Retail Distribution Review

Written evidence submitted by Wingate Financial Planning

About Wingate Financial Planning

Wingate Financial Planning is a firm of Chartered Financial Planners based in Caterham, Surrey. Wingate Financial Planning provides exclusively private client financial planning advice. We have three registered individuals (RIs), with six supporting staff.

Alistair Cunningham, the author of this evidence, is also a Chartered Financial Planner and a Fellow of the Personal Finance Society.

Executive summary

· Wingate Financial Planning embraces the switch to 'adviser charging'. We believe it is fairer to offer individuals the choice of how they pay for advice with the cost of this advice being agreed in advance of any chargeable work being undertaken, or any recommendations being made.

· We do not understand how the banning of commission or provider factoring will reduce the ability of individuals to obtain advice; however, it will require advisers to more clearly articulate the benefits of their advice, and focus on providing a valued service rather than selling products.

· We welcome the introduction of a higher level of qualifications for registered individuals, although we believe there is a clear need for simplified products that are more tightly regulated, and are available to be recommended by less qualified individuals. We believe the QCF Level 4 should be a basic ‘hygiene factor’ for those giving independent advice, and further qualifications should be taken to support the recommendation of more complex, high risk products such as pension fund transfers, pension fund withdrawal and equity release.

Background:

The FSA have set out three outcomes that define the Retail Distribution Review:

· improve the clarity with which firms describe their services to consumers;

· address the potential for adviser remuneration to distort consumer outcomes; and

· increase the professional standards of investment advisers

In 2010 the FSA published policy proposals for each of these points.

Adviser charging:

Commission has historically been paid by life, investment and pension providers to intermediaries for the sale of the providers’ products. Over the years there have been many changes to the structure of commission payments, including the setting of fixed percentages that could not be varied. At the current time, the principal requirement placed on an adviser is to disclose to an individual the commission that will be received from the provider.

It is important to note that commission increases the cost of financial products but there is a wide misconception by consumers (created and continually fuelled by the way in which it is presented by advisers) that this means the advice and services of the adviser is ‘free’. In reality, the receipt of commission by the advisory firm may end up costing the consumer more than the commission payable over the life of the product.

Adviser charging requires the adviser to agree with the consumer the cost of advice and services in advance of any recommendation been made. This is more in line with other professional services, for example accountants and solicitors. The proposals laid out by the FSA do not prohibit the deduction of these fees from any products ultimately recommended but will inarguably remove any commission bias by agreeing the cost of services in advance.

It has become apparent to us that many advisers find it difficult to understand the difference between commission and fees that are agreed in advance and deducted from the products. There is a misunderstanding that if you are charging a fee the client must pay these directly from their bank account and the other options of paying the fees are overlooked.

Qualifications:

The current required qualifications for an independent financial adviser in the UK are set at a minimum of QCF level 3. This is broadly equivalent to GCSEs. By the end of 2012 it is proposed that all financial advisers, irrespective of whether they are independent or restricted, will be required to hold the equivalent of QCF level 4 qualifications which is broadly equivalent to A-levels.

It is our opinion that QCF level 4 is a good starting point for those who wish to call themselves independent financial advisers, but further qualification should be required to advise in more complex areas such as pension transfers, pension fund withdrawal and equity release. These are high-risk areas of advice and we believe relevant and specific technical competency must be evidenced (via qualification but not necessarily examination) along with evidence of relevant continued relevant learning and development.

Restricted advice:

This firm welcomes the differentiation between independent financial advice and restricted advice. However, it is our view that the current guidance in terms of how an adviser will explain their status is not sufficiently robust.

We believe that independent advisers should represent the pinnacle of the advice industry and be able to advise on the broadest possible range of financial products, notwithstanding our comments in the previous section on holding specialist qualifications for more complex areas of advice.

We accept that a restricted adviser would be able to hold more basic qualifications but consider the QCF level 4 is the minimum so there is a reasonable minimum benchmark across the industry. We believe this level should then be enhanced over the next 5 years for ‘independent’ advisers to ensure the professional standards continue to strengthen which will support increased consumer confidence.

Restricted advisers (qualified at QCF level 4) should only be able to advise on "simplified products" such as regular premium investments and savings, protection products and risk controlled investment products. Annuity purchase, being principally driven by rate-driven underwriting criteria would also be permissible.

