Written evidence submitted by Patricia
Hutchinson, Independent Financial Adviser |
I understand the Treasury Select Committee are asking
for evidence that the RDR will or will not achieve its stated
It is difficult for me as a sole practioner IFA to
argue against the might of the FSA with their massive budgets
to commission research in support of their views. With my limited
resources I have no alternative but to rely on published reports
and to relate my own personal experience and those of my contemporaries.
I don't know if this will count for anything but I feel passionate
enough to state my case.
I presume there can be no dispute that in the UK
we have a massive savings gap which needs urgently to be addressed
if people are not to fall on the state for support.
Twenty five years ago there were 200,000 advisers
and now around 33,000. The savings gap has grown over this period.
The IFA is in the front line to give advice to local
people but IFA numbers have already been decimated. Over the last
five years I personally have received many calls from people looking
for a new IFA since theirs has gone out of business.
Most IFAs advise ordinary people with relatively
simple needs and limited funds.
Aifa's paper "Restoring Trust in Financial Services"
"86% of adults surveyed by YouGov in July
2008 on behalf of AIFA, who had dealings with IFAs in the past
three years, rated their services fairly good or extremely good.
98% of consumers who already have an IFA state
that it is their IFA who they trust most to offer financial advice.
The YouGov research also showed that of the respondents who have
had dealings with different FSis in the past three years, 78%
of those questioned trusted IFAs to treat them fairly"
In September 2010, the FSA's annual consumer confidence
research found 98% of those questioned believed their adviser
had treated them fairly.
Many IFAs are approaching retirement. Talking to
other IFAs my overwhelming impression is that most IFAs, like
me, believe that post RDR they will struggle to get their clients
to pay fees and therefore see no point in spending large amounts
of time and money meeting the new standards as their business
may become unviable.
"A report by Ernst & Young in February
2009 suggests that the combined effect of the
RDR proposals will be to reduce the number of
IFA firms from 16,000 to 10,000 (35-
40%) by 2013.75"
Those who survive will inevitably focus on more profitable
(higher net worth) clients who are more able to pay fees thus
leaving the vast majority of ordinary people without an adviser.
The FSA has not calculated any possible detriment
caused by a decline in adviser numbers although The Association
of Independent Financial Advisers (AIFA) published a Manifesto
for Regulation on 16 Nov 2010 which suggested a 10% drop in adviser
numbers would lead to a £650 million drop in long term business
in one year, a £1.76 billion drop in sales of Oeics and unit
trusts and two million less policies resulting in a reduction
in pension benefits of £4.4 billion.
Conclusion: IFAs are the most trusted of all financial
services institutions and maintaining IFA numbers is crucial to
help address the savings gap.
The FSA has recently stated that mis-selling is costing
consumers around £500 million a year although this figure
has not been quantified. Common sense would suggest that target
driven sales teams are under the most pressure to sell inappropriate
products as they risk losing their job if they fail to hit their
targets but RDR will not affect this culture in bancassurers.
The Financial Ombudsman Service (FOS) complaints
data shows the large bancassurers have the largest number of complaints
and the largest proportion of complaints upheld by FOS. They operate
a target driven sales culture.
Anonymous postings on the Money Marketing website
from bank employees paint this picture:
"I am currently working in a branch for HSBC.
The pressure to sell fee paying accounts along with Mortgages,
Credit Cards, Home and Motor Insurance is VERY stressfull
have resorted to quoting family and friends to try and boost our
"I started my banking career in Natwest and
the pressure to sell to unrealistic targets was unreal. I looked
forward to end of day conference calls with the senior manager
each day where individuals who had not performed to target were
humiliated and bullied in front of other staff. Half the sellers
were off with stress. I moved to Barclays hoping they would treat
customers more fairly and they are no better. The bullying to
sell is not quite as harsh as Natwest but there are new challenges
with Barclays such as cross sales ratios...if you sell one product
to a customer they are not content with that, they want you to
sell three products in one hit".
"I hope something is done to stop bank sales
culture, it is not fair on customers and it is not fair on staff"
Gill Kirk, a former HSBC employee stated during Which?'s
Future of Banking Commission in London on 25 February 2010:
"You had to sell, whether it was for the
customer or not. You'd like to think that if you knew the customer
you could sell them the right product but some people didn't do
that because they were trying to reach a target and they sold
whatever they could."
Customers are today well aware of the opportunity
to complain if they feel they have been mis-sold a product courtesy
of the burgeoning complaints management industry and high profile
advertising by the FSA of consumer's right to complain.
Surely the complaints data published by the Financial
Ombudsman Service (FOS) must give a reliable picture of where
this mis-selling is occurring. The FOS data shows that in 2010
IFAs attracted just 2% of complaints received by the Financial
Ombudsman Service. At the same time Standard & Poors reported
that for 2010 IFAs held 67% of personal finance business yet it
is the IFA numbers which will be decimated by RDR.
