Retail Distribution Review

 Written evidence submitted by Hargreaves Landsdown

We write further to recent invitation to comment on the Retail Distribution Review (RDR). 

We have kept our comments succinct.  However, Hargreaves Lansdown is one of the UK's largest financial services businesses of its type and we would be happy to discuss our views with any of your representatives in due course.

Our comments are below:

Background

Hargreaves Lansdown is the UK’s largest Direct to Client fund supermarket.  We administer approximately £20 billion of client assets.  Our major service is called ‘Vantage’ and allows clients access to a wide range of investments at low cost.  The main products are an ISA, Pension (SIPP) and Fund & Share Account.  Within the products, clients select their own investments on an execution-only basis.

Last year we processed approximately 5,000,000 trades and have over 330,000 clients.  Over the years Hargreaves Lansdown has been a key contributor to bringing investment opportunities to the general public and using negotiating power to reduce prices in the marketplace for its clients.  Last year Hargreaves Lansdown saved its clients £180 million in charges.

Our key thoughts

We understand the RDR is designed to achieve the following three objectives:

· A transparent and fairer charging system

· A better qualification framework for advisers

· Greater clarity around the type of advice being offered

We have based our comments around our view of whether the RDR is likely to meet these objectives.

Our overall conclusion

We believe that the RDR has some laudable aims, but has been misguidedly implemented.  It is a concept that has swelled well beyond the realms of what was an acceptable brief.  As a result, it threatens to deliver unintended consequences, bureaucracy, cost and confusion for both private investors and financial services companies alike.  We believe it needs to be pared back to the few aspects that will do genuine good, if it is to proceed at all.

A transparent and fairer charging system

The original problem was a simple one.  There was bias in personal finance advice due to the payment of large initial commissions to financial advisers by product providers.  We agree with the need to remove this bias.  The banning of large initial commissions from product providers to advisers, allied to a requirement that ongoing ("trail") charges could only be levied in return for a genuine service, would have been a simple solution, sufficient to achieve the end required.

Financial advisers would have had to be professional, well capitalised, and offer a good service if they were to keep their ongoing income.

However, the RDR project has now gone far beyond the original brief in its proposals in respect of what can and cannot be charged for by a wide range of businesses.  In addition, proposed excessive additional disclosures – despite the clear evidence that excessive disclosure confuses clients and does not help them make better decisions or understand charges better –threatens to create confusion in the market and amongst investors.  As a result, the original laudable end is likely to be obscured.

A better qualification framework for advisers

This part of the RDR is a good idea and the proposals have been reasonably well executed.  More professionalism and a higher standard of qualifications are necessary in order to maintain and improve confidence in financial services.  This is particularly true in the area of personalised financial advice.

The government should not be distracted by the fact the most vociferous objections have come to this aspect of the project.  It is needed.

Greater clarity around the type of advice being offered

This objective has been flawed from the start.   Whatever the regulatory and legal definitions of "advice" it is well-known that most clients, when they pick up a telephone to a company, want good information that they can trust and rely on.  They do not understand or differentiate between different "types of advice."  Information that can be trusted and relied upon can be delivered by the correct delivery of the two previous objectives.

To make matters worse the RDR project has so far proposed a range of measures which will undoubtedly reduce clarity and increase confusion.   A vast range of additional disclosures has been mooted, none of which we can see will improve clarity for clients.  What is more, these requirements will apply only to certain types of businesses.  For example, the entire life insurance industry, ironically a key source of historically high commission paying and opaque products, is exempt from most of the requirements. 

Lessons such as that of India, where similar rules were applied to one part of the market but not another, resulting in the collapse of mutual fund sales at the expense of commission paying products, seem set to be ignored.

Initiatives that seemed to fit none of the objectives

A range of measures seem to have been added to the RDR are that appear to relate to none of the stated objectives.

For example, it is being proposed that vast amounts of information must be provided to investors in unit trusts.  This must be done at great cost and whether clients want it or not.  No evidence has been provided that there is a demand for such information that warrants the cost or environmental impact involved.  Indeed our own experience is that clients prefer paperless and efficient administration.  The few who want reams of obscure data should be dealt with by exception, not as the rule.

As a result, we find ourselves fighting against a wide range of proposals, some with consequences that have not been thought through or are unknown.  We cannot see how they will benefit clients or the financial services industry, although we work hard to try and find ways to implement them to cause minimum disruption, confusion and cost.

In our opinion the RDR should be reviewed and either stopped or refocused on the very few key initiatives that have come out of it with value.

We would welcome the opportunity to discuss our views further.

January 2011