Retail Distribution Review

Written evidence subnmitted by the Chartered Institute of Bankers in Scotland (CIOBS)

On behalf of the Chartered Institute of Bankers in Scotland (CIOBS), I am pleased to respond to the Committee’s Call for Written Evidence on the Retail Distribution Review (RDR).

1. Introduction

1.1 As one of the professional bodies providing qualifications for financial advisers, CIOBS has been involved with the development of the new framework of professional standards for financial advisers. Our evidence focuses, therefore, on the specific issues of whether the RDR will provide a better qualification framework for advisers and whether this outcome could be achieved in other, potentially better, ways.

1.2 In our view, the framework of professional standards developed by professional and awarding bodies, trade associations and other industry groups under the guidance of the FSA does provide a "better" qualification framework for advisers, in terms of:

i. Clarifying entry requirements to the financial advice industry;

ii. Providing a framework for ongoing professional and personal development (not covered by existing arrangements focusing on initial qualifications only); and

iii. Providing a foundation for the future development of a financial advice profession.

1.3 More importantly, the framework helps ensure better outcomes for consumers – this is, after all, the main objective - by:

· Raising the standard of initial adviser education and qualification;

· Developing advisers’ ethical sensitivity and decision-making skills;

· Introducing requirements for continuing professional development (CPD); and

· Introducing Statements of Professional Standing (SPS) so that consumers are more easily able to confirm their adviser’s qualifications and expertise.

1.4 It is clear that consumers expect advisers to be appropriately, professionally qualified. In the banking sector, where CIOBS operates, a YouGov survey commissioned by the Institute in November 2009 found that 88% of retail customers expected all bank staff to have passed their "banking exams".

2. New Qualification Framework

2.1 We are, like all professional bodies, conscious of the concerns raised by some existing advisers and employers that there may be significant costs and difficulties associated with raising the level of professional standards, and that some long-standing advisers may leave the industry rather than have to "re-qualify" at a late stage in their career.

2.2 The "raising of the bar" by increasing the minimum qualification level for advisers from QCF Level 3 (or equivalent) to Level 4 has been criticised both by those who think it too low, and from those who think it too high. It is worth, we believe, considering this in the context of qualifications required for other professions in the UK such as accountancy, tax and law; and comparable advice professions in Europe and elsewhere. In most cases, a Masters level qualification is the norm, whilst QCF Level 4 is equivalent only to the first year of a degree. The new qualification level required does not seem to us to be, therefore, an overly onerous requirement.

2.3 Furthermore, the debate around educational levels has obscured a key point – that it is the standard and quality of advice received by consumers that really matters, not the level of an advice qualification. When we looked, in developing our financial advice qualifications, at the knowledge and skills required by an adviser in their daily work, we equated these to an educational level of QCF Level 5 and have developed our own qualifications accordingly.

2.4 The CIOBS Diploma in Investment Planning, developed both for retail banking advisers and (in conjunction with the Association of Independent Financial Advisers – AIFA) for general advisers, adopts an "alternative assessment" approach. This involves testing advisers’ knowledge and skills through a series of practical, case-study assessments that reflect real-life, day-to-day scenarios faced by advisers – testing advisers’ ability to give advice, not their ability to memorize rote learning, facts and knowledge. To date, approximately 1,000 advisers have commenced their study programmes leading to the Diploma. Further information on the Diploma and examples of alternative assessments are provided below, for information.

2.5 The majority of existing advisers who have kept their knowledge and skills up-to-date and are currently providing high quality advice should, in our view, have no significant difficulty in passing a assessments designed in this way. CIOBS and our partners provide a variety of comprehensive support packages to help advisers prepare for their assessments.

2.6 Recognizing that some advisers may prefer a further alternative to traditional examinations, CIOBS (together with the National Skills Academy for Financial Services and CTP Training) has also developed a workplace "Assessment of Competence" route (currently being piloted) which tests the actual advice given by advisers, rather than testing via case studies. Existing advisers therefore have two alternatives to traditional examinations provided by CIOBS alone.

2.7 Other professional bodies have also developed a wide range of traditional and alternative approaches to meeting the new qualification requirements. We believe there are routes on offer that should enable all existing advisers to meet the new requirements in a manner that suits their needs. Advisers and employers not satisfied with their existing providers can shop around for other awarding bodies/providers that better meet their needs.

