Retail Distribution Review

Written evidence submitted by Ian Brough, Independent Financial Adviser

The areas I wish to highlight are mainly about quality of data, statistics and surveys.

(i) Surveys utilised

(ii) Affordability of advice and bringing financial services to a wider audience DP07

(iii) Cross subsidy

(iv) Commission and bias

(v) Qualifications

(vi) Summary and suggestions

Ian Brough Financial is a small IFA firm operating in the North East of England based near Durham City. Ian Brough has previously worked in national tied and IFA firms before starting his own practise.

It should be remembered:

The RDR from January 2013 will, if implemented, change the way every consumer can pay for investments and savings in the UK.

Opening Statement

I believe that major flaws in the RDR started with poor data and research issues, then got worse, effectively building on poor foundations, there are inconsistencies, no counter arguments for trends or statistics, information shortfalls from the initial intentions of the RDR to the present day, my letter demonstrates in around 2000 words, very limited time, with no budget or consultants that the data the RDR was based upon does not stand up well to scrutiny.

(i) The surveys within reports commissioned by the FSA often state that sample rates of those surveyed are not sufficient percentages/numbers to be considered a true reflection of the sector/group, yet they still constitute part of these reports and conclusions. I can only conclude other evidence was in short supply to justify using this material. Why not seek further information in these situations?

If this were evidence in a court case, it would probably be inadmissible, the opposition would shout ‘object’, there appears to be no similar system here to filter poor data or statistics.

This is most telling in the firms commissioned to provide reports, these firms have to protect their professional reputations.

(ii) The FSA listed a problem at the start of the RDR when Amanda Bowe (head of RDR) was in office, I quote:

‘Many consumers who have the means to save are simply unable to afford advice relating to their financial situation. Moreover, some consumers may not be able to access advice because the costs of regulatory requirements, and the ways in which many firms apply these requirements, limit the number of firms willing to serve certain types of consumer.’

Amanda Bowe also stated the RDR was intended ‘to bring financial services to a wider audience’

However the Oxera report 2009 (for the FSA) states:

(1)‘In the longer term, there may be some unwinding of cross-subsidies, which will result in higher fees for ‘low-value’ clients. Consequently, some will no longer have a realistic option of receiving independent advice. Some may switch to non-independent advice, others to bancassurance, while some may not purchase at all. The result will be a loss of choice for these customers, which may be perceived as harming competition.’

The statement ‘while some may not purchase at all’ indicates a loss of financial service clients and does not mention in the report the possibility of a whole new wider audience or even replacement of those lost clients.

These main aims have been lost:

· When did this major change occur?

· Without this how is the £1.7bn (approx) and huge job loss justified?

(iii) This statement (1) above gives the impression a small number of people will be negatively affected by removal of the cross subsidy between wealthier clients and those less affluent clients, however, if we look at the table below only 15% of households- I stress households not individuals, have over £20,000 of total savings, and of these 15% of households who hold over £20,000 of savings many will be on deposit in National savings, banks and building societies not in investments. Furthermore, if we allowed emergency funds for each individual we could be looking at 85% or more of the population falling in to the two lower bands mentioned.

· The untangling of this ‘cross subsidy’ is going to benefit how many clients?

· How does this ‘bring financial services to a wider audience’?

· If this cost and action only benefits the very wealthiest in society, where was this intention listed in the initial intended outcomes of the RDR?

(iv) Commission

Oxera also report:

(2)2.5.12 Commission bias

‘In markets involving commission payments to an intermediary, there are incentives for the intermediary to recommend either an individual product that offers the highest commission rates, or products from a particular provider offering high commission rates in general. The former may be termed product bias, the latter provider bias.

In the case of retail financial services, there is a perception that both product and provider bias has existed in the past, although actual evidence to support this perception has often been hard to identify. In a 2002 study for the FSA, evidence was found of provider bias, but only for single premium products, while there was no evidence of such bias for regular premium products. With regard to product bias, the study found evidence of this in certain products, such as ISAs and investment bonds, but it was not widespread.38 Since then further research has reached similar conclusions.39’

38 CRA International (2002), ‘Polarisation: research into the effect of commission based remuneration on advice’, a report for

the FSA, January.

39 See, for example, CRA (2005), ‘Financial Advice: How should we pay for it?’, a report for ABI, February.

Considering this is a report by a private firm paid for by the FSA, there are some weak statements in here to justify changing the face of retail financial services in the UK and spending up to £1.7bn, such as: ‘although actual evidence to support this perception has often been hard to identify’ and ‘but it was not widespread.’

