Retail Distribution Review

Written evidence submitted by Philip Wise, Spofforths Financial Planning

I am pleased to be able to set down my evidence to the Treasury Select Committee.

1. Executive Summary

1.1. In general, the RDR will result in progress for the financial advice profession; however, it does not go far enough, and has been watered down by vested interests. As a result, it is only a step in the right direction.

1.2. At present, the financial advice and planning industry is in its infancy, and it needs to be nurtured. There are many who call themselves "advisers", but very few who actually provide genuine advice and planning to their clients. This is a result of history. Most IFAs, myself included, started life selling policies for commission, and it has very hard to unlearn the habits which were learnt in those days. The public has an appetite for impartial advice about financial matters, yet what is offered in most cases is a (fairly) impartial selection of a financial product. RDR will help more IFAs become genuine advisers, but a larger, bolder step should have been taken.

2. About Philip Wise

2.1. I have worked in the financial services industry since leaving university in 1987. I have worked in a variety of different roles, and spent the first part of my career working for insurance companies, selling to financial advisers. I have worked as an independent financial adviser for around 15 years now, mostly alongside accountants.

2.2. I am a Chartered Financial Planner. I realised in the early 1990s that it was likely that it would become necessary to have a good level of qualifications in order to practise as an adviser. I also realised that many clients wanted their advisers to be well qualified. I therefore took steps to gain the highest level of qualification possible as soon as I could.

2.3. I have run Spofforths Financial Planning for 11 years. Spofforths is a Sussex-based firm of chartered accountants, which employs approximately 150 people across four offices. The financial planning company has grown from its start up (me and half a secretary) and now employs 15 people. We have around 500 clients to whom we provide ongoing financial advice. We acquire many clients as they approach retirement, and hope to look after them until they die.

3. Clarity of Type of Advice/A Transparent and Fairer Charging System

3.1. The biggest problem with the financial services industry is the all-pervasive lack of integrity of those involved. Straight talking is replaced by clever marketing talk, making products and services appear attractive, whilst avoiding liabilities for those offering the products and services.

3.2. I have been in the financial services business for 20 years and I can report some progress – outright lies have been replaced by half truths!

3.3. One of the problems with advice is that when the financial services business talks about advice, it means "selling a policy or investment". This is even true of the regulator which simply asks us questions about how many products we have sold and never asks us how many pieces of advice we have given, for example. The abuse of language has gone on for so long in the financial services business that the public often find it difficult to understand those of us who work in the business. It is common for IFAs to fail to understand what a client wants – when a client asks for "advice", the IFA often understands this as "a new financial product". The most common example of this occurs in banks, where many clients ask their bank whether there is a way of increasing the interest rate on their savings, and end up being sold a complex, long term, risky financial product.

3.4. The Committee has asked whether the RDR will help people to understand better the type of advice they are getting. It will help a little if there is a logic in the FSA making small steps towards a goal, rather than one large leap.

3.5. When the public asks for advice they do not expect to be sold a product. In my experience there are many occasions when the solution to a client’s problem does not lie in the provision of another product. Provision of advice is therefore inextricably linked with the method of payment for it. If a client is to receive advice, and an adviser is to stay in business, the client must agree to pay the fee before the adviser commences his work.

3.6. If there is to be clarity around the type of advice being offered, it needs to be clear to the public when they are being given advice and when they are being sold a product (or recommended to buy one). The RDR does not do this, and the proposed distinction between "independent" and "restricted" advice only confuses matters further, as both terms refer to the sale or recommendation of a product.

3.7. The financial services industry seems to be, somehow, ashamed of selling products and it disguises the sale of products behind the term "advice". This results in a lack of clarity of the type of advice.

3.8. It is right, therefore, for commission to be banned, but the system proposed for advice in the RDR needs to be amended so that, if the service offered is the provision of advice (as opposed to the sale/recommendation of a product) the client and adviser reach agreement on the cost of the advice prior to its delivery.

3.9. Such a system will also create a dialogue between adviser and client in which it becomes clear what services the adviser is offering. Our experience of other advisers’ work is that this is unusual at present and this leads to many disputes. The system of agreeing costs for advice prior to delivery of the service will naturally resolve the issue of the clarity of advice.

3.10. Where the service offered is the sale or recommendation of a product, the service should simply be described as such, and it would be reasonable for the adviser only to be paid once the product has been arranged.

3.11. Advisers should therefore describe their services as follows:

· Financial Advice. Client agrees to pay, whether or not a product is arranged.

· Product Recommendation. Only possible if the adviser offers products from the entire market.

· Product Sale. Where the adviser does not offer products from the entire market.

· Product Implementation. Helping the client set up the product.

4. A better qualification framework for advisers

4.1. It is important to understand that there are many varied tasks undertaken by IFAs. Not all IFAs work in the same area. For example, whilst I have been an IFA for 15 years, I do not get involved in residential mortgages.

4.2. The current exam framework is logical, testing an adviser’s knowledge in specific topic areas. So, for example, an adviser would take an exam based on pensions or investments.

4.3. If experience is to be used as an alternative to qualifications, it must be used in a similar way. So, experience of giving advice about pensions could be tested.

4.4. It would not be right for an adviser to claim that by having, say, 10 years of experience, they were qualified in all the fields which an IFA might be involved in. If I use myself as an example, I would feel uncomfortable giving residential mortgage advice without improving my knowledge, so it would be wrong for my 15 years of experience to allow me to give advice in this sector without obtaining further knowledge.

4.5. With regard to the qualification framework, there are some improvements which are necessary. The quality of the exams is poor and regulatory action needs to be taken to improve this. In particular, the exams would need to become more relevant to the work of advisers, there needs to be an improvement in the quality of the learning materials and in the quality of the examining (in particular the questions asked). The examining bodies have had many years of experience but have failed to improve the quality of their exams and intervention by the regulator would, therefore, seem a logical step, as market forces have failed here.

4.6. In this area, and generally, there is a need for the regulator to improve the way in which it addresses the industry. Its rules about qualifications are confusing and they are written in "civil service speak", with talk of "QCF 4". This sort of terminology means nothing to most of us, but a list of the qualifications we would require, in order to practise in the future, would be very easy to put together. Overall, the regulator needs to engage better with the people it regulates and its poor communication on this matter is symptomatic of its failure to engage properly.

5. Recommendations

5.1. There should be an improvement in the way that advisers describe their services.

5.2. A service should only be described as "Financial Advice" when the client agrees to pay for that advice, whether or not a product is arranged.

5.3. It should not be possible to substitute qualifications with experience.

5.4. Regulatory action should be taken to improve the quality of the examinations.

5.5. The regulator should take steps to engage better with those it regulates, and it should take steps to communicate in a clearer way.

December 2010