2.8 The wide variety of routes available and healthy competition between professional/awarding bodies involved also keeps the costs of meeting the new requirements low; advisers can qualify via an alternative assessment route with CIOBS for £655, for example, including all materials and tutor support. This does not seem excessive when compared against the costs of many professional qualifications, or indeed academic ones.

3. Conclusions

3.1 We are supportive of the new framework of qualifications and professional standards being introduced as part of the RDR, and believe that they will improve outcomes for consumers seeking advice. More could be done to improve outcomes still further, however, and in this regard we would like to see:

· A common Code of Ethics for financial advisers (and, indeed for the financial services industry more broadly);

· An independent Professional Standards Board or similar to oversee professional standards for the financial advice profession; and

· A requirement for professional body membership for advisers.

3.2 We believe that existing advisers who have kept their knowledge and skills up-to-date should be able to achieve the new minimum qualification level without significant difficulties, and at a reasonable cost, given the wide range of qualification routes and support offered by awarding bodies and others.

January 2011

ANNEX

a) Example of Alternative Assessment (CIOBS Diploma in Investment Planning Mock Exam)

b) CIOBS Diploma in Investment Planning Information Leaflet [not printed]

Providing

Investment

Advice

Mock Exam

Question 1 – C ase Study

You are a portfolio manager with a leading quoted UK fund management firm and are an approved person under the Financial Services Authority.

Recently you bumped into an old friend, Janice Dewar, aged 42, who works in a busy newsagent’s shop in the town where you stay. She earns approximately £15,000 per annum. You were sad to hear that recently, Janice’s husband Maurice was killed in a car accident. The couple did not have any children. Maurice was an avid stock market investor and had, during a period of almost fifteen years, built up a portfolio of investments – Janice has now inherited that portfolio. Janice, a regular church-goer, has indicated a desire to make a gift of £5,000 to her local church.

The shares which Janice now owns are as follows:

Janice, having known you since your school days, has made an appointment to call on you for advice – both from a general planning perspective and also what she should do with her portfolio.

(a) You mention to Janice that although you know her personally, before you can reasonably expect to provide investment advice and act on her behalf, you must conduct a thorough fact find. Explain to Janice what this is and why it is required.

( 3 marks)

(b) What essential information might you seek from Janice in preparing your fact find?

( 6 marks)

(c) Janice is aware of your position in the firm and asks if you will take on the responsibility for the longer term management of her portfolio. She had heard of the term "portfolio planning" and wondered first of all what this meant and how it relates to her as an individual. You are asked to clarify what this means for her.

(1 4 marks)

(d) Putting yourself in the position of the now newly appointed Investment Manager for Janice, briefly review her portfolio from the point of view of income, growth and portfolio diversification and make any recommendations you think might be appropriate going forward.

( 7 marks)

(e) During your conversation with Janice, you mention the term "beta" and fully explain it to her. Janice admits that she was only half-listening to you and so is still confused. She asks if you can repeat your explanation (she promises to listen intently this time!) and perhaps give her a couple of examples.

Assuming that the return on a "risk-free" investment is 4% per annum and that the return on securities carrying the market rate of risk is 7.5%, advise her of the annual theoretical return she should receive on Rio Tinto which has a beta of 1.34 and Vodaphone which has a beta of 0.76.

( 6 marks)

(f) Fully explain to Janice how she can maximise her proposed gift to the church.

( 4 marks)

(TOTAL 40 MARKS)

Question 2

Tess Thomas, aged 61, has been a customer of your bank branch for many years and, over the last few months, you and your colleagues have been advising Tess on a number of matters.

Tess has always been a frugal saver and, as a result, has built up a small portfolio of investments. She has now produced correspondence from Computershare Services, this being a provisional allotment letter for a rights issue that one of her investments, Morrison (Wm) Supermarkets, is having. She has 10,000 shares which presently trade at 295p and the company is seeking to raise £650 million for expansion via a 1 for 5 rights issue at 200p.

Additionally, Tess advises you that she has spare capital and would like to make further equity investments. After referral to a portfolio manager colleague, Tess is advised to invest £10,000 in Patio Pot Plants plc, a relatively new company who bank with you.

(a) Tess asks what options she has in dealing with her provisional allotment under the rights issue.

(4 marks)

(b) Calculate the theoretical ex-rights price of the Morrison (Wm) Supermarkets shares.

