Retail Distribution Review

Written evidence submitted by Robert Jackson

I have a copy of a letter that was sent to you by Mr Sants on the 13th of this month, and I would like to offer a different perspective for your consideration.

Problems in the market

First of all, the public’s lack of trust in financial advice stems, in the main, from the treatment that they have received from the High Street banks advisers.

This treatment is caused by the pressure that the High Street Banks impose on their employees to sell to targets, rather than to customer needs.

Most Independent Financial Advisers rely on referrals for their business.

This speaks for itself as far as trust is concerned. Would you recommend somebody that you did not trust, to a relative or friend?

Most people allow themselves to be exposed to a High Street Bank "adviser"

because of pressure applied because of other needs. Loans, Mortgage etc.

Most people see an IFA because they perceive a need for advice and after actively seeking an IFA.

In short, it is essential that the FSA differentiate between High Street Banks, who are responsible for 61% of the complaints received by the FOS, and the IFA sector, who are responsible for 2%.

RDR proposals

The FSA’s consultation process has not taken account of the views of IFA’s. It has however, bowed to the views and demands of Insurance companies and High Street Banks.

RDR, in its present form is designed to provide a clean, but extremely limited market for the future. It will achieve this by :-

(1) Forcing experienced, honest professionals, with an often, unblemished

career to undertake a new batch of examinations involving a huge cost in terms of time and money. This will force many in their 50’s and 60’s to retire early, causing a shortage of IFA’s, many businesses to close, adding to unemployment and reducing availability and choice for the public.

This is the only profession where continuing in practice depends on passing new qualifications, without any grandfathering arrangements.

(2) Improving the already crystal clear description of services offered.

Perhaps the current distinction between "whole of market" and "tied" is too clear for the tied section of the market.

(3) Addressing the mythical potential for commission bias, by banning

commission. As most clients of even "fee based" IFA’s use the commission generated to offset the fee charged, this action will put independent advice out of the reach of all but the rich.

Increasing the capital requirement of firms, so that, in the case of small businesses, an even larger percentage of their assets are unavailable for expansion or improvement. This action will help to reduce the IFA sector, again limiting availability and choice for the consumer.

None of this will help the average consumer in any way. Providing firms obey the current rules, consumers are already protected from wrong doing.

It will however deprive the vast majority, of independent, whole of market advice, which can be the only advice worthy of the name.

Professionalism

Consumers expect their advisers to be suitably qualified and to undertake continuing professional development.

I became qualified in 1992 and have been practicing since then, without any complaint against me or my company. Every year, I carry out at least 50 hours targeted CPD. and attend to the needs of all my clients, irrespective of their income, providing straight forward, honest advice that often does not result in a sale. Every year I take on-line examinations in Protection, Investments and Retirement planning, to ensure that my knowledge is complete and current.

How professional should I be?

The new measures will come into effect at the end of 2012. This is 4 years since the idea of RDR was muted. However, it is considerably less than that since the final details were published.

The idea that these rules will apply across the board is entirely fanciful. For instance Scottish Widows is owned by Lloyds Bank. Scottish Widows is the only provider recommended by Lloyds Bank. Who will regulate how and how much Lloyds take from Scottish Widows clients?

RDR will not apply to those giving advice on Stakeholder products. So, it will be OK to receive commission for simple products. It will only be complicated products, for complicated problems that people will be unable to afford. Presumably advisers will need two hats, so that changes can be made if and when the problem ceases to be simple.

Fortunately the FSA calculate that attaining the required qualification will only take 370 hours. That’s only nine and a bit weeks without an income. How many sole practitioners can afford that?

Another nail in the coffin of independent advice.

Adviser charging

Firstly, I notice that the research used dates from 2005.

Most IFA’s are either already "fee based" or working towards that position. In my case, I charge an hourly rate for the time spent specifically on a clients case. Any commission that is generated then belongs to the client and, in 90% of cases, is used by them to offset our fee. Without that commission, the vast majority of clients will no longer be able to afford our services. They will then be forced to either deal with the Banks, Supermarkets or Internet. If this happens they will receive no advice and will end up with the product that suits the salesperson involved.

