Retail Distribution Review

Written evidence submitted by Killik & Co

1.0 Introduction

1.1 The stock market changes under the Conservative Government of the 1980s encouraged many members of the public to consider the stock market as a home for their savings, and inspired the founding of Killik & Co in 1989 as an Advisory Stockbroker.

1.2 Whilst Advisory Stockbroking had always been available the industry was polarising between Discretionary Portfolio Managers interested only in high net worth individuals, and Execution Only (XO) stockbrokers who didn’t offer the help, advice and service these first-time investors required. (Both types still exist.)

1.3 The founders of Killik & Co believed that there was a place for a personal, open service which offered both advice and execution. And if the service was going to be accessible, why not make it truly physically accessible, with branches on the High Street?

1.4 Now there are 10 Killik & Co branches in Greater London, along with one regional branch in Ipswich and an international branch in Dubai. All are open to both clients and the general public to walk in and speak to a Broker.

1.5 We welcome the opportunity to provide this written evidence on whether the RDR will achieve the stated outcomes of:

· a transparent and fairer charging system

· a better qualification framework for advisers and

· greater clarity around the type of advice being offered

and whether the outcomes could be achieved in other, potentially better, ways.

2.0 Executive Summary

2.1 We believe that the RDR will not achieve its stated outcomes.

2.2 Interfering in pricing amongst competing businesses will distort the market and lead to many unforeseen consequences.

2.3 Commission bias will remain, even with the removal of trail (renewal) commission.

2.4 Rather than benefiting consumers, removing trail will result in significantly increasing the cost as well as the availability of advice.

2.5 In the interests of transparency for the investor, and avoiding interference in pricing, all commissions should be declared in a much more open manner than is currently being proposed.

2.6 Increased costs may persuade people against taking advice and result in them making poor investment decisions.

2.7 The deadline for advisers to achieve the appropriate new qualification should be extended to 2020 in order to avoid too many experienced advisers leaving the industry and thereby not passing their practical, invaluable knowledge on to less experienced colleagues.

2.8 The current proposals on who can define themselves either as "Independent" or as "Restricted" will cause confusion to both consumers and practitioners.

2.9 The terms "Independent" or "Restricted" should only apply to the purchase of Packaged Products to be defined either as an Insurance Product or a Savings Product - a firm would only need to be "Independent" or "Restricted" in either one or both groups.

2.10 The Government should defer implementation of the RDR, whilst a fundamental review is undertaken, particularly in the light of the European Commission’s PRIPs project , which has the same objectives as RDR, but is seeking to achieve them by different means.

3.0 TRAIL COMMISSION:

3.1 RDR Proposal:

3.2 To permit trail (renewal) commission payments to Execution Only firms, Platforms* and Discretionary Managers**, but not to Advisers

3.3 Likely Outcome

· This is State interference in pricing between competing businesses and is anathema to most on that principle alone.

· It is also a "leap in the dark" and is likely to have unintended consequences.

· The interference gives an artificial and unfair advantage to some groups of Financial Service firms over others. (The State should not interfere in the pricing of a competitive industry).

· It will make advice more difficult to find and more expensive, driving those that need advice into "doing it themselves", with all the risks that that entails.

· The advice industry will need to replace the lost income, so RDR will not result in lower costs of advice for consumers. In fact it will cost the investor 20% more as VAT will be charged on the adviser fee whereas it is not charged on the trail commission that firms currently receive. With over £500 billion invested in UK onshore funds, total trail commission payable to Advisers could amount to £1 billion (assuming an average trail commission of 0.4% on 50% of £500 billion of funds value), and VAT on this figure could cost consumers an additional £200 million per annum.

· It will cause commission bias, as advisers will be reluctant to sell a holding, which was purchased pre RDR and upon which trail commission can continue to be received, to buy units upon which trail cannot be received post RDR. Indeed, there is potential for bias/conflict within firms that offer both discretionary and advised services in that the firm may buy the highest trail paying funds for its discretionary clients to help compensate for not receiving trail on funds recommended to advised clients. This could be to the detriment of discretionary clients.

3.4 Killik Proposal:

3.5 Leave the industry to make its own decisions on pricing, but insist on greater transparency for the investor. All commissions should be declared both pre the trade (by reference to the firm’s rate card) and post the trade (the cash amount shown on a trade confirmation). However we also recommend that any organisation in receipt of a payment from a product provider, be they a Custodian***, Platform or Adviser, should send a single consolidated statement to a client, once a year, detailing any and all sums received from a product provider upon their behalf over the preceding 12 months. This level of transparency will provide the information necessary to allow the market to resolve the issues by competition.

4.0 PROFESSIONALISM:

4.1 RDR Proposal:

4.2 An individual cannot offer advice to a client post RDR without an appropriate Level 4 qualification.

4.3 Likely Outcome:

· A large number of highly experienced advisers will leave the industry as they will be reluctant to take an examination.

