Retail Distribution Review
Written evidence submitted by Paul Naylor, A P Financial Services UK Ltd
I understand that you require information on this matter from practitioners such as myself in order to review the proposals set down in the RDR.
There are a number of areas I would ask you to consider could impact on both the Financial Services Sector as a whole, the possible effects on retail investment into the equity markets and the availability of Independent Financial Advice to the consumers.
Last but not least the assumption that Commission paid by product providers to fund the costs of advice is not acceptable by the consumer.
1. Potential Impact on the Financial Services Sector
It has been mooted by press and other pundits in the industry that the IFA sector could see some 30% of current practitioners closing down and leaving the industry. Even Hector Sants the head of the FSA has estimated that only 20% of IFAs will leave the industry post RDR implementation.
There are apparently about 21,000 IFAs operating at present in the UK, the loss of 20% of those advisers (around 4200) is too appalling to contemplate, the need for financial advice has grown exponentially over many years and IFAs have dominated the Investment and Pensions market to drive the retail investment sector forward by providing advice and services which the consumer can rely on as competent and ethical. Unlike the banking industry which has generated 4 times the level of complaints to the Financial Ombudsman Service for mis-selling financial products, the IFA sectors record is infinitely preferable to the activities of banks whose driving force is to sell products, not give competent affordable and appropriate financial advice.
If we were to take the worst case scenario and take 30% of IFAs out of the industry as a consequence of RDR proposals, that would mean the loss of 6,300 advisers.
2. The possible effects on the Retail Investment and Equity markets.
If one assumes a worst case scenario of a 30% loss of IFAs, there will also be a knock on effect for the loss of support staff as well. Estimates of the numbers do not bear thinking about, but another 3 support staff for each IFA who leaves the industry, would, coupled with the number of IFAs leaving, put another 25,000 + out of work and seeking jobs, which will no longer exist.
Aside from the human cost, if, as anticipated, that 30% of IFAs leave, that is 30% less
retail investment business going into the investment markets.
The effect on the economy and the recovery will be felt almost immediately and I do not believe it is in the country's interests to see such a decline in the investment markets
halfway through the governments term of office.
Most established IFAs have around 500 clients per practice, some much more (networks
for example would naturally have thousands of clients) so if we take 30% of IFAs out of the sector, I estimate that over 3.15 million clients will no longer be able to access their IFA and that is not acceptable.
If only every one of those clients stopped paying or indeed did not continue to pay into their pension plan at an average premium of£100 per month, that would mean over £300,000,000 per month would not be invested in the equity markets, the yearly figure is too much for my simple mind to contemplate.
The assumption that disaffected clients who can no longer access their IFAs services will take advice from the banking sector is not supported by any cogent or compelling evidence or research, so the probability of a dramatic decline in the retail investment sector will occur post 2012, is a very real and economically frightening prospect.
3. The Availability of Independent Financial Advice to consumers
Under the current FSA regulations IFAs are obliged to provide advice most suited to a clients personal requirements, affordability and attitude to risk and only recommend a product, which after a full analysis of the clients financial situation can meet that need. The current system of payment for advice has specific non negotiable requirements :-
a. To offer the client the choice of payment by fees or product commissions
b. To fully disclose wherever possible, prior to the sale of a product the actual commission in real terms that the product provider will pay the advising firm.
The RDR proposals take away these choices and revert to one method only, Fees paid directly by the customer, or in the alternative front loaded onto an investment contract as a deduction from their initial investment.
The commission system, has to date been the preferred method of paying for advice by which the majority of clients fund their need for advice. It offers a cost effective method of obtaining the services of their IFA, without having to pay directly from their income, which in todays recessionary times is becoming an issue for most middle income families. The costs of Commission is usually spread over the first five years of the contracts purchased, so in effect it is a loan to both the client and adviser and if the plans lapse the commission has to be repaid in part or in full depending on the term the plans have been in force.
The commission system, also enables lower income clients to fund the need for advice in order to enhance their meagre savings into pensions and pay for Life Assurance protection.
4. Commission on Financial products vs Fees
I have no doubt that for a small minority of unethical and unprincipled advisers, there has been an abuse of the commission method of paying for advice, but these occurrences tend to be in the minority.
