Retail Distribution Review

Written evidence submitted by Consumer Financial Education Body (CFEB)

Introduction

The Consumer Financial Education Body (CFEB) is an independent body, created in April 2010 by the Financial Services Act 2010. We are responsible for helping people understand financial matters and manage their finances better. We do this by providing information, education and advice through our unbiased money advice service.

Executive Summary

· We are responsible for helping people understand financial matters and manage their finances better.

· Our work means we have a direct role to play in supporting the Financial Services Authority’s stated outcomes for the Retail Distribution Review (RDR).

· We provide generic financial advice through our money advice service. This will form a crucial part of the advice landscape in the UK and will help people understand how to manage their money and seek help when needed.

· This free, unbiased advice service will complement the work of the financial services industry and wider advice sector, as well as help fill the potential ‘advice gap’ created as a result of the RDR.

Introduction

1. CFEB was established by the Financial Services Authority (FSA) in April 2010 "to enhance–

(a) the understanding and knowledge of members of the public about financial matters (including the UK financial system); and

(b) the ability of members of the public to manage their own financial affairs." [1]

2. Our statutory functions include promoting awareness of the benefits of financial planning, promoting awareness of the advantages and disadvantages in the supply of financial goods or services, and provision of information and advice to members of the public.

3. The Committee asks whether the RDR will achieve its stated outcomes – a transparent and fairer charging system; a better qualification framework for advisers; and greater clarity around the type of advice being offered – and whether these outcomes can be better achieved.

4. This response sets out how our work relates to the these outcomes, with particular focus on the last.

Our Role

5. Since our creation in April 2010, we have been continuing the programme of work begun by the FSA. This aims to help people through critical stages and events in their lives and includes projects to help schoolchildren, young people, students, employees, new parents, and other targeted groups such as people facing redundancy, approaching retirement and those going through divorce or separation. We deliver these in partnership with the financial services industry, consumer groups, professional bodies, voluntary organisations and the media.

6. We are also responsible for the national roll out of the UK’s first unbiased money advice service. This new advice service will allow people to speak to trained money advisers who will assist them with their money issues.

7. We believe that the current charging system for financial advice has a fundamental problem: people think that advice is free when it is not and they are subject to potential mis-selling due to commission bias. A transparent and fairer charging system will lead to a significant improvement in the way that people understand and pay for advice.

8. We also believe that professional advisers having to achieve higher standards will benefit people who get regulated financial advice so we welcome a better qualification framework for advisers.

9. Of the three RDR outcomes, the most important to us is greater clarity around the type of advice being offered, for two reasons:

i) The advice landscape is complex so we will need to help people understand the differences between independent and restricted, as well as basic and simplified, advice. These will each come with different payment structures, delivery methods and, in some cases, different qualification levels.

ii) We provide free, unbiased money advice online and over the phone. We also offer face-to-face appointments in a number of priority areas across the UK, and from spring 2011 these will be available nationwide. It is important for consumers and other stakeholders to understand how this fits within the advice landscape. We set this out in more detail below.

RDR framework for financial advice in the UK

10. The RDR proposes that firms that advise on retail investment products must clearly describe their services as either "independent" or "restricted" [2] .

11. To qualify as independent, firms must make recommendations based on a comprehensive and fair analysis of the relevant market, and to provide unbiased, unrestricted advice.

12. If advice is not independent, then it must be described as restricted. This covers firms that advise on their own products or on a limited range of products, such as bank advisers and other single-tied and multi-tied adviser firms. Restricted advice also covers:

· Basic advice – regulated advice on ‘Stakeholder’ savings and investment products using a process that involves using pre-scripted questions. It was designed to deliver simple products to people with straightforward needs.

· Simplified advice – an industry-designed advice process to help people whose needs are relatively straightforward access the market for investment products.

13. Also worth noting are non–advised services, or execution-only sales. These are where a customer buys a product but no advice or recommendation is given.

14. The final part of the landscape is generic advice – advice that is not regulated but helps people to understand and manage their money and take the right decisions based on their needs. We play a central role in the provision of generic advice to UK consumers.

Our money advice service

15. A ‘pathfinder’ to test the potential for a nationwide generic advice service, and delivered under the Moneymadeclear brand, was run by the FSA in partnership with Government in the North East and North West of England.

