Retail Distribution Review

Written evidence submitted by Cazenove Capital Management

Cazenove Capital Management is delighted that the Treasury Select Committee (TSC) is raising concerns about the costs and benefits involved in the FSA’s Retail Distribution Review (RDR). We wholeheartedly support aims in the RDR to achieve a better qualifications framework, transparent and fairer charging, and the raising the quality of advice. No one can argue with these aims, but we believe the proposed execution is misguided in places and the timing of its implementation now looks challenging. We would draw the TSC's attention to the following issues:-

1. The RDR will result in only middle to high earners or those with accumulated wealth being 'offered' advice - thus leaving those who really need advice unable to access it or being educated to the fact they need it.

The removal of commission and factoring for regular premium savers and lower income earners will mean it no longer economically viable for advisers to sell regular savings plans or pensions to these individuals. If the FSA wishes to continue with this approach, it must give a stronger lead on Simplified Advice, or a large tranche of society will be left without financial advice. This will be to the detriment of promoting a savings culture in the UK.

2. Restricted versus Independent advice.

The FSA is not listening to industry concerns on this issue. The current proposals are flawed, will degrade the term "independent" and potentially lead to miss selling of complex products as IFAs attempt to offer a holistic service in order to retain the independent title.

3. RDR’s recommendations on Continuous Professional Development (CPD).

Our belief is that we are doing -yet again- a "one size fits all exercise" based on erroneous cost benefit analysis. Any firm with a strong culture of providing excellence for clients will insist on qualifications and training. For our firm at least, the proposals do not help this.

The proposed CPD regime puts the onus on the individual (removing a firm's power to control this element of its culture) and increases the CPD hours to higher levels that other professions (solicitors and lawyers must complete a minimum of 16 hours of CPD per year- the FSA wants 35, of which 21 hours "must involve structured learning with verifiable and measurable activities"). It also requires external monitoring which will only cover 10% of our employees (we currently monitor 100%). Because we already take our CPD seriously, we don't believe this regime will lead to our employees giving a better service to our clients. It will add bureaucracy and cost which will ultimately be passed on to the client. It will also take our employees away from their clients. So, no public benefit, no ill fixed, more red tape and added cost.

The financial cost is not the biggest issue. It is simply deeply frustrating for our employees, who would rather spend their days looking after our clients, that their time will be wasted needlessly yet again for no consumer benefit. Our suggestion is as follows:-

As it stands, the FSA is applying new requirements across the industry with no flexibility to reflect the range of different firms covered by these requirements – from small IFAs to major institutions. Therefore our suggestion is that the FSA leave the CPD requirements as they are and add an application process under which the FSA could grant permission to a firm to self-manage CPD. The applicant firm would have to demonstrate that is has the processes and resources to self-manage CPD. The FSA could monitor self-managed CPD firms through Arrow, theme visits or regulatory returns. If the FSA want to take another route with smaller IFAs, it is free to do so.

4. Platforms.

The RDR is placing considerable reliance on Platforms. Macquarrie have pulled their WRAP platform from the UK market and it will not be the last. As the latest platform paper has assured the future of fund platforms and WRAPs as the main delivery mechanism for advice, it is right that fund platforms should be forced to declare their financial position and hence viability. This is important, irrespective of the rule change forcing platforms to facilitate re-registration. As it stands today, these platforms are known to burn significant amounts of cash and their financial viability, whilst often questioned is never made clear.

In the November paper the FSA confirmed they would allow rebates to clients, but only in unit form, not cash form. On speaking with the platforms, they are universal in their view that they will find it difficult to administer these themselves. The concept of unit rebates poses a number of issues and questions. We are told the cost of implementation of this could be greater than the benefit of the rebate to the client, plus the scope for dealing errors increases significantly for both platforms and clients.

We believe cash rebates to clients should be allowed. While the FSA have said they do not want to allow cash rebates because this could facilitate a commission, they seem to be ignoring the fact that the client will be the recipient of the cash. Once that cash is in their account (and they have sight of that) it is then pooled with other funds in the cash account which will pay the advisers fee (which the FSA are allowing). The client has transparency and determines what the adviser is paid which is one of the FSA key goals.

Fund groups, platforms and the FSA are all agreed that rebates should be allowed so that larger IFA firms can use their scale to benefit their clients. It seems the only way this can happen is if the FSA re considers their view of the impact of cash rebates.

In conclusion, while the overall aims of RDR are to be applauded, the detail and timing of implementation looks problematic. We believe the initiative should be reviewed and fully adopted by the new Chief Executive of the CPMA before it is implemented. This will reduce regulatory overload for both the FSA and the industry during a period of significant change, as well as removing the danger that the CPMA could claim the RDR was not of its making. Hector Sants' own estimate is that this will cost the industry £1.7bn over 5 years. For such an enormous outlay, we would expect to see tangible consumer benefit and more quantifiable success measures adopted by the CPMA.

January 2011