Conclusion: Mis-selling occurs overwhelmingly
in organisations with a target driven sales culture but RDR will
allow this to continue.
The FSA believe that better qualifications will result
in better advice yet:
The Legal Complaints Service (LCS) investigates complaints
about solicitors handling over 300 complaints a day: http://www.legalcomplaints.org.uk
and solicitors are highly qualified.
The Solicitors Disciplinary Tribunal's (SDT - a division
of the High Court) Annual Report to April 2007 revealed that up
to 17,000 Solicitors per years were reported to the Law Society
Research by the FSA showed:
"We find no statistically significant correlation
between consumer losses and either the qualifications of advisers
or their competence."
"Surprisingly, we find no relationship between
the share of advisers who passed the qualification exam or the
share of competent advisers and either the amount or the incidence
of consumer loss attributable to the PIF. None of these variables
is statistically significant in any of our estimations. This implies
that we cannot find a relationship between adviser competence
and consumer loss, though given the data limitations this can
in no way be construed as conclusive evidence that such a relationship
does not exist rather, it should be interpreted as indicative
of the weakness of our data."
This is from http://www.fsa.gov.uk/pubs/other/report_predictors.pdf
Firm-level Predictors of Consumer Loss Through Poor
Financial Advice: Independent research for the FSA by Europe Economics
29 April 2008
The FSA says a study conducted in Australia seven
years ago provides the "most relevant" evidence of a
link between higher qualifications and better financial advice.
Yet some of the highest qualified planners made the poorest recommendations.
To my knowledge no other profession requires existing
qualified staff to undertake an additional regime of examinations
and Peter Hamilton, barrister, has said Financial Services and
Markets Act does not give the FSA power to ask an IFA to requalify:
Conclusion: There is no strong evidence to prove
that better qualification = better advice. IFAs are being treated
unfairly compared to other professions in being disqualified by
new qualification requirements.
During 2002, the FSA commissioned Charles River Associates
to undertake a major piece of research to determine whether advisers
were biased towards certain products or providers by commission.
The research reached a number of conclusions as shown
"The advice market is not riddled with bias."
"There is no detectable bias on regular premium
"The role of commission in stimulating the
sale of savings products may be socially beneficial in the current
UK situation, because many customers and potential customers are
thought to make insufficient savings."
"Despite anecdotal evidence that some IFAs
and IFA networks do take advantage of their position to recommend
product that yield them the greatest commission, there is little
sign that this is happening on a large scale."
During 2004, Charles River Associates undertook a
further survey on behalf of the ABI. This research found:
"No evidence of bias being prevalent across
the advice market."
"No evidence of bias to oversell."
"No evidence of provider bias on regular
"We therefore conclude that the problems
of perception are greater than the reality."
One particularly interesting comment related to the
potential for moving from commission-based advice to fee-based
"One of the models tested was a fee based
model - we concluded that there was no evidence that artificially
moving to such a regime, to the exclusion of commission, would
lead to benefits since consumers choosing to pay on a fee basis
do not receive better advice than those opting for a commission
Charles River carried out further FSA research in
January 2009 and this included the statement.
"It is often argued that providers offering
higher commission will buy a market share. We did not find evidence
to support this."
Conclusion: Major research supports the current
regime as providing the best outcomes for consumers.
Currently IFAs are required to offer their clients
the option of paying by fee or commission or a combination. We
disclose the amount of commission we receive to our clients. The
vast majority of my clients choose commission.
Under RDR fees will have to be discussed, agreed
and arranged which will lessen the consumer's appetite to engage.
I have personally spoken to several dozen of my clients about
the new regime and without exception they all stated they
were perfectly happy with things as they are ie that I am paid
by commission but give them an option to pay a fee.
The FSA Australian study suggests those planners
paid a combination of fees and commission gave the best advice.
Read more: http://www.ifaonline.co.uk/professional-adviser/news/1934608/revealed-flaws-oz-study-justify-rdr#ixzz1BHueQhpX
Conclusion: The FSA's own research confirms confirms
fees and commission give the best outcomes.
RDR - INDUSTRY VIEWS
Paul Selly HBOS:
"Bancassurers set to benefit."
Robert Kerr, head of retail distribution
development at Scottish Widows says:
"The RDR could have the unintended consequence
of "disenfranchising" the majority of consumers from
David Hazelton of Tax Incentivised Savings
Association (TISA) 30 October 2009:
"The RDR could be detrimental to consumers
both in terms of higher product charges and an increase in the
cost of advice". He also states Implementation
costs for the RDR are being "seriously underestimated"
and product charges will consequently have to be raised.
Datamonitor research finds:
"The implementation of upfront fees will
widen the advice gap, as some consumers will be underserved. IFAs
who focus on high net worth individuals will leave the lower
end of the market underserved. Consumers are reluctant to pay
upfront fees for advice. Bancassurers can acquire consumers underserved
by other distribution channels, but they must identify an appropriate
advice pricing strategy."
Conclusion: RDR's unintended consequences will
provide poor consumer outcomes.