House of Commons - Retail Distribution Review

Retail Distribution Review - Treasury Contents

2 Qualifications

The upcoming change

7. Under the reforms being brought in under the RDR, the qualification level required for those providing advice on retail investment products will be raised. The current qualification requirements for those providing advice in the investment sphere lies at Level 3. Under the National Qualifications Framework, that equates to A-levels.[4] These new rules, as discussed earlier, will apply to all those wishing to provide advice on investment products. Following the RDR, the requirement will be for Level 4 qualifications, equivalent to a Certificate in Higher Education, or the first year of a degree.[5]

8. The FSA provided the following explanation as to why it had decided to move to this higher level of qualification. It stated that:

We believe these changes are fundamental to equip the modern adviser to give good quality advice, and many advisers recognise that these skills have great relevance to their role.

The enhanced professionalism requirements will also mean that advisers, on the whole, will be more competent than at any time in the past. As the professionalism and reputation of the adviser community increases, new entrants will be attracted to the sector. We are seeing more learning opportunities for new entrants and some firms are creating graduate recruitment schemes to accommodate some of the demand.[6]

The case for Level 4

9. In a letter to us prior to our hearing with the FSA, Mr Sants provided the following evidence to support the move to Level 4. He referred to the following pieces of evidence:

—Our data from early 2010 on platforms shows the advice of advisers meeting current qualification standards was deemed to be "suitable" in 11% of cases and 89% of advice was either "unclear" or "unsuitable". The advice of advisers with a similar qualification to the new standard was suitable in 43% of cases, "unclear" in 32% and unsuitable in the remaining 25% of cases. Cases from the few advisers who had attained qualification in excess of the new standards indicated that 71% were classed as "suitable" advice and were "unclear" in 29% of cases.

—A review of the quality of financial planning advice by an expert panel from Australia (ASIC 2003 study) also showed that plans completed by advisers with a "certified"/qualified status (around QCF [Qualification and Credit Framework] Level 6) scored better than unqualified advisers.

The use of this Australian study brought particular condemnation from others who provided evidence to the Committee. Derek Gair, GDC Associates, wrote to us as follows:

Numerous studies conclude the proposals fail to match the original intention of RDR and that they will result in the deprivation of mass-market advice. Yet [the] FSA rely on an outdated study (Australian Securities & Investment Commission) of just 124. This study is not representative of the UK market, being filled with inaccuracies—8% of the study group were rated "poor" purely because they failed to provide a general guide to the customer (nothing to do with the advice aspects whatsoever)—15% of the overall score was based on the adviser supplying generic regulatory booklets NOT the quality of the advice. It is also true to say that the advisers were judged on providing a comprehensive financial plan not typical of day to day financial interaction with clients who generally require relatively simple financial advice and products to satisfy those requirements.[7]

10. The FSA in January 2011 provided further evidence as to why the move to Level 4 was justified:

We based our decision to raise professional standards on recommendations from our initial industry working groups, which were refined and developed by PSAG, throughout which we carried out substantial consultation. This was supported by some focussed research on how higher professional standards might lead to better outcomes. The research we obtained indicated that both in the UK and non-UK markets advisers meeting higher professional standards give more suitable advice. We have summarised this research, and the main findings, in the following paragraphs:

(a) Professional Standards and Consumer Trust. This research found that in the longer term, measures to improve compliance with professional standards may result in improved consumer trust and engagement in markets.

(b) Professional Standards Bodies: Standards, Levels of Compliance and Measuring Success. This research demonstrated that professional bodies operating in markets with potentially similar consumer problems are taking a broadly similar approach to us in standard setting and establishing processes for monitoring and enforcement.

(c) Linking Professional Standards to "Consumer" and Other Outcomes in the Financial Sector. The research presents two case studies showing positive links between standards and outcomes. The first was a review of financial planning advice by the Australian regulator and consumer agency. The evidence suggests that qualification at the level of higher education and engaging in Continuing Professional Development (CPD) contribute to increasing professionalism and improving the quality of financial advice. The second study aimed to identify whether qualifications of fund managers could be used to explain differences in the performance of their funds. The research concludes that clients with advisers holding professional membership and/or higher qualifications ought to improve outcomes.