16. Following the success of this pathfinder [3] , a national money advice service will be rolled out in spring 2011. In the meantime it has already been extended and is now available in 37 priority areas, including Greater London, Scotland, Wales and Northern Ireland. It remains in operation in the North East and North West of England while the national financial advice service is rolled out.

17. Our national money advice service will be the UK’s first free and unbiased money advice service, and will provide advice on all areas of personal finance. It will operate online, face-to-face and over the telephone. A key component of the service is the development of an online financial health check which will provide people with an interactive review of their finances and the actions they need to take to understand and manage their money.

18. The service will fill the gap between financial information and regulated advice, by providing unbiased money advice which will include generic product recommendations. This does not mean it will recommend specific providers, nor will it give regulated financial advice, however it will advise people on how to manage their money and the actions they should take. This will form part of a personalised action plan that they will take away from an advice session.

19. This action plan will include specific actions, such as drawing up a budget using our calculators and online tools or taking out a generic financial product, for example life insurance. In other areas it will refer people towards further advice – such as debt advice, or regulated financial advice where appropriate. In all areas, it will equip people with the information they need, and the key things to think about, so they can take effective action.

20. A key part of our advice service is to articulate clearly what regulated advice services exist, what the different types of advisers are, and how people can access them. Where we have identified that someone using our service would benefit from regulated financial advice we will refer them on appropriately.

21. For example, while we would be able to explain the differences between different types of mortgages we would not recommend one provider over another. If this advice was required we would refer the person to a mortgage adviser. Before doing this, we will ensure he or she understands the nature of the organisation to which they’re being referred, as well as equipping them with the information they need and questions they should ask so they can benefit from the referral.

22. We will refer people to regulated financial advice when it is clear that they have a long-term planning need and will benefit from advice on specific products, a service that only IFAs can effectively deliver [4] . Similarly there will be occasions when we expect that people will turn to their main financial services provider to buy new products and we will explain the implications of receiving this, restricted, advice.

23. Our money advice service aims to equip people with the knowledge, skills and confidence to make more appropriate financial choices and engage with the financial services industry on a more equal footing. We believe that our work will bring clear benefits not only to consumers but also to the financial services industry.

24. We expect our work to lead to an increase in the demand for IFA services as people are made aware of the benefits that seeking such advice offers. This has been our experience during the pathfinder stage of the money advice service.

25. Our pathfinder also showed that there was an 'advice gap' in the UK. Some people lack the confidence to engage with the financial services industry, others do not trust it, others believe that they can neither afford nor benefit from professional financial advice.

26. That gap may widen when the RDR comes into force – research published by the FSA suggests that the number of advisers and advised clients would be reduced by 11% as a result of market exit [5] . Should the market for regulated financial advice become even more restricted then our service can help fill this larger gap.  We will both help people who are unable or unwilling to seek independent advice as well as refer people to IFAs as appropriate.

27. So our work is complementary to that done by IFAs and many other types of professional advisers, such as accountants, tax specialists, debt advisers or insolvency practitioners. We will refer people to these experts where appropriate. Similarly we expect that many people will access an adviser directly and it is not our view that everyone will need to access our service before they approach a professional adviser.

28. We are following closely wider developments across the advice landscape. For example, we have been working with Government on its recent consultation on simple financial products, and how such products might be integrated in our work. We are also following industry initiatives on simplified advice. We will continue to work with all relevant stakeholders to ensure that our work complements these initiatives.

Final comments

29. The RDR is aimed at making the FSA-regulated market work better for both firms and their customers by changing the way that retail investment advice is provided in the UK. We support the FSA in this aim.

30. However a financial services market that works better for consumers cannot rely on regulatory initiatives alone. Our money advice service is a demand side initiative, part of the wider effort to improve the financial capability of the UK population.

31. Our work will complement the RDR by increasing consumer access to financial products and services. More people are likely to have identified savings, investment or protection needs once they have received free, unbiased advice. When people are in a position where they could benefit from regulated financial advice, we believe that the RDR will present them with a simpler and more transparent framework for obtaining the products and services that best meet their needs.

January 2011