Retail Distribution Review

Written evidence submitted by Fidelity International

About Fidelity International

Fidelity International is an asset manager serving investors globally outside North America . It was established in 1969 and manages all significant asset classes for institutional and retail investors in long-term savings products. FIL International employs over 4,000 people in 21 countries managing US$ 246 billion of assets worldwide and services over 7 million customer accounts.

In the UK, FIL distributes life, pensions and fund products through its platform business, FundsNetwork, as well as being a pre-eminent manager of an extensive range of its own range of UK domiciled OEICs and unit trusts. As a UK business we have in excess of 1 million customers, manage relationships with over 12,000 financial advisers and administer over 400 employer schemes. The platform business has over 90 asset manager relationships and £3 5.1 bn in assets under custody. As an asset manager FIL distributes through almost every distribution mechanism in the UK , including the majority of ‘platform’ operators. FIL also runs a Life Insurance business, supporting a number of si gnificant group pension schemes. FIL is the largest provider of non-cash ISAs. (all data as at 31/ 12 /2010 )

Executive Summary

Over the last 4 years Fidelity International has been a strong supporter of goals and objectives of the Retail Distribution Review. We recognise the enormous complexity in delivering these changes, and as such have lent considerable time and resource to this process to help in the implementation of the rules.

The possible success of the RDR has to be looked at in terms of the outcomes it will look to achieve, and in particular improving those of the consumers of the products and services provided in the market place. We believe that as it stands there will be a number of significant benefits of the proposals, but also a number of other unintended consequences.

Our fear is that however clear and right the objectives of the proposals, the implementation of the RDR simply creates a more complex environment for participants to operate within. The overall outcome of any regulatory proposals within the retail long term savings market should be that it creates an environment to increase both the numbers of individuals and the overall levels of saving. The risk is the current proposals fail on this front.

The Committee has asked for evidence on three specific points and Fidelity International is pleased to respond to that call. The following provides a summary of the points raised within each question and an overview of our current views on the proposals.

1. The proposals around how advisers are remunerated are entirely correct. This will create an advisory industry that is remunerated based on relationships, and will improve the transparency of the cost (and value) of advice

2. The adviser charging rules should be managed in line with other forms of remuneration and non-monetary benefits received in the adviser market. If the removal of commission is to be successful, all other forms of product bias should also be reviewed to ensure that ‘commission-like’ models do not develop.

3. The qualifications standards should be seen as a minimum for both new and existing advisers and will bring substantial improvement to the service to clients. The level of professional qualifications held by financial advisers should increasingly be seen as a differentiator, and as such further benchmark levels should be set as demonstrating excellence in advisory practices

4. The current definitions of independent and restricted advice are at best sub-optimal, and will not lead to any improvement in consumer outcome around the disclosure and implications of either service. Restricted advice will be seen for some as a means to drive costs down, which although creating ‘bargaining power’ for advisers and consumers, does not mean that the consumer will be receiving the best product. If a large number of advisers simply move into the restricted market, and assuming consumers do not understand the differences in offering, these proposals will have failed.

5. There are significant discrepancies between the regulation of different providers of products and services in the market place, which will lead to different outcomes. Although the consumers of these products and services see these as being homogenous, the regulatory environment will treat these differently. For example the execution-only, adviser, life insurance and mutual fund industries will all have different regulations applied to them. These regulatory differences will at a minimum create consumer detriment due to different client experiences, and at worst carries a significant risk that it opens up regulatory arbitrage opportunities for providers who deem an area to be less tightly regulated. There must be consistency applied to suppliers of homogenous products and services, as to do otherwise would produce client detriment and inefficiency.

6. The current outcome of the RDR is likely to see an initial increase in costs of advice, but also a reduction in the supply of the service. The proposals around introducing a ‘simplified regime’ currently require significant detailing before any business could adopt these standards. We would encourage the Treasury to continue to look at ways in which advice and guidance can be provided more cost effectively, and that a regulatory environment is embraced that reduces complexity.

7. The impact of taxation is an area which requires further consideration. The current proposals already risk seeing costs rise due to the increased complexity introduced by the proposals. Notwithstanding this issue, the tax efficiency of the proposals risk in their own right a material increase in costs, specifically around VAT and CGT on the fees payable to both advisers and product providers in some instances.

8. The impact of the legacy market will create significant complexity and also potential irrational behaviour. The proposals only focus on business written going forward and as such consumers of products and services will be subject to two different experiences in the ‘pre and post RDR-environment.’ This will introduce complexity that will need to be explained. The legacy market in its own right may provide a disincentive for providers and advisers to move clients and assets as it would risk bringing these assets under a new set of rules, whereas some change in investment might be in the customer’s best interest. This issue as yet has not been addressed.

9. The current timings of key decisions and the corresponding detailing of requirements are not forthcoming, and there is still a significant proportion of outstanding work still awaiting publication. This detail not only creates costs in managing the required change programmes required to implement the rules, but carries with it significant risk that either market participants simply run out of time to develop the required capabilities, or that when the detail is published, fundamental flaws or undesired outcomes emerge. There is a significant amount of detail still awaiting publication from the FSA.

10. The current proposals will not in their own right reduce costs in the industry, and in fact the implementation and ongoing running costs, coupled with the likely reduce in the supply of a number of core services risks in fact seeing costs being increased. The proposals should although increase the levels of transparency in the market place, which in its own right increase price competition. This has to provide a long term consumer benefit. And the standards in the advice market should rise substantially.

A transparent and fairer charging system

The banning of commissions and subsequent introduction of the adviser charging regime will be a fundamental step towards creating a more transparent and fairer charging system. This should become the blueprint for European distribution, and as such the recent EU Commission consultation on the MiFID directive could be seen as aligned to the proposals.