Another aspect of this particular subject is that it only applies to the advice part of a transaction. This means that if I were to stop offering advice and just sell policies, I could save all the expense etc involved with RDR. Of course my clients would almost inevitably end up with an unsuitable policy, but at least they would not be able to complain.

Capital Resources

This will put further pressure on small firms, tying up cash that would be better spent on customer services. However, it will help to reduce the IFA sector and further reduce the availability and affordability of independent advice for the majority of the population.

RDR costs

I have tried to calculate the cost of RDR to each firm, but because of the clever switching between billions and millions, I have given up. Suffice it to say that at present there are approx. 22,000 IFA’s and after 2012, this figure is estimated to fall to around 10,000. In any event the cost is staggering and as the only source of income for an IFA is his client, once again the client will suffer.

It is interesting that the FSA professes to be concerned about extra costs to consumers. Who do they think will ultimately pay the £600,000 for this years Christmas bash.

All things considered, RDR in its present form will drive thousands of honest, hard working IFA’s out of business. These people are not crooks and charlatans, but well qualified (at least we were until our certificates were suddenly declared worthless), advisers, helping ordinary people to make the best of their money. These ordinary people will have no option but to try to research themselves, or to throw themselves on the tender mercies of the banks.

I would be grateful if you could consider two case studies :-

(1) Consider a 30 year old male non smoker who decided that he would like £200,000 of life assurance to protect him for the next 30 years .

If he were to ask Nationwide, who are tied to Legal and General, the premium would be £16.02 per month. A total of £5,767.72 over the term

If he were to ask Tesco, who are tied to Friends Provident, the premium would be £14.32 pm. A total of £5155.20 over the term.

If he were to ask Britannia, who are tied to AXA, the premium would be

£13.44 pm. A total of £4,838.40 over the term.

If he were to ask me, who is Independent, the premium would be £12.78 pm.

A total of £4,600.80 over the term.

At the moment the commission paid would be £280.70. However, as I am "fee based", this money would belong to the client and would probably used by him to offset our fee. As this transaction is relatively straight forward, he would invariably be left "in credit".

Throughout the process, we would have discussed other aspects of his financial life, met his family, and ensured that this type of cover was in his best interests.

After RDR, there will be no commission payable, so this client will either have to pay my bill himself, or take his chances with the banks.

Incidentally, if the policy was placed with Legal & General through me, instead of through Nationwide, the premium would be £12.80 pm. A total of £4,608.00 over the term. Meaning that Nationwide are taking an incredible extra £1,159.72 off this client.

If companies are able to get away with this sort of thing now, imagine what will happen when the predicted 80% of IFA,s have been forced out of business and are not competing.

(2) This time we have a 65 year old man who has a Personal Pension with Zurich.

He has a total pension fund of £100,000.

He wants the maximum tax free cash and a guaranteed income for the rest of his life.

He is single, a smoker and has high blood pressure.

Zurich do not provide Annuities, so they would recommend a Legal and General product that would pay approx. £5,126 per annum.

If his pension had been with Aviva, they would have offered an Annuity of approx. £5,228 pa.

Standard Life would have offered approx.£4,510 pa

Prudential , approx. £4,361 pa.

None of these providers would visit the client or complete a "fact find", to ensure that all aspects of his life were taken account of.

If he had been able to afford to take advice from an IFA, he would have been advised that he would probably qualify for an "Enhanced Annuity"

which would pay approx. £5,993 pa.

This would represent a difference of between £7,650 and £16,320 over a 10 year period.

The commission paid would be £750. Again more than adequate to cover our fee, so the client would finish up, better off for the rest of his life and "in credit to boot.

Surely, these two examples demonstrate the value of advice to ordinary people and the damage that will be inflicted if they are left to the banks and providers.

Please do not allow RDR to go forward in its present form. Please consider the needs of the ordinary consumer.

December 2010