A fairer system of commission which puts a cap on the level of payments providers can
offer to IFAs as a possible inducement to sell products, would inject an element of fairness and equitable treatment into a system which is not fundamentally flawed and provide the client with an easy method of comparison between the costs of advice for various products, compared to the costs of fees.
The current system is a free for all and providers set the level of product commission, capping those levels would be infinitely preferable to clients, than losing the choice of methods of payment.
Naturally as an IFA, I would prefer to be paid up front fees by my clients on a time costed basis, but for the majority of middle income clients the costs of just taking pensions advice would be somewhere between £700 - £1000 in fees and if the adviser concluded that there was no need to purchase additional products, that could be a very expensive exercise indeed for the middle and lower income client.
The FSA has ignored one fundamental principle of business, that is to generate sufficient profits from their business to pay their costs, wages and taxes, by taking away what has been the main engine of market growth, the economy will stall, possible stagnate and the economic recovery will falter and possible fail, with no back up plan.
The decline in the IFA sector will also inevitably result in a decline in tax revenues, which no seems to have considered.
In your interview with Money Marketing issue 9/12/2010, you believe the FSA listen to the concerns expressed by MPs.
Most IFAs know that the regulator is not answerable to parliament, conducts its activities without proper consideration of the legal ramifications of the RDR proposals and the Restrictions on Trade, which are unfair and has not taken any notice of submissions from the IFA sector including the professional bodies like AIFA. It is in fact the worst kind of Qango, out of control, costing the industry and consumers millions of pounds without any real benefit to either.
This regulatory body has, by its many failures, demonstrated it is not fit for purpose and is biased towards the banking sector, the RDR in its current form amply demonstrates such bias and is unlikely to contribute anything to improve the economy, the retail investment sector or consumer benefits, the FSA admits that the costs have escalated beyond their original estimates and if one takes into consideration the possible loss of jobs in the IFA sector, the effects of a decline in retail consumer investment in the equity
markets, it will prove to be an expensive exercise in futility.
5. Professional qualifications and status of IFAs
I have no dispute with the need for improving the overall necessity for better qualified and more knowledgeable advisers in both the IFA sector and the banking industry to come into the industry has existed for some time.
At age 61 however, I dispute the need that after 20 yrs as an IFA, without any customer
complaints, that after 2012 if! do not take additional exams to bring me up (so called) to the diploma level, that I am deemed no longer competent to advise retail clients.
No doctor, Solicitor or Accountant or Nurses, once qualified to their original required standard, can be forced many years down the line, to take additional qualifications to continue practising.
The FSAs proposal to de authorise older advisers who do not bend the knee to the regulators edicts and obtain these often irrelevant further qualifications that bear no resemblance to how advice and services are promulgated and performed in the real world is not beneficial to consumers or the industry.
The need for improvement in knowledge and expertise is not covered by these additional exams as it is only with continued professional development and experience of how to advise real clients in the real world, that we become better able to do our job.
It transpires that a major portion of those FSA staff who regulate and control our sector
have not even attained the basic qualifications that an IFA would currently need to be deemed knowledgeable about their job.
The FSA has lost its way, I can see little benefit in allowing such draconian changes to the way IFAs operate to go ahead, when it is clear to anyone with an ounce of common sense, that the FSAs assumptions on which they have based their proposals have not been properly researched (none has been published for us to view and consider) ill considered as to the benefits to consumers, ill considered as to the likely effects of a decline in the retail investment sector and are not supported by facts and substantive consumer research.
If this flawed legislation is allowed to be implemented, the effects will be irreversible and although predictable, seem to have been ignored by the regulator, despite substantial submissions by the IFA sector as to what will inevitably be a disastrous change to our beloved industry.
I put in simple terms the above, from a personal point of view, I love my job, have served my clients with exemplary ethical and honest advice, the RDR proposals are a mess, they do not address the real need for a strong and client friendly Independent Financial Advice sector and will ensure that ordinary middle and lower income families will soon, no longer be able to afford to go to their IFA for advice and service.
Once the IFA sector shrinks to the level it is anticipated, it will never recover and that would be a loss to the consumers and the country.
January 2011
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