· Private investors will find it even more difficult to get advice.

· Industrial Branch style Insurance business, involving the collection of small sums each week for funerals etc, will likely cease.

4.4 Killik Proposal:

4.5 We would support an extension of the qualifying date to 2020 on the grounds that most advisers will be 65 by that time if they were over 50 when the qualifications issue was first mooted. However, exemptions need to be given for those selling very small premium business.

5.0 "INDEPENDENT" OR "RESTRICTED"

5.1 RDR Proposal:

5.2 All Advisers to private individuals have to define themselves either as "Independent" or as "Restricted" to reflect whether they favour the products of a given house(s) over the products available in the wider financial services market. Furthermore, to be "Independent", advice must be offered across the financial services market from Retail Investment Products to Insurance Products.

5.3 Likely Outcome:

· Confusion both for Consumers and Practitioners, as the intention is to apply the descriptions – "Independent" or "Restricted" - to Stockbrokers who may primarily buy listed or quoted securities, not products. This is clear evidence that contrary to the FSA’s view "one size does not fit all".

· In order to call themselves" Independent", firms will claim to cover areas where they have limited experience.

· IFAs are more likely to meet these Independence rules than Stockbrokers, and they will use this as a marketing advantage when in competition with pure Stockbrokers who would have to call themselves "Restricted".

· Under the rules of their governing bodies professional intermediaries such as Solicitors and Accountants, will not be able to refer clients to Stockbrokers, and will have to remove them, if the firms cannot claim to be "Independent".

5.4 Killik Proposal:

5.5 The terms "Independent" or "Restricted" should only apply to the purchase of Packaged Products and any listed or quoted securities or products would be excluded. Products should be defined either as an Insurance Product or a Savings Product and a firm would only need to be "Independent" or "Restricted" in either one or both groups.

6.0 PRIPs (Packaged Retail Investment Products):

6.1 A serious weakness of the RDR is that the FSA is "front running" Brussels, with no guarantee that Brussels will follow. This is particularly in the area of PRIPs, which are central to the RDR, but which have yet to be defined by the European Commission, and which it may never define.

6.2 Indeed the Commission published a consultation paper on 26 November 2010 that stated it favoured merging the PRIPs project into the on-going work taking place on the reform of the Markets in Financial Instruments Directive and the Insurance Mediation Directive.

6.3 Therefore, at the very least, the PRIPS project will be subject to some delay and yet the FSA is carrying on regardless. Indeed one possible consequence of this is that it will be theoretically possible that a financial services business registered in another European country could be passported into the UK and be outside the RDR.

6.4 Moreover, the Commission’s consultation paper went on to say that a new disclosure instrument was necessary but that further consultation would be needed to determine how charges and performance history should be presented. It added that the responsibility for disclosure should rest with the product provider rather than the distributor.

6.5 This, on top of RDR will make for a complex and burdensome regime with consumers receiving information about charges from both the product provider and the adviser. This seems likely to add to consumers’ confusion rather than improve clarity. 

6.6 PRIPs and RDR are ostensibly seeking to achieve similar outcomes for consumers in terms of removing product provider bias and increasing transparency over charges, but are approaching these aims in totally different ways.  This should be reason alone for RDR to be delayed and reconsidered in light of the PRIPs’ consultation.

7.0 CONCLUSION

7.1 The FSA  approached the RDR with the best of motives but it has become a complex monster which as it currently stands will not achieve its stated outcomes.

7.2 Therefore, we urge the Government to defer implementation of the RDR, whilst a root and branch review is undertaken. The RDR’s rationale should be reconsidered, particularly in light of the work being undertaken in Brussels, the resulting rules should be at a much higher level and less detailed, and the industry should be centrally involved in their design. If this were to happen, the FSA’s stated outcomes would be much more likely to be achieved.

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Definitions:

* Platform is similar to a Custodian (see below), but Platforms only custody Fund assets, as opposed to listed equities or bonds. IFAs will commonly use a platform to hold their client assets upon their behalf, given that IFAs generally only buy funds. The platform will also provide ISA and SIPP wrappers around the underlying funds.

** Discretionary Manager is someone who can manage a Client’s Portfolio without reference to the client, making changes at his, the manager’s, discretion.

*** Custodian is an organisation that holds clients’ physical assets. For example, if you hold shares through Killik & Co, your custodian would be TDWCS, a subsidiary of Toronto and Dominion Bank. The shares will be registered into the name of a wholly owned nominee company of TD upon your behalf. However, if you hold a European stock through your TD account with us, the ultimate custodian would be UBS, who will hold the stock in Europe, but to the order of TD. So you would effectively have two custodians, but one that is ultimately responsible to you, TD - UBS would be acting as their agent.

December 2010