(d) Platforms thematic review. Our data from early 2010 on platforms shows the advice of advisers meeting current qualification standards was deemed to be "suitable" less often than that of advisers with a similar qualification to the new standard.

(e) Major banking group—internal review: The review analysed quality of advice provided by level 4 and level 3 advisers. Analysis of fail rates (a measure of "poor" quality) and risk scores (a blend of Key Performance Indicators including complaints) showed that indicators were better for higher qualified advisers.[8]

11. It was not just the FSA's evidence base for the move to Level 4 that was criticised. Concern was also expressed at how far a qualification could prevent mis-selling and further complaints, especially given the level of complaints in other professions with higher qualification levels. Mr Simon Mansell, Temple Bar IFA Ltd, explained that "Six years of exams and a very restricted complaint definition didn't stem complaints against solicitors!".[9]

12. Other evidence we have received also questioned whether higher qualifications alone would work. RBS noted that "Higher qualifications do not in themselves equate to increased professionalism and must be seen in a wider context of measures that will inspire consumer confidence and trust."[10] Others were more forthright. Mr John Amey, Cavendish Independent Financial Advice, stated that:

It is a false assumption that passing exams reduces mis-selling. The ability to pass exams is no guarantee of honesty and integrity. The most highly qualified can still be corrupt if they choose. If the FSA seek to control any mis-selling through a better qualifications framework, this must fail. Further, no account has been taken of the fact that mis-selling has decreased year on year in the IFA sector—look at the Ombudsman service figures.[11]

13. When we suggested to Mr Sants that qualifications would not get rid of malicious intent, he acknowledged that "it would be wholly wrong for us to suggest that we are going to eliminate all mis-selling, and I don't think we suggest that".[12] He noted that "the reality of the cost of regulation is such that even if we were the most efficient policeman, for the sort of money and resources we have we will still have mis-selling on top of that. There are certain types of wilful deception that, however good your regulatory policing process is, the cost to detect would not be acceptable".[13] But he continued:

The question is, is this a significant improvement in the round on where we were? We believe it to be. We believe we have good, solid evidence to that effect and that is why we should go forward. A number of very useful, sensible points have been made, which I would like to consider on the margin, but on the central thrust of the argument, it still seems to me that the logic is compelling.[14]

14. Others though supported the move to Level 4 qualifications. Which? was adamant that there was a need for higher qualifications. In its evidence, it argued that:

The current minimum qualification a financial adviser is required to hold before they can give advice is set at Qualifications & Credit Framework (QCF) Level 3. This is equivalent to an A-Level examination. We cannot see how this is remotely appropriate as a minimum standard for an individual whose advice has such an enormous impact on people's lives. When you compare the level of training necessary with that of an accountant or a solicitor it is hardly surprising the current qualification standards do nothing to support consumer confidence in the industry and the quality of the advice they receive.

As a result we welcome the moves in the RDR to improve the professionalism of those offering financial advice and selling financial products. Many advisers are already qualified at a level above the level required by the new proposals so will not be affected by the change. Many others are taking action to increase their level of qualification and the FSA has taken steps to ensure there are a range of options available so that those advisers who do not wish to sit written exams can take an alternative route.[15]

There were also those in the industry who also supported the move. Nick Bamford, Informed Choice Ltd, was adamant that:

The RDR introduces a requirement that advisers are qualified to QCF Level 4 by the start of 2013. The current benchmark entry level of formal qualification is QCF Level 3. In the highly technically complex world in which financial advisers operate, Level 4 should be accepted as a minimum qualification level. Level 3 is simply inadequate in ensuring competent advice to the consumer.[16]

15. The evidence provided by the FSA on the need to move to Level 4 was weak. Nevertheless, the Committee sees some merit in a move to a higher level of qualification, both as an opportunity to build a stronger professional ethos amongst advisers and as a reflection of the high level of responsibility financial advisers have for the financial welfare of clients. Trust in financial services must be key.

