Retail Distribution Review

Written evidence submitted by LifeafterX Ltd

Executive Summary

1. The goal is financial inclusion: a state where everybody has access to an appropriate range of financial products and services, allowing them to effectively manage their money.

2. LifeAfterX, a totally new personal finance service, seeks to plug the gap for financial advice for the mass market. LifeAfterX has ethical behaviour at its heart and is delivered online and through telephone coaches. It may be described as an e-IFA that sources and engages with its customers via online social media. The service, which is built around life events, will help customers plan their finances and then, if they have a need, help them to buy the right products at the right time in their lives, in a cost-effective way. It also seeks to build long-term relationships with its customers.

3. We believe that we bring a new perspective to the debate because:-

- The Treasury Select Committee consultations are being submitted by an industry which focuses on the mass affluent and high net worth (HNW) clients

- The current regulatory system for financial advice was developed originally in the 1980s and assumes face to face advice and paper based systems. Though it has clearly been updated, there have been massive changes in the social fabric of the country within which it must exist including society’s use of the internet and social media.

4. We cannot cover all aspects so in this note we focus on comments on two of the original RDR objectives of:-

- standards of professionalism that inspire consumer confidence and build trust

- regulatory framework that can support delivery of all these aspirations and which does not inhibit future innovation where this benefits consumers

5. On professionalism, we would recommend:-

- extending the current modular approach to training to reflect customer segment, i.e. mass market, mass affluent, high net worth

- allowing ‘Grandfathering’ where it can be shown that advisers are appropriately qualified and experienced within customer segment advised, product area specialism and role

- devolving responsibility for individual authorisations to professional bodies and removing this from the FSA. We suggest the model for such a system could be that operated by the British Medical Association.

- creating categories of General Advisers and Specialist Advisers so the client knows who is advising them

- requiring a General Adviser to hand off the client to an appropriately qualified specialist.

6. On innovation, face to face advice using paper based systems is expensive. Hence, we do not believe that financial inclusion for the mass market can be achieved cost effectively without advice provided online using the internet and social media. This needs to be a customer friendly process taking no more than 30 to 45 minutes even for the more complex products. A key constraint to industry use of these processes is the attitude of the FSA and Financial Ombudsman Service (FOS). We ask that the FSA and FOS provide clarification on how such online automated advice can be handled within the regulatory environment.

Professionalism

7. The RDR objective on professionalism was:-

• standards of professionalism that inspire consumer confidence and build trust;

8. The existing training regime is modular in approach based on role undertaken and product area(s).

9. Two examples, using Chartered Insurance Institute (CII) qualifications, would be:-

- a claims administrator for a motor insurance company would work towards the Certificate in Insurance involving 3 modules, IF1 Insurance legal and regulatory, IF2 General Insurance business and given their specialism in motor insurance, IF5, Motor insurance products

- an Independent Financial Adviser (IFA) specialising in advice to elderly clients would have, under RDR rules, to hold at least the Diploma in Regulated Financial Planning plus study for 3 additional modules, CF6 Mortgage Advice, CF8 Long term care planning and ER1 Equity Release

10. LifeAfterX believes that there are two distinct customer segments with differing needs:-

- mass market, those of modest means who in general need simple products sold using a simple process with a simple cost structure

- mass affluent/HNW, those who have more complex financial needs require complex products which, by their very nature, lead to a complex sales process and pricing structure

11. The existing training regime is not modular by customer segment. Hence, each advisor has to learn aspects relevant to all customer segments, whether mass market, mass affluent or HNW. That means every IFA has to learn everything on tax from treatment of jobseekers allowance to inheritance tax, regardless of the customer base they will provide advice to.

12. The FSA state they would like to move to degree level training. There are two potential issues with this:-

- unless modular training by customer segment is recognised, students will need to learn even more material across all market segments irrespective of the customer base they will provide advice to

- whilst there are excellent initiatives by universities to offer financial planning courses the FSA will need to recognise these degrees as appropriate qualifications so that graduates do not end up having to either do ‘gap fill’ CPD or having to take further exams to obtain a recognised qualification.

13. The argument against training focussing on specific products, e.g. for mass market clients, is that the IFA needs to understand the wider market to ensure that the specific product recommendation is appropriate. We believe that is true at the boundaries between customer segments. However, we believe the syllabi could be considerably simplified for mass market customers and, where necessary, a mass market customer referred on to a specialist IFA.

