Conclusions and recommendations
Qualifications
1. 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.
(Paragraph 15)
2. 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. (Paragraph 28)
3. 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. (Paragraph 31)
4. 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. (Paragraph
34)
Commission
5. There
is already full disclosure to customers of the cost of the advice
they receive, whether paid for via commission or fees. However,
as both advisers and the FSA have told us, many consumers appear
to see financial advice as being 'free' under a commission based
system, despite adviser disclosure of its actual cost. The introduction
of consumer agreed remuneration under the RDR will potentially
create a market price for advice. Given that some consumers will
have seen advice as 'free' beforehand, it must be assumed that
the setting of this price will lead to a reduction in the consumption
of advice, just as would be the case in any normal market where
the price of a good rises. But this rise in the price of advice
may also lead to consumers undertaking greater scrutiny of the
advice they are paying for, and who is providing it. Given the
past mis-selling episodes of the industry, this must be a welcome
development. However, we do not underestimate the scale of the
change in culture that this will involve for an industry based
so heavily on individual relationships. (Paragraph 43)
6. Trail commission
where advice is not offered is very difficult to justify. However,
we note the initial impact its removal may have on the value of
IFA firms, and recommend that the FSA analyse the impact of this
measure on the market for advice, and especially on the small-firm
IFA market. We discuss later in this Report concerns expressed
to us about an increase in trail commission being awarded in the
run-up to the implementation of the RDR. (Paragraph 49)
7. Consumer agreed
remuneration will allow advisers to deduct their fees from regular
payments made by customers for their products. Advisers would
like product providers to be able to use factoring to create a
single payment at the start of a product's life from this future
stream of income. However, the FSA's concern is that the discount
rate used in the factoring process by product providers can be
used to influence advisers' decisions in a way consumers may find
difficult to understand. We therefore agree with the FSA that
allowing factoring by product providers would provide a potential
bias in the market at odds with the overall transparency aims
of the RDR. (Paragraph 53)
8. The RDR concerns
not just IFAs, but advisers in banks as well. We would be extremely
concerned if banks found ways round the rules that will cover
all aspects of remuneration. We recommend that the FSA (or its
successor the FCA) report after one year, and then yearly, on
the impact of the RDR on vertically integrated firms' remuneration
structures, indicating breaches that have been found and what
remedies the regulator has asked for. Only with such transparency
will the IFA community be persuadable that it has not been unfairly
impacted by the implementation of the RDR. (Paragraph 55)
9. The evidence we
have received suggests that there is some confusion on both when
VAT will be payable, and how much it will raise. We recommend
that HMRC, in conjunction with the FSA if necessary, report to
us as soon as possible with clear guidance on when VAT will be
payable for financial advice under the RDR, why it has not been
payable in the past, along with any expected additional revenues
from the change, and whether further reform of VAT rules in the
area will be needed. The FSA should report to us on whether this
imposition of VAT will have an impact on the provision of advice,
and whether an unfair tax advantage between different advice models
will result from the move to the RDR. (Paragraph 58)
Types of advice
10. We
note the concerns raised by some about change in how advice will
be described, especially around the 'restricted' label. We recommend
that the FSA and other relevant bodies provide significant resources
to explaining to the public the change, and in particular that
'restricted' may mean restricted by product, or by firm. (Paragraph
62)
11. We note the concerns
held by some that simplified advice may simply replace the advice
of IFAs with an inferior advice system. Without a fully developed
system to allow analysis, it is not possible to know. We urge
the FSA to maintain the pace of its work towards a simplified
advice regime so that a competitive market can begin to operate.
We recommend that the FSA (and its successor the FCA) report to
us both on progress towards a simplified advice regime and, when
such a regime is put in place, update us on how implementation
has affected consumer outcomes. (Paragraph 66)
Transition
12. We
take the concerns expressed about the adverse incentives towards
poor advice that have arisen in the transition to the RDR very
seriously. We therefore recommend that the FSA, and its successor,
use all available tools to search either for pre-implementation
churn, or post-implementation holding of clients, where that is
not the best solution for the client. We expect to see the results
of any regulatory findings. (Paragraph 70)
Overall costs and benefits
13. The
evidence suggests that there will be a loss of market capacity,
as some advisers decide not to comply with the new requirements.
