Retail Distribution Review

Written evidence submitted by Michael Fallas

First of all my I say I admire your campaign to look into the issue of RDR and bring it to the House.

You have I gathered recently asked for supporters of RDR to contact you which is indeed admirable, however I would have to say that I believe you also need to look at the business models those who say they already operate an RDR business model and then decide if this is the sort of business model and charging structure that you feel is what RDR is about.

It does seem to me that "investment" IFA’s will find RDR attractive far more so than generalist IFA’s so this needs to be taken into account.

I personally am not in favour of a set percentages as a charge as it reflects little on the work done particularly for larger investments but it seems this would still satisfy RDR proposals.

I myself am NOT Pro RDR as I do not believe it serves the consumer well and I have been offering my clients fees for over 20 years. Some pay a fee and some do not and I always disclose any commission.

I am in favour of a proper structured CPD as it is on-going and relevant (unlike these exams) and can cater better for specific areas that any regulator discovers needs addressing as time goes one. The regulator should structure the CPD though but not the FSA or anyone in power at the FSA currently, they are too badly damaged and we need everyone to be confident in any new regulator. Comments such as "be afraid" from the regulator are simply not needed.

I believe many consumers still prefer the commission route as a method of paying for their advice and yes it MUST be disclosed and the option to pay a fee MUST be given but it should not be ruled out, though excessive commissions should be reported to the regulator. I really cannot understand why after nearly a decade the FSA do not have an online system whereby any product sold has to be reported to the regulator as soon as the policy or investment is set up via an online system. No client details need to be given, just the amount invested or premium paid, the product sold and policy number or reference number, the term of the product and the commission paid or fee deducted. This can then be checked by any regulator and if it looks like excessive commission or fees have been taken they can act immediately and if too many similar sales and being made by one firm then again checks can be made. This would not cost a fortune if done via an online system  but would solve many of the problems the FSA usually finds many years after the event.

Personally I believe the biggest cost by far to the consumer is "the FSA" and I estimate they have cost the consumer far more than people realise and I just wish a full analysis of the FSA and the costs are fully examined. Not just the running costs but the effect t of their policies from FRS17, forcing endowment providers to reduce risk by selling shares and buying gilts etc. (the list it just too long). The FSA and their policies have affected so many aspects of everyone’s lives the effects really do need studying. I just can’t help think the consumer has paid a very heavy price for this so called "protection".

The FSA and FSCS has cost all those regulated by it, some £3 Billion since 2003/4 and the costs are rising at an astonishing rate. The amount paid out to consumers in compensation over the same time frame by the FSCS was only £2 Billion and that included compensation paid out for the banking crisis. Add in the cost of every regulated firms time etc. in following and implementing the ever changing rules and regulations by the FSA and you can probably add another £6 Billion on top. That means we are talking about a £12 Billion cost to protect the consumers to the tune of £2 Billion since 2003/4.

For me that is utter nonsense and sadly not only do your Government seem content on keeping this arrangement but the costs are rising at an alarming rate. The FSA now has some 4,000 staff with IFA numbers are dropping (so less to help pay their costs) and Mr Sants has already stated he expects up to 20% of IFA’s to leave the industry by 2012. I have spoken to quite a few who are very experienced and they have no intention of staying post RDR. These are probably the most experienced people in the industry and many have 20-30 years experience. Clients become friends after that length of time, so they will never trust to the same degree a younger highly qualified advisor no matter how many qualifications they may have.

I too will leave the industry not just because of RDR but because I have no faith in the FSA and knowing I am liable for my advice until the day I die the law of averages say I will get a complaint at some stage though my complaint file is till empty after 20 years. The risks and costs are just too high and rising, we are also "not treated fairly" when compared to other industries and there is not a level playing field. The FSA expects us to pay for our mistakes, judges and sentences us when we do but they do not use the same standards on themselves and are protected by statute. It is a bit like a policeman upholding the law while he also carries out crimes knowing he is unlikely to be caught or punished (unlike the FSA who are actually immune, despite overseeing our worst financial crisis in 70 years).

The compensation bill for the NHS is budgeted this year by the NHSLA to be £15 Billion yes Billion (due over the next 10 years or so) and this bill is still rising, yet those in the NHS pay nothing towards this massive bill, but we (IFA’s) have to pay towards all those who foul up or commit fraud etc. Why are we the only ones? We even have to pay for a "free advice service" recently announced by Mr Hoban. Solicitors don’t pay for "legal aid" do they?    

RDR is undoubtedly going to encourage people to buy "without advice" particularly online which is why many providers are really gearing up for it. Banks too will also benefit as they can make cost savings due to their scale and are already advertising heavily, so small IFA’s will be squeezed further.  Will product providers reduce their fees as a result of no longer needing to pay commission? I doubt it so it will be a bonus for them also. No bonuses for IFA’s that I can see. I wonder how you would feel if they told you you could not be an MP if you had been one for 20 years unless you took an exam which needs 100+ hours of work etc. plus the training costs and time.

NEST is most likely to encourage employers to stop their personal and stakeholder pension schemes, and "simplified products" which Mr Hoban wants to encourage are also likely to be sold online without advice. I am concerned that NEST is going to encourage many to invest in gilt based funds which are considered "low risk" but if the UK economy gets worse and our debts do not reduce these gilts could become high risk. In fact the FSA seems to have encouraged a low risk environment all round from our pensions to savings but done nothing to stop the high risk of higher and higher lending multiples and easy credit availability yet this is also a "consumer risk". They just concentrated on the "stick and carrot" method of regulation as it was easy but they failed to look at the "whole picture" which is why we are in the mess we are in now and still they fail to see the whole picture.

I don’t believe that is best for consumers and personally I believe it is the product that should be regulated and "approved" and "commission, charges etc. can then be monitored and controlled with only more complicated products being "unregulated" and requiring specific exams for anyone to advise on them and so on. Consumers need to feel confident in the products they invest in as the FSA has done its best to destroy that over the years.

It is very worrying that Mr Hoban seems unprepared to listen to any reason. Some feel he is biased towards the banks especially having disclosed he received some £150K of work by a firm that does a lot of work for the banks. I hope that is not the case.

It is interesting to read this independent report on the FSA’s own website:

"We find no statistically significant correlation between consumer losses and either the
qualifications of advisers or their competence."

And

"Surprisingly, we find no relationship between the share of advisers who passed the
qualification exam or the share of competent advisers and either the amount or the
incidence of consumer loss attributable to the PIF. None of these variables is statistically
significant in any of our estimations. This implies that we cannot find a relationship
between adviser competence and consumer loss, though given the data limitations this
can in no way be construed as conclusive evidence that such a relationship does not exist - rather, it should be interpreted as indicative of the weakness of our data."

This is from http://www.fsa.gov.uk/pubs/other/report_predictors.pdf

I despair of the whole industry and the lack of Government understanding and indeed control over the FSA, as they seem to have none and by all accounts don’t want any either. The FSA seems to be a hot potato and if it was not for people like you we would not even have a chance to get this far.

Keep up the good work and have a great Christmas and New Year. I will in the meantime be looking for another career as no one is going to employ me at my age of 54.

December 2010