· Again this leads me to wonder how short of supporting data where the FSA to include these sources?

· What does the rest of the data look like?

One must conclude from this suggestion of negativity surrounding bias, that bias must be detrimental to the consumer. In fact, one of the reports calculates estimated losses in monetary terms if this potential IFA bias existed throughout the whole industry,

Oxera report:

‘Consequently, some will no longer have a realistic option of receiving independent advice. *Some may switch to non-independent advice, others to bancassurance, while some may not purchase at all’

Where is the equivalent data showing the potential consumer cost of *driving the client to the ultimate bias of a tied provider? Some clients must be driven to the same provider and product through the tied proposition as the ones highlighted IFA bias issue?

· How does the overall cost of tied/multi tied compare to the cost of independent product?

· Do those detrimental providers and products still exist today in 2011?

The commission reports are from 2002 and 2005 the data within those reports may go back in to the 1990s, large home service operations were in existence, Royal London, CIS agencies etc and before Resolution consolidated many life companies, before other amalgamations, before many funds closed, additionally many national IFAs have gone, BBNFP etc.

· How does the FSA ensure this data is still relevant today?

· What are the trends in research, IFAs use of product research tools and other systems of working from the 1990s to the present date?

· An Oxera report clearly shows a recent trend of downward initial commission, which indicates a pattern, is this reflected in other behavioural shifts?

(v) Qualifications-existing advisers

Other professions in similar environments of constant change have adopted structured CPD and training as their solution to keep up with changes and improve competency within their professions.

The medical profession has issued many reports on this subject (which can be viewed online) these have been scrutinised by experts such as universities.

Could the FSA explain:

· What is wrong with the medical profession’s conclusion?

· Why the FSA’s solution is favourable?

In addition on a basic educational level, if an industry needs to raise ‘competence and behaviour’ as listed in the FSA’s DP07;

· Why is academic qualification the correct solution above other types of study?

· Please could they supply the supporting information for academic preference from some existing well referenced independent studies, as well as similar studies to show why CPD and training or vocational training is the wrong solution ‘to raise competence and behaviour’?

· How did the panel/other groups working for the FSA end up with an academic solution and is there any academic bias in this panel?

(vi) Summary

I am confident the treasury and MPs will hear the industry challenge much of the information the RDR was based upon.

In my opinion it is this foundation of reports, information and panel conclusions before discussion papers where the main faults lie.

In my opinion the Retail Distribution review should be scrapped or shelved, the information the RDR is based upon is not robust enough to justify this cost or magnitude of change in an industry.

Suggestions:

The new replacement regulator should be allowed to take office before any further assessment of major change within the industry.

An information dept should be established

A new dept independent of the regulator should be established, this should be used to gather information, statistics and reports. This dept could:

· Compile referendums and produce reports in the style of the ‘Forum of Private business’ seeking openly and honestly the views of the industry, clearly defining them from any other surveys

· Hold any regulator reports and all of the supporting documentation for industry scrutiny, comment and challenge, before it is used for any particular purpose

Hold other general useful data:

· RPI

· CPI

· Various National Statistic wealth of the nation reports etc

· Industry trends

· Industry numbers

· Average Commission/fee levels

· Any private industry data which may be saved

· Anything else the industry thinks is important and relevant to store here.

This would allow the industry to operate more on fact, be aware of reality, reduce debate, argument and stop fiction being repeated and included in so many discussions. Ultimately introduce more hard fact and reduce soft fact.

I would like to see the integrity of the FSA panels tested regularly, it has been noticed

· an inexplicable leaning toward academic study which appears to go against the tide of thought in other professions

· sometimes: ‘missing the obvious’ when it comes down to independent financial advice subject matter.

Is this a bias or problem in that panel system?

I do not see academic qualifications as the answer for existing advisers due to:

· evidence provided by other professions as an overwhelming support for structured CPD and training,

· we operate in a profession which changes even more quickly than medical advances with legislation as well as the economic climate it seems logical that an ongoing adaptable system is adopted in favour of ‘one moment in time’ academic study/testing.

· Systems such as the CII’s online CPD system with testing is already in place, content only requires adding/amending

In short I would like to see the competence and behaviour issue addressed once and properly.

Thank you for the opportunity to contribute to this debate.

January 2011