However, the FSA state that barriers to entry in the market are
low. We are concerned that the loss of advisers, particularly
individuals and those in small firms, will disadvantage smaller
savers by reducing choice and competition. (Paragraph 80)
14. Personal savings
in the UK are unacceptably and unsustainably low. We were therefore
concerned about the impact that loss of advisers might have on
saving. The FSA seeks to reassure us in its evidence, but we recommend
that regular reports on the impact of the RDR on adviser levels,
and savings through independent financial advice, should be compiled
by the FSA and its successor. (Paragraph 83)
15. Implementation
of the RDR must be to the benefit of consumers. Consumers will
not benefit if it results in a reduction in choice and competition
through a substantial loss of advisers and firms. Some advisers
have already complied with the requirements of the RDR. We have
no wish to alter those requirements, but do wish to allow more
time for advisers to reach the required standards. Therefore we
recommend that the FSA defer the introduction of the RDR by 12
months, alongside our earlier recommendation to temper the 'cliff-edge'
nature of the reforms to the required qualifications. (Paragraph
84)
European and international issues
16. The
FSA and its successor bodies will always be faced with difficult
decisions over whether to proceed with UK specific legislation
quickly, or wait until things have cleared at a European level.
The FSA though should act wherever possible to remove consumer
detriment in financial services, as it has in this case. (Paragraph
90)
17. We recognise that
passporting (where firms from other countries within the EU conduct
business in the UK) may seem to present an opportunity to some
advisers to counter the implementation of the RDR. However the
evidence provided to us by the FSA repays careful study. It makes
it clear that passporting will only be possible in some areas,
and cannot be used by UK operators as a device: "a firm may
not conduct its business on a cross-border basis if it is doing
so to evade the host state standards". We recommend that
the FSA (and its successor the FCA) undertake regular scrutiny
of operations passporting into the UK within the area of activity
covered by the RDR, and report on action it has taken to limit
this type of activity. (Paragraph 93)
18. We note the concerns
of certain firms that the RDR may have a deleterious impact on
their ability to provide a full service to High Net Worth individuals
from their London offices. The FSA has not done specific research
on the RDR's impact on this specialised area of business. We ask
that the FSA as a matter of urgency review the evidence we have
received related to these matters, and the proposed remedies,
and report back to us on both the potential scale of the issue,
and whether modification of the RDR might be possible to mitigate
those concerns. We recommend that the FSA examines how to allow
High Net Worth individuals, as determined by the FSA, the opportunity
to opt out of the requirements of the RDR should they wish. This
should also mean they opt-out of most or all protections that
retail customers receive. (Paragraph 97)
The Financial Conduct Authority
19. We
note the assurances of Mr Sants that the Financial Conduct Authority
will be content with the RDR. However, the FCA will have different
objectives to the FSA, and we therefore recommend that the Treasury,
in response to this Report, state whether it is content that the
RDR as currently constituted would be consistent with the objectives
of the FCA as it currently sees them. (Paragraph 101)
20. The creation of
the FCA provides an opportunity to examine the accountability
mechanisms that will apply under the new system of financial regulation.
We will therefore instigate an inquiry into this including the
mechanisms proposed by the Government, as well as the concerns
raised within the evidence attached to this Report, to decide
whether they are adequate. (Paragraph 104)
21. We note the FSA's
acceptance that there may be a need to look at whether a long-stop
on potential liabilities should be instituted within financial
services. We recommend that the Committee on the Draft Financial
Services Bill, which would create the Financial Conduct Authority,
consider whether there is a compelling case for a long-stop. Our
view is that any long-stop would need to be shown to be clearly
in the interest of consumers. (Paragraph 109)
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