To use an analogy, you would not expect a primary school teacher to have the sufficient qualifications or experience to teach on a degree level thesis. This does not invalidate the primary school teacher’s qualification, but does highlight appropriateness and specialism.

Experience and Continuing Professional Development

Is our opinion that qualifications and experience provide the mix that makes a successful adviser.

We do not believe it is appropriate to allow individuals to become qualified to the required standard by experience alone. We have a variety of views in our firm on whether there should be an alternative to examinations to achieve the QCF level 4 qualification and my personal view is a more ‘vocational’ alternative should be available for those that do not feel comfortable in the examination environment. I envisage this would rely on case studies and suitability reports which create realistic and challenging assessment of an individual’s technical competence in a "real world" advice scenario. This method of assessment could also be used to evidence enhanced knowledge in the more complex areas of advice mentioned earlier.

Continual Professional Development remains important and we welcome a more formal arrangement for recording and evidencing both ‘structured’ and ‘unstructured’ CPD . Solicitors already do this and it will assist those who are less comfortable with exam based qualifications to evidence ongoing self-improvement for the benefit of their clients. However it is noted that with the FSAs view that it is preferable that CPD is "structured", "verifiable", independent, and "measurable with, where possible, "outputs"; this sounds a lot like further examinations!

We are however concerned over the ‘Gap Filling’ requirements. Over the past few years the FSA have encouraged advisers to specialise and attain enhanced qualifications in the areas in which they are advising clients. This is appropriate and supported by the fact that for certain types of advice an individual must hold specific qualifications to be authorised to provide advice. This has been extended by the FSA commenting that even if they hold the relevant qualification they should avoid advising in ‘high risk’ areas unless they undertake this type of work on a regular and frequent basis (equity release provides a good example).

This approach helps consumers receive high quality advice from advisers who have the relevant experience and qualifications and deal with clients with similar circumstances and needs which in turn leads to improved confidence. The ‘Gap Filling’ is in total contradiction to this FSA stance and if you take my situation as an example, I am qualified to Fellowship standard but my gap filling analysis requires me to complete many hours of study across various areas, the majority of which is irrelevant to the clients I am advising. If this is implemented, I will be forced to spend time developing my knowledge in areas which are of no use or value to our clients which will of course detract from the level of development in the areas my clients do value (or eats into my personal life!).

In our opinion the future of ‘independent’ advice is not best served by ‘General Practitioners’ but by ‘Specialist Consultants’ in much the same way as the medical profession. The needs of the mass market will be most appropriately met by the advisers operating in the ‘restricted’ area, will of course be more like GPs, but those clients with more complex advice or planning requirements will go to a specialist who is higher qualified and with specific expertise in their area of need.

Opponents of the RDR

It is our view that the RDR is most vocally opposed for three principle reasons:

· Misunderstanding – the most common objection is that consumers will not pay fees. It is the experience of this firm that individuals are willing to pay fees when they understand the value of the advice and service they will receive and that payment by ‘commission’ does have a cost

· Defensiveness – the FSA have used some inflammatory language in some of their RDR consultations, and some of their evidence supporting RDR has been challenged as being interpreted to support their mandate (the recent use of seven-year old data from Australia is a good example), feeling under threat, it is understandable how this makes some IFAs very defensive. However this does not in itself invalidate the broader RDR proposals

· Self-service – whilst in the minority, it cannot be ruled out that some IFAs do not want the RDR to take place because they are more concerned with their own interests than their clients. It is our opinion these are in the minority, and indeed we query if the ruthless will not find another means to circumvent RDR.

Summary

It is our view that the proposals put forward are by and large sensible, and as a firm we welcome the Retail Distribution Review. The FSA have not done themselves any favours by some of their recent evidence and comments; for example Hector Sants’ comment that pushing 20% of IFAs out of business is inflammatory, and hardly surprising it invokes a vehement response! Use of contentious research to support what appears a foregone conclusion also does not help, in late 2010 they highlighted a seven-year old Australian report as pre-emptory evidence than the RDR would have the benefits of improving customer outcomes, it is my personal view that this evidence is flawed and gives an impression of ‘interpreting the facts to fit the policy’, a view I know is held by some of my peers.

January 2011