The 'cliff-edge' and 'grandfathering'

16. Some also took exception to how the Level 4 requirement would be implemented. From 1 January 2013, those without Level 4 qualifications will be unable to provide advice on retail investments. There was vociferous criticism of the 'cliff-edge' nature of these reforms, and many wanted some form of 'grandfathering'. Grandfathering in this case would allow certain people to be regulated under the system, without first attaining the new Level 4 qualification requirements.

17. Several of those who provided evidence were close to, on or above, the current state-pension retirement age. These older IFAs felt it unfair that they would have to undergo further qualifications where the benefit to them would be limited, as they might retire soon. As an example, Paul Naylor, A P Financial Services UK Ltd, informed us that, "At age 61 [...], I dispute the need that after 20 yrs as an IFA, without any customer complaints, that after 2012 if I do not take additional exams to bring me up (so called) to the diploma level, that I am deemed no longer competent to advise retail clients".[17] As APCIMS noted:

FSA opposition to any form of "grandfathering" for older staff without relevant qualifications effectively means that the experience/expertise that these individuals have acquired over decades of looking after clients count for nothing and may, in many cases, be lost to the industry as advisers choose to retire rather than having to 're-qualify'.[18]

18. These were not the only complaints against the cliff-edge approach being followed by the FSA. Many of those who wrote to us also felt that it was unfair to allow those who were both experienced, and complaint free, to be removed from the industry, while others felt that both the cost of the examinations, as well as the time required to study for exams, were of significant concern. Evidence we received from Jason Georgiou raised many of these concerns:

I have been in the industry for 30 years now, had no complaints and keep my knowledge up from both my experience and ongoing CPD. I have started studying to the level of RDR already but with great reluctance. The cost with my examining body, IFS, is £600 but it is not just the monetary cost which I consider to be excessive but also the time that will be required to complete the studies and examinations. I would expect it will take in the region of 100 hours to study information for an exam which will be nothing more than a test of memory rather than aptitude for the job.

So that means 100 hours at least out of my working time. This is when I am trying to run a business, earn money for that business, keep up to date with compliance issues (of which there seems to be an endless flow), keep staff in a job etc. etc. Just to give you a practical example I received my exam coursebook for the second element (I recently passed the first and feel no more qualified to do my job) at the beginning of November. It was 25 November before I had chance to even look at the first page of the study text as I was so busy actually doing the job which pays the bills.[19]

19. But support for some type of grandfathering was not universal. Some highlighted that there had been several years for those affected to begin to move towards gaining Level 4 qualifications. The IFS School of Finance noted that "In 2008 the Financial Services Authority (FSA) confirmed that new minimum qualification standards at level QCA (now QCF) Level 4 would be introduced. Those advisers who were not appropriately qualified were therefore fully aware that they had four years to obtain the necessary qualifications".[20]

20. Consumer groups were also supportive of the FSA's approach. Which? was firm in its opposition to any 'grandfathering'. It stated that:

We appreciate the fact that any regulatory change on this scale can be difficult for some of those already in the industry to handle. However it is clear that the current service offered by the industry as a whole is simply not good enough and we would strongly oppose any proposals to introduce grandfathering rights. While in many cases experience does bring wisdom it simply cannot be said that, just because someone has been in the industry for a long time, they provide a good service to consumers. Widespread grandfathering would also result in a significant number of bank advisers and IFAs being automatically upgraded to the required level, which would mean that it would take a generation for the higher standards of professionalism to implement. This would be totally unfair on the significant number of IFAs who have already put significant effort into gaining the new qualification.[21]

21. This unfairness to those who had already gained, or were proceeding towards, Level 4 qualifications was discussed in other submissions we received. Mr Andrew Reeves, The Investment Coach Ltd , argued that "To 'water down' the requirements now would also be inequitable to those that have pursued further qualifications already".[22] Evidence was also provided to show that many had already qualified at the level required, or intended to do so. The FSA informed us that "In March 2010, 49% of all advisers were already appropriately qualified"[23] and that "82% expected to remain as a retail investment adviser".[24]

22. The FSA has consistently taken a firm line on such wide-spread grandfathering. In its further evidence following our hearing with them, the FSA put up the following defence of its cliff-edge approach. It argued that:

We are concerned about the lack of consumer trust and believe there is a need for a step change for the whole financial advice sector. This explains why the increased professional standards will apply to all advisers, even though we do recognise that there are many advisers who have considerable experience.