The outcome of these proposals should be that it creates transparency within the value of advice, and will enforce a relationship based model demanded for a successful advisory model. These in their own right should be good outcomes for consumers.

The focus on disclosure within the proposals should create a more transparent market, and create positive consumer outcomes. Transparency should lead to greater competition, especially around price differentiation. Advisers will be key gatekeepers to helping gain better value from the services and products they use, and the RDR should create a more transparency in parts of the market.

That said, the rules currently do not create uniformity in how providers of what are relativity homogenous products and services are either remunerated or forced to disclose their services. The FSA must create parity in the rules for how different parts of the market are regulated where they are providing homogenous offerings.

Finally, there needs to be focus on the other forms of remuneration that may develop or become more prevalent as a result of these proposals. If there is a model where it is felt it easier for a provider or supplier of a service to be remunerated, then this is likely to attract additional interest. There are a number of possible ‘loop holes’ in the proposals which create areas of the market less affected by the proposals, which in our opinion risks be abused. These must be closed.

A better qualification outcome for advisers

We do believe that the proposals on qualification are correct, and we would urge the Treasury to continue to support these. Advice on financial matters is often highly complex and its effects may only be observed very much later when any error s may be difficult to rectify. The effect of poor advice on individuals can be devastating.

The FSA proposals will lead over time to greater professionalism, this will have a number of beneficial effects. It should lead to a greater number of younger people joining the industry because of its p erceived professional standards and clear development path. It will be seen as a minimum standard, many will seek higher qualifications. This competition in excellence will benefit clients. We would seek to encourage any further proposals that allowed further qualifications to be seen as a mark of excellence and possible further differentiation of adviser businesses.

We also believe that the stance on grandfathering is correct, although we have sympathy with those advisers who have been operating to an exceptional standard for a number of years who are now required to gain further qualifications. Other markets that have been through similar processes have shown that not allowing grandfathering has been the most effective mechanism for improving financial advisory standards.

Fidelity International operates across Europe , and in that context the FSA’s move could appear belated. Countries such as Germany and Sweden have already introduced compulsory qualifications at degree level. In neither case has grandfathering been allowed.

Greater clarity around the type of advice being offered

There are some doubts about the proposals for the classification of advice , and whether these will be effective . The changes in adviser remuneration will create an environment which will remove the majority of product bias in the advised market , and will create greater clarity in the value of the service being provided.

The proposals that look to classify the type of advice being provided are less effective, difficult to practically implement, and risk being misunderstood by the end consumer. The test for independence is drawn on the basis of the adviser being able to survey the whole market to find suitable products for his client. That is too wide a test. All advisers will be independent under RDR in one sense in that they will not be able to receive payments from providers. The breadth of the product offering that will be required to be under consideration may be vast, just to prove the independence of the adviser.

This is in stark contrast to the range of products considered by an adviser under the new restricted advice category. This could cover any adviser who limits the range to potentially only a few products, even those just from a single provider, or those who limit themselves to a broader range or perhaps a few hundred funds. Clearly there is a difference between an adviser who simply ties themselves to a one or few providers based on a commercial interest, and those who carry out careful due diligence to restrict themselves to a carefully selected range of best of breed products. We believe that there does require greater clarity here that aims to distinguish these types of relationships, and perhaps an additional category needs to be created here.

We are concerned also that as it stands m any advisers may chose to work under the restricted label as this is more in line with the current business models. If the majority simply adopt this standard then the proposals will again have failed, as the independent label will simply be dropped in favour of the simple term ‘financial adviser’. The creation of this new identity and the relative lack of disclosure around breadth of product offering will make it increasingly difficult for a consumer to understand whether any restriction of offering is either a good or bad thing.

The restricted market in its own right could have a positive outcome. It would be possible for a financial adviser to create a ‘panel’ of products that create a complete set of solutions that cover a wide range of consumer needs, but also allows them to use their restriction to provide preferential terms for the end consumer. This is clearly a good outcome, and also one that would demonstrate a high standard of advice. It is the model that operates successfully in the United States . Under the current proposals this would be deemed as a similar standard to a provider who simply operates off a limited range of products for convenience.

We would therefore suggest that these rules are again reviewed to create further clarity on the differences in offering and ensuring optimal outcomes.

Other issues

The RDR proposals will stand and fall on their ability to create a more sustainable, attractive and ultimately successful market for the provision of financial advice. In doing so it should create a regulatory environment that creates simplicity and provides a more open and transparent market place. It should also aim to be regulating homogeneous products and services in consistent way. It current fails on a number of parts.

To many consumers of the products and services, what constitutes advice is broader than the current regulatory definition. The views in a Sunday paper, a website blog or the guidance of a friend, family of other consumer may also constitute a level of advice, albeit not personalised, against that provided by an adviser. The execution of a trade with a fund manager, investment platform, life insurer, through a financial adviser or directly with a stockbroker, would all be seen as relatively homogenous set of products and services in the eye of a consumer. The current implementation of the RDR proposals will end up treating all of these parts of the market differently, and as such the RDR will struggle to meet its objectives.

The proposals must create a landscape that provides a consistent and uniform approach to remuneration, disclosure and service offerings. The proposals must create an environment that becomes more accessible, affordable and sustainable, and creates simplicity and allows innovation. The management of the new and legacy regimes without doubt will make the industry a more complex environment with which to interact. As a result , as the pro posals stand today they risk doing the opposite.

Finally, there are too many proposals that currently still lack the detail required to enable implementation, and as such there now carries risk that either there is too little time to implement these requirements, or an associated risk that once the detail emerges there are too many flaws with the outcome.

January 2011