Retail Distribution Review

Written evidence submitted by NFU Mutual

Thank you for providing NFU Mutual with an opportunity to respond to the Treasury Select Committee regarding the Retail Distribution Review ("RDR"). We have a number of major concerns regarding the impact on the financial services industry in the UK if the RDR Rules are implemented as currently drafted.

Along with most if not all industry commentators, we believe that the combination of higher levels of minimum qualifications, cost of systems changes and enforced changes to adviser firm business models will lead to a very significant reduction in both the number of advisers within the market and to limit the capability for the remaining ones to promote themselves. This will mean that it will become increasingly difficult for customers, particularly within the mass market, to gain access to good quality advice.

Looking at NFU Mutual specifically we now believe that the aggregate costs relating to RDR changes will amount to more than £15 million. In addition to this we believe there will be higher ongoing costs in order to retain and recruit advisers, who will become an increasingly scarce commodity for at least the next five years, and reduced income because of our expected reduced advice capacity. As a mutual organisation, operating within tight target profit margins, we are concerned that we will inevitably be forced to limit the advice we give to wealthier clients or increase charges.

We would encourage changes in three key areas to prevent this customer detriment from occurring:

• Firstly, we believe that the FSA must persevere with its engagement with the industry to help enable an effective and sizeable "Simplified Advice" market to be set up. Key attributes for "Simplified Advice" would include limitations of product range and the advice offered to facilitate such a service delivering the best outcomes for the customer at an acceptable cost. Related to this, there should be specific regulations put in place to facilitate "Simplified Advice" so that both advisers and customers should be clear about the rules under which such advice is given.

To be economically viable advisers offering this service should have a lower level of minimum qualifications than those offering full advice. If these conditions are met, we see "Simplified Advice" not only being viable from the supplier-side - but also attractive in terms of both cost and quality to its target mass-market customers.

• Secondly, whilst we agree with the broad thrust of the proposals regarding Professionalism we believe that the FSA should be pragmatic in implementation to minimise the loss of advisers. The shift of minimum qualification levels for an entire industry without grandfathering is a major undertaking. We believe that the FSA should conduct regular reviews to assess how this transition is progressing and be prepared to show a degree of flexibility closer to the post-2012 deadline if appropriate.

NFU Mutual has taken a highly proactive approach in implementing a structured plan to move our advisers through to reach the new minimum qualifications. Nevertheless we are planning for between 15 and 30% of our existing advisers either leaving the advice profession, retiring early or not meeting the new minimum qualification criteria by the end of 2012 – with those over the age of 50 being particularly affected. Even if the ultimate number is towards the bottom end of the range then we will suffer disruption to our business, particularly in relation to the extent of advice availability and level of service we offer to customers.

• Lastly, the FSA should rethink its approach to status-disclosure. We need to make sure that customers are not put off seeking good quality advice regardless of whether such advice is defined as independent. The label "restricted", for advice that is defined as not being independent, has negative connotations. Given that under the proposed RDR Rules much, if not most, of the advice market will not meet the criteria for independence, it does not seem to be appropriate for the label "restricted" to be used as the initial descriptor of the advice model. We believe that a narrative description, keeping a distinction between the nature of advice given and any subsequent limitations on product or fund provider, will be more understandable and in consumers' best interests.

January 2011