This position is supported by our extensive consultation on the RDR, which found broad industry and consumer consensus that higher professional standards are necessary, with the majority of respondents opposed to grandfathering. We also do not see how advisers can evidence their improved professional standing if they do not demonstrate this through an objective measure—a qualification—that tests this. This goes to the heart of restoring consumer confidence and trust.

We consider our changes to be a fair and proportionate step in meeting the consumer protection objective, consistent with our legal obligations. Allowing grandfathering for a proportion of advisers, perhaps based on age, experience, a good track record (as evidenced by no or few complaints), or some combination of these, would create its own problems and would lead to different issues of 'fairness'. Creating conditions under which grandfathering is acceptable would inevitably lead to challenge from those advisers that didn't meet the precise conditions set out. Allowing grandfathering would also be unfair to that majority of advisers who are either already appropriately qualified or who are well on the way to being qualified.[25]

OLDER ADVISERS

23. Many of those who submitted evidence suggested that the move to a higher qualification level via a cliff-edge approach would lead to a reduction in the number of IFAs in the market, and a subsequent reduction in the amount of advice available. Adviser Alliance provided the following evidence as to the potential scope of the problem:

The prospect of taking further examinations has persuaded many older advisers, with over 20 or 30-years experience, to leave the industry, albeit unwillingly. A figure of 20% is accepted by the FSA, although numerous independent surveys have placed a figure of between 20% and 50%.

1. Figures provided exclusively to Financial Adviser by Matrix-Data Solutions showed there were 32,000 advisers in 2008. However, this plunged to 30,198 in 2009 and currently stands at 28,714. A 10.3% reduction as at June 2010.

2. Robin Stoakley, Head of Intermediary Business at Schroders said, "I do see up to 30% of the IFA market leaving".

3. TISA Director, Malcolm Small, "How many will leave? Perhaps 40% of the adviser market will go as a result of the RDR".

4. Deutsch Bank, "There has been industry talk of 30% or even 50% of IFAs exiting the industry post 2012, which is not impossible"

5. Rachel Vahey, head of pensions development for Aegon, stated, "The way that the RDR is panning out is that it will restrict access to advice".

6. Financial Services Skills Council director, Sarah Thwaites, who previously headed the FSA Training Dept, stated, "The danger is that if too few existing advisers meet the new qualifications level or the industry does not find it cost-effective to offer advice to the mass market, the very important aim of achieving good consumer outcomes may be lost." [26]

24. As the Adviser Alliance evidence makes clear, many who wrote to us were worried that older IFAs were most likely to leave the market on implementation of a cliff-edge approach. Many emphasised the costs involved in gaining further qualifications, compared to the limited period they may wish to work. As Mr Chris Dodd, an Independent Financial Adviser, told us:

The RDR requirements, as they stand, are extremely unfair on the older IFA. It creates a "cliff edge" scenario whereby someone like myself will be, after 30 years' service, disqualified from practicing on 1 January 2013. I see no reason why someone like me should take a raft of expensive exams for a few more years service.[27]

Others however were less sympathetic to this line of argument. A sceptical Mr Chris Petrie, an owner of an IFA firm, warned us:

You will be told that financial advisers are highly experienced (particularly the older ones) and that they should not suffer the stress and cost of further higher level qualifications by examination. But the truth is that we provide advice about products that sit in a highly technically complex world. Many financial advisers have out of date qualifications. The experience that they claim is also dated and not necessarily conducive to the delivery of high quality financial advice in today's world.[28]