14. An example would be a mass market customer who inherits £250,000 being advised by a ‘mass market’ qualified IFA:-

- scenario 1, customer is married with children, has large credit card debts, large mortgage, is in ‘negative equity’, has no life insurance, no ‘rainy’ day savings and no pension provision. Advice in this case would be to pay off debts, put some money aside for ‘rainy day’ savings, take out life insurance, pay off some or all of their mortgage and if any money left over, high interest savings account or pension plan

- scenario 2, customer is single, has no debts, small mortgage, has life insurance, ‘rainy day’ savings, a cash ISA and employer provides a reasonable pension plan. Customer is now looking for sophisticated investment advice. IFA refers customer on to appropriate specialist.

15. The argument against ‘grandfathering’ is that it would confuse clients about the standard of advice. We agree that the client needs to be clear whether they are being advised by a general or a specialist adviser.

16. The industry already has specialist advisers. Authorisation is linked to training and specialist processes. For example, a company cannot be FSA authorised to sell equity release products unless they have an appropriately trained adviser.

17. FSA will require Statements of Professional Standing (SPS) for each adviser under RDR from recognised professional bodies. Advisers will have to join a professional body to obtain an SPS and ensure that any training they undertake including Continuing Professional Development (CPD) is reflected on the professional body’s database. If they do not, their SPS will be incorrect.

18. The FSA have also consulted and the FSA handbook will be amended to state "any approved person performing a significant influence function should take reasonable steps to satisfy themselves that each area of the business for which they are responsible has in place appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of staff."

19. The implications of this are:-

- To understand and keep up to date with the necessary knowledge on all aspects in all products is not possible given the range of products used across all market segments at all stages of people’s lives.

- Advisers can be trained in subject matter that they are unlikely to ever use depending on the client base they have.

- There will be duplication of training and competency records and multiple assessments of advisers by Company Directors, professional bodies and the FSA.

20. There will be considerable extra regulatory overhead and cost which the end consumer will pay for. The consumer will not be delivered with better quality of advice or service.

21. Hence, on professionalism, we would recommend:-

- extending the current modular approach to training to reflect customer segment, i.e. mass market, mass affluent, high net worth

- allowing ‘Grandfathering’ where it can be shown that advisers are appropriately qualified and experienced within customer segment advised, product area specialism’s and role

- devolving responsibility for individual authorisations to professional bodies such as the CII, Institute of Financial Planning (IFP) and removing this from the FSA. We suggest the model for such a system could be that operated by the British Medical Association. A doctor can be struck off if incompetent or unethical. The CII could operate a similar system. If struck off, you could not practise as an IFA

- creating categories of General Advisers and Specialist Advisers similar to General Practitioners (GPs) and Specialists in the medical profession so the client knows who is advising them

- where there is a ‘boundary’ issue, require the IFA to hand off the client to an appropriate qualified specialist colleague. This would be similar to a GP referring a patient to a specialist. If there was evidence that inappropriate advice had been given, e.g. because of commission incentives, this would be grounds for a professional body to strike off the IFA.

22. The benefits of this approach are:-

- appropriate training by role, product specialism and customer segment served

- clarity to the customer on the level of adviser providing regulated advice

- cost effective professional monitoring

- self regulation by individual IFAs

- reduced regulatory costs passed on to the consumer

Innovation

23. RDR objective of innovation was:-

§ regulatory framework that can support delivery of all these aspirations and which does not inhibit future innovation where this benefits consumers

24. Association of British Insurers research shows advice typically costs £670 in total and is therefore beyond the reach of about two-thirds of the UK adult population. Hence, we agree with the ABI belief that there is a need for a cheaper advice process for those people who cannot afford, or do not require existing full advice propositions.

25. This needs to be a customer friendly process taking no more than 30 to 45 minutes even for the more complex products. This process should be capable of being "chunked" to allow the customer to be in control of when and how they obtain advice. The only way this is possible cost effectively is via the telephone or web. ABI research showed 83% of respondents rated their experience of a mock process as either very good or quite good.

26. The following table contrasts the complementary traditional and ‘new world’ models of advice.

27. The ABI have identified that a key constraint to industry use of simplified advice is the attitude of the FSA and Financial Ombudsman Service (FOS). Would the FSA fine a company because it was perceived to break the full advice rules? How would any customer complaints be judged by FOS? Would they be judged based on any limitations outlined to the customer at the start of the process or against information disclosed under current full advice face to face disclosure rules? Hence, we recommend that the FSA and FOS provide clarification on how such online automated advice can be handled within the regulatory environment.

January 2011