(4 marks)

(c) In connection with the Patio Pot Plants plc investment recommendation, identify the specific conflict of interest that is apparent and suggest how such a conflict may be avoided / resolved. Additionally, outline three other generic ways in which conflicts of interest may arise.

( 7 marks)

(TOTAL 15 MARKS)

Question 3

Roderick Gilfillan, a retired doctor, has sought your advice regarding the immediate investment of a cash sum of £15,000 which he has recently inherited.

As a higher rate taxpayer, he tells you that he has an inherent dislike of HM Revenue & Customs and so insists that any product purchased is 100% tax-efficient. He also confirms to you that he has already fully utilised his cash ISA limit for this year and that he is prepared to invest for up to five years.

When Dr Gilfillan retired five months ago, he invested £40,000 of his pension commencement lump sum into an Enterprise Investment Scheme (EIS). It’s clear from your discussions that he’s especially excited about receiving the tax-free dividend income! He estimates that his tax liability for 2010 / 2011 (ignoring his EIS investment) will be £7,200.

(a) Based on the information available, identify a product that would suit Mr Gilfillan’s needs and describe how that product works.

(5 marks)

(b) He asks you to remind him of the income tax benefits of his EIS investment and any other pertinent tax-related information.

(5 marks)

(c) Finally, Dr Gilfillan states that a former colleague had told him that he may have been better off with a Venture Capital Trust investment. He would now like to know the main income and capital gains tax benefits of such an investment.

(5 marks)

(TOTAL 15 MARKS)

Question 4

You are employed as a financial adviser working for a large bancassurer and are able to give investment advice on packaged products, including personal and stakeholder pensions. A meeting has been arranged with Colin Shellard.

Colin is an oil services engineer working with Drillco, a US-owned oil exploration and production company based in Aberdeen. Colin has worked for Drillco for 16 years, has been in the industry for over 25 years and is well-known and respected. His current salary is £60,000 per annum and he is due to retire in 10 years.

His company contributes 10% of his gross annual income into the company defined benefit pension scheme. Colin considers that he is fortunate to have been in the scheme for all but one year of his employment with the company and so is happy to commit the required 4% of his salary himself.

(a) Colin would like to know how much of a pension he is likely to receive from his employer when he retires and, although he has heard of the word "commutation", he asks you to fully explain this to him.

( 4 marks)

(b) Colin now asks you to explain how the scheme’s ill health rules are likely to operate and what the position will be regarding his own pension should he have to retire on ill health grounds.

( 4 marks)

(c) Colin has been asked by a number of colleagues if he would consider being a member-nominated trustee of the pension fund, as a vacancy has just arisen. Outline to Colin, four of the non-discretionary powers that pension fund trustees are likely to have.

( 4 marks)

(d) Finally, Colin throws you a "curved ball"!

Out of the blue, he asks you what factors the financial services regulator considers in deciding that financial advisers, like you, are deemed fit to undertake the role of advice-giving.

( 3 marks)

(TOTAL 15 MARKS)

Question 5

Kevin and Pauline, both aged 31, have been married for over eight years and have just taken out a mortgage, on a capital and interest repayment basis, on their new two bedroom flat. Their mortgage loan to value was in the region of 91%

Both are self-employed. Kevin is a master joiner, whilst Pauline is an interior designer.

Whilst experienced in business, until now and by their own admission, they have been a little naive in relation to their personal finances. Currently, they have a combined buildings and contents insurance policy and a decreasing term assurance policy in place, although that is the full extent of their insurance provision. After disappointing discussions with another adviser, they have approached you with a view to taking out additional life assurance and income protection policies. Prior to doing so, however, they have a number of ‘fairly technical’ questions for you and require answers to these before proceeding to place their business with you.

(a) ‘We had to pay a higher lending charge when we took out our new mortgage. The adviser at the building society mentioned something called "subrogation", but he lost us completely! What on earth is it?’

( 4 mark s )

(b) ‘The adviser we spoke to previously said that we had to have an "insurable interest" in each other in relation to taking out a life policy. He did explain it, but to be honest, he was pretty awful! What’s this all about?’

(4 marks)

(c) ‘What factors does an insurer normally consider when setting the premiums for an income protection insurance policy? The adviser also referred to it as permanent health cover or something like that.’

( 6 marks)

(d) ‘If we do take out say a life assurance policy and an income protection policy, how long do we have to change our minds if we want to cancel?’

( 1 mark)

(TOTAL 15 MARKS)

TOTAL MARKS – 100