25. However, we were concerned by the potential loss of advisers from the market, and therefore asked the FSA to provide further evidence on the age profile of those to be affected by the RDR. The FSA also told us that NMG in March 2010 estimated that there are 48,000 advisers impacted by the RDR.[29] Table 1 shows the age profile of all advisers, which includes IFAs, but also all the other types of advisers impacted by the RDR. The FSA added that "looking only at those working for IFA firms, this shows that IFAs have a slightly older profile with 14% aged 55-59 and 18% aged 60 or more".[30]

Table 1: Age profile of all advisers impacted by the RDR

Age-band	All advisers
18-29	4%
30-39	21%
40-49	35%
50-54	16%
55-59	11%
60+	12%
No answer	1%

Source: Financial Services Authority, Ev 33

26. Given the significant proportion of advisers aged over 55, it is also necessary to note that for this age group, the FSA's own data indicated their expectation of leaving the market were higher than the average for all advisers, as shown in Table 2. While as can be expected more of those aged over 55 were retiring as planned than in the entire adviser group, the RDR appears to have also led more of those aged 55 or over retiring earlier than planned, or stopping advising on retail investments, than in the overall adviser group. Table 2: Advisers' future intentions

Age-band	Aged over 55	All advisers
Likely / definitely remain as a retail investment adviser	59%	82%
Retire as planned	17%	5%
Retire earlier than planned	8%	3%
Stop advising on retail investments	5%	2%
Leave the industry	3%	3%
Other / don't know	7%	5%

Source: Financial Services Authority, Ev 34

27. Given the potential for older advisers to leave the market, 'grandfathering' by age or experience has been discussed. When dealing with the question of whether there could be grandfathering for older advisers, the FSA noted its need to act within existing equality legislation. It told us that:

The Equality Act 2010 requires us to have due regard to the need to eliminate unlawful discrimination in the exercise of our functions. This includes discrimination on the basis of age. Given our consumer protection statutory objective, any grandfathering rights would need to be granted on the basis of a certain number of years' experience rather than upon age alone. This is because an adviser who is, for example, 60 years old will not necessarily have worked in the financial services industry for a significant number of years.

Allowing grandfathering on the basis of a certain number of years' experience would indirectly discriminate against younger advisers. Therefore, in order to comply with our obligations under the Equality Act, we would have to be able to justify this indirect discrimination on the grounds that it is a proportionate means of achieving a legitimate aim. We do not consider granting grandfathering rights for more experienced advisers to be proportionate on the basis that more experienced advisers will need to invest significantly less time acquiring the necessary knowledge to pass the qualifications and granting such rights would not be consistent with our statutory duty to achieve an appropriate degree of protection for consumers.[31]

28. We are concerned at any potential loss of competent and experienced advisers from the market. Any restriction of any trade must be carried out with due consideration for the livelihoods of those affected. However, the FSA has argued that it cannot because of the provisions of the Equality Act provide a blanket grandfathering process either on the grounds of age or experience. In an effort to achieve the legitimate aim of maintaining competition and choice in the advice market, we recommend that the FSA consider instituting a process whereby it provides for flexibility for advisers on a case-by-case basis.

LESS OF A CLIFF-EDGE, MORE OF A SLOPE

29. Not all those advocating a move by the FSA away from a cliff-edge approach advocated a simple pass-through to the new regime with no need for further qualification. We received several suggestions of ways in which a more gentle approach into the new regime could be provided. While rejecting a mass grandfathering approach, AIFA made the following comments:

we are concerned that a fixed deadline for all advisers will cause unnecessary hardship for some advisers and their clients when greater flexibility would not undermine the effect of the reform. We therefore call on FSA to take a more flexible and pragmatic approach with regard to the deadline for those advisers who are demonstrating commitment in attaining Level 4 as the deadline approaches. The objective must be to ensure that the maximum number of advisers are able to trade at the higher level of competence and this is not best served by simplistic lines in the sand. We believe that FSA should make it clear the basis on which they would entertain dispensation requests from firms for an extension of the timescale to complete their qualifications.[32]

