Retail Distribution Review - Treasury Contents

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 consumer outcomes.

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" published reports:

"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…….We have resorted to quoting family and friends to try and boost our branch performance".

"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: 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 for action.

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

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 below:

"The advice market is not riddled with bias."

"There is no detectable bias on regular premium products."

"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 premium products."

"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 advice:

"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 basis."

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:

Conclusion: The FSA's own research confirms confirms fees and commission give the best outcomes.


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 financial advice."

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.

January 2011

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Prepared 16 July 2011