There continues to be uncertainty on firm s ’ ability to use existing examinations , and a lack of clarity on roles and responsibilities of the regulator, Accredited Bodies, employers and advisers in the post RDR landscape , the costs of which firms cannot currently accurately quantify . Uncertainty will continue further with the FSA’s announcement to defer publication of the Professionalism Policy Statement until January 2011. The FSA also continue to consult on the notification requirements that will be placed on firms should th eir advisers breach the requirements of their role. Firms will require adequate time to adapt their reporting systems in response.

4.8 As the FSA’s consultation on particular aspects of the RDR will continue well into 2011, the implementation period for firms will become increasingly challenging. With the Professionalism Policy Statement deferred to January and sales data requirements due to be consulted on throughout the first half of 2011, the implementation period for the industry is growing ever more demanding. RBS would welcome consideration being given to extending the implementation timescales for certain requirements, such as transactional sales data and CPD arrangements.

5 Greater clarity around the type of advice being offered

5.1 We are in agreement with the FSA that it is important that customers understand the nature of the advisory services being provided, be that Restricted or Independent.

5.2 As with the outcome regarding the qualification framework, this is another aspect where we believe that a consumer education programme involving the industry, consumer groups, trade bodies, professional bodies and the regulator will be essential in fully achieving this outcome.

5.3 We believe however that the labels applied to the advisory services are secondary to the need to ensure that customers have access to professional financial advice.

6 Conclusion

As we have stated within this response RBS believes that the RDR will largely achieve its intended outcomes albeit at a significant cost. We also however believe that there will be unintended consequences for the industry and consumers, primarily a detrimental impact on access to financial advice to the less affluent. Simplified Advice may present a solution. However, in order for the financial services industry to deliver a commercially viable simplified advice model, revision to existing RDR rules and proposals are needed. Specific consultation on this issue is therefore required.

January 2011