The Financial Services Skills Council suggested another route to prevent a 'cliff-edge' type approach. They suggested a supervision approach as follows:

We are not in favour of grandfathering if this just means a tick box approach which allows you to carry on in the industry. However it might to be possible to introduce a transitional process used by a previous regulator the Personal Investment Authority (PIA). It allowed a period of transition, if the new standards were not achieved within two years, advisers were allowed to continue working under the supervision of an appropriately qualified supervisor, whilst they continued to gain the qualifications.[33]

30. In its evidence to us however, the FSA resisted attempts to provide further leeway to advisers that would not make the cut-off of RDR implementation. It argued that it had already been lenient enough, and that a supervisory approach would not work. They stated that:

We also considered a working group recommendation in 2008 to permit existing advisers a grace period of two further years (to end-2014) under supervision to allow them longer to get qualified. However, we had serious concerns about the supervision of these advisers being effective. At its most unacceptable supervision carried out within firms is a form of remote file checking with no coaching, mentoring or training of the individual. Instead, we found an acceptable compromise and said that those who are on course to complete, or already hold, an appropriate qualification can continue with this. This meant that from November 2008, existing advisers could continue or begin their studies using existing higher level qualifications, without having to wait for the new qualifications to be made available. Overall, our view is that, by the end of 2012, established advisers will have had enough time to meet the new standards.[34]

31. Later in this Report we recommend that implementation of all aspects of the RDR be delayed by twelve months, in order to maintain choice and competition in the advice market. We recommend that the FSA temper the 'cliff-edge' nature of the current reforms. A system of proper supervision, along with the additional year, would provide some leeway, while maintaining the Level 4 requirement.

LEGALITY

32. Some of those who wrote to us doubted the legality of the FSA's action in preventing grandfathering.[35] When we questioned the FSA representatives on this, Ms Nicoll replied:

Yes, we have taken legal advice on this. There have also been challenges in the context of human rights law and we have satisfied ourselves that the powers that we have are sufficient, that it is legal and that we are doing this within the law.[36]

Beyond Level 4

33. Several of those providing evidence suggested that Level 6 (equivalent to a degree) should be the minimum level of qualification.[37] And in its evidence to us, the FSA also noted that there had been pressure for this level of qualification. It stated that:

In developing our policy and rules, we consulted on a proposal from our industry groups that advisers wanting to provide a wholly independent service should have to achieve qualifications at graduate level. While many advisers tell us that they want to become more professional, feedback was that this level was too high for the market at the moment. We therefore settled on the vocational equivalent to the first year of an academic degree as this level requires more relevant skills than is required by the current standards.[38]

When we questioned Mr Sants on whether there were plans to move to Level 6, he replied:

I wouldn't take it as a formal plan. I recall a discussion in an earlier Committee here where it was questioned whether we had set the qualification at a high enough level, and I think we responded at the time that this is something we would keep under review. However, we don't have a formal intention to do this at this point in time.[39]

34. It is conceivable that in the future the FSA may require Level 6 qualifications for advisers. We would expect there initially to be a full study undertaken by the FSA (or its successor) before any move to Level 6, using a large sample of UK based advisers, looking at the merits of such a move. Should implementation then be proposed, we would expect, in view of the significant difference between Level 4 and Level 6, there to be a far longer lead time to implementation, with a wide-range of potential routes available to those wishing to upgrade their skills and qualify under any new regime.

4 http://www.ofqual.gov.uk/qualification-and-assessment-framework/89-articles/250-explaining-the-national-qualifications-framework, Ev 28 Back

5 Ibid. Back

6 Ev 28 Back

7 Ev w182 [Note: references to 'Ev wXX' are references to written evidence published in the volume of additional written evidence published on the Committee's website] Back

8 Ev 31-32 Back

9 Ev w42 Back

10 Ev w259 Back

11 Ev w91 Back

12 Q 90 Back

13 Q 90 Back

14 Ibid. Back

15 Ev w281-282 Back