Retail Distribution Review

Written evidence submitted by the Building Societies Association

Introduction

1. The Building Societies Association (BSA) welcomes the opportunity to contribute evidence to the Treasury Select Committee on the Retail Distribution Review.

2. The BSA represents mutual lenders and deposit takers in the UK including all 49 UK building societies. Mutual lenders and deposit takers have total assets of over £365 billion and, together with their subsidiaries, hold residential mortgages of almost £235 billion, 19% of the total outstanding in the UK. They hold more than £245 billion of retail deposits, accounting for 21% of all such deposits in the UK. Mutual deposit takers account for about 36% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

Executive Summary

3. The BSA supports the aims of the Retail Distribution Review. However, the BSA is concerned that some of the specific proposals may not be the most effective way of achieving the RDR’s objectives and will provide feedback relating to:

· The impact of RDR on access to financial advice – particularly for those saving on a regular basis.

· Creating a fair market for distributors and product providers.

· Achieving a proportionate system of adviser CPD.

Increasing Access to Financial Planning

4. The original objectives of RDR, as outlined in Discussion and Consultation Papers, are subtly different from those set out more recently by the FSA, particularly by Mr Sants in his recent evidence to the Treasury Select Committee [1] . The BSA is concerned that the FSA has dropped references to the RDR "delivering a market where more customers have their needs and wants addressed".

5. The BSA is concerned that the FSA’s proposals may reduce access to financial advice. The BSA is particularly concerned that those seeking to invest on a regular basis may find it difficult to obtain financial advice. Firms providing advice to these customers will either have to levy an up-front fee (making the advice expensive relative to the amount being invested) or will spread their advice charges over time, meaning they will carry a loss in the short term. In one scenario the demand for advice will fall, in the other, supply. Given the increasing need for individuals to make private provision for their retirement, the BSA believes that any proposals which reduce access to financial advice will be to the detriment of the UK consumer generally.

6. The FSA has raised the possibility of a ‘Simplified Advice’ process and the BSA believes that a simple and efficient sales process, under a system of commission, could provide an effective way of delivering advice to the mass market. We know of at least one building society that has made representations to the FSA on what could constitute Simplified Advice but the sector will require greater clarity before it will devote the resources required to make this a commercially viable concept.

Creating a fair market

7. Generally, the arrangements proposed under the RDR should provide greater transparency of charges. However, ‘vertically integrated firms’, that is those firms that are both product manufacturers and distributors, may have a potential competitive advantage over firms that act only as distributors. If advice charges become a genuine point of competition, vertically integrated firms may be able to subsidise the costs of advice in their product charges and advertise low advice charges. The FSA has stated that ‘any cross subsidisation [should not be] significant in the long-term‘ [2] ; however the basis on which costs are apportioned between manufacture and distribution is not clear cut. Vigilance will be needed to ensure that the disclosures by vertically integrated firms are made on an equivalent basis to others.

A better qualification framework?

8. The BSA supports the FSA’s plans for greater professionalism among advisers, supported by higher qualifications. Feedback from our members indicates that arrangements are well in hand for ensuring their investment advisers meet the new QCF Level 4 standard in time for the introduction of the RDR regime at the end of 2012.

9. While the BSA welcomes the requirement for a system of Continuous Professional Development (CPD), it is concerned that the FSA’s specific proposals are an unnecessarily costly and complex way of delivering the solution, in a landscape where these additional costs will be reflected in the advice charge levied on the consumer.

10. The FSA’s current proposals are for a system of individual adviser accreditation. The BSA believes that a system which gives larger adviser firms the option of taking delegated responsibility for adviser accreditation (such as the system employed by the Association of Chartered Certified Accountants - ACCA) would be more efficient. This approach allows for Chartered Certified Accountants to meet their CPD requirements through their Approved Employer programme, which is free to join and which is based on a number of ‘best practice’ learning and development statements to which firms have to subscribe.

11. The BSA believes that this approach would offer an equally robust and less expensive solution to the issue of CPD accreditation compared to the FSA’s current proposals for individual adviser accreditation. For organisations such as our members, the underlying value of the ‘brand’ is a sufficiently strong driver to guarantee that they take responsibility for advisers’ CPD due to the brand risk of retaining ‘incompetent’ advisers.

Greater clarity around the type of advice being offered?

12. It is important that consumers have a clear understanding about the basis of any advice they receive. The "independent" advice label is reasonably well understood and it is appropriate that it is to be retained under RDR as a differentiator of independent and non-independent advice.

13. We have some difficulty with the term "restricted" advice, however; as it is not clear that this will be understood by consumers. It will cover a very wide range of advisory services. In order to provide clarity to consumers about the nature of the restricted advice they are being offered, additional disclosure will be required. Accordingly, the value of such a catch-all term has to be questioned.

14. More important than labelling is consumer access to investment advice and as we state above, we fear that will be considerably diminished under the RDR.

Summary

15. The BSA fully supports the objectives of the RDR, but does have some concerns about some of the specific proposals. In that light the BSA would make the following observations:

· The BSA’s most significant concern regarding the RDR is that it risks limiting access to financial advice at a time when this advice is critically needed by many who need to make private provision for their retirement. The BSA is concerned that the FSA seems to have removed references to one of the original (and important) objectives of RDR to extend the availability of financial advice. The BSA would urge the Committee to investigate the likely impact of the RDR on access to financial advice and to make recommendations as to how it can be protected and extended.

· The BSA is keen for the RDR to deliver a fair market for consumers, distributors and product providers and for the disclosures by vertically integrated firms to be made on an equivalent basis to firms that only provide advice.

· The initiative to increase professional standards is a positive development for the industry and many of our members have taken early steps to ensure their advisers meet the new qualification requirements.

· The BSA has received feedback from among its members that the proposals regarding adviser CPD will be unnecessarily complex and costly to administer in a situation where these costs will ultimately be passed on to the consumer.

January 2011