Financial Services Bill

Memorandum submitted by Association of Independent Financial Advisers (AIFA) (FS 03)

1. The Association of Independent Financial Advisers (AIFA) is the representative body for the IFA profession. There are approximately 16,000 adviser firms that employ 128,000 people, and turnover is estimated at £6.5 billion (including £4.5 billion from life policies, £1 billion from fund management and £1 billion from mortgages and general insurance). Around 20% of the UK population regularly use an IFA, with c45% consulting one from time to time.

2. Membership is voluntary and on a corporate basis. IFAs currently account for around 70% of all financial services transactions in the UK (measured by value). As such, IFAs represent a leading force in the maintenance of a competitive and dynamic retail financial services market.


3. AIFA’s view primarily focus on proposals in relation to the Financial Conduct Authority (FCA) and the key policy issues as relevant to the IFA profession.

4. AIFA support the government’s overall objective to increase financial stability and improve customer protection, but we are increasingly concerned about the overall cost burden placed on our member firms. The current structure and its accountabilities does not provide for an aggregate view of the cost of all regulatory entities on smaller firms. AIFA are fearful that the costs of regulatory reform are not fully recognised and predict ever increasing cost pressures befalling our members as a consequence. An example of this is the FSA have just announced a 15% increase in costs, on top of a 10% increase the previous year. At the same time, the FSCS is taking aggressive action to recover costs after the collapse of Keydata (a regulated firm that offered investment products) from IFAs that sold the firm’s products. FSCS have already levied IFAs collectively, as normal, but in pursuing the individual firms, they are likely to put many out of business. The cumulative impact of the burden of FSA fees and of FSCS recoveries on the IFA sector is further increased by businesses in the sector failing or exiting, as the cost is spread amongst fewer firms. And there is no consideration of the total burden placed on firms.

5. AIFA is concerned that the increasing cost burdens will lead to an increasing number of advisers to leave the industry altogether. This will result in fewer opportunities for consumers to access financial advice and undermine the government’s wider public policy agenda to help consumers re-engage with their long-term financial well-being. Reduced access to advice also translates into reduced access to products and services from which consumers can and have derived significant benefits. AIFA believe there should be a controlled approach to cost increases and full recognition of the affect increasing costs have in regard to the number of firms, the access to advice, competition and consumer choice and cost. At a time when the public sector as a whole have been restricted, the FSA has awarded itself double digit increases to its budget. AIFA suggest that the FCA should have regard to the total cost burden on financial services firms and that future fee rises for the FCA should be limited. This could be achieved through a cap (for example limited to CPI + 1% or to the rate of increase in public spending) with larger increases needing Treasury approval.

6. We are encouraged by the government’s recognition of the required cultural change necessary in order to ensure that the FCA is effective and operates in a manner that commands the respect of both consumers and firms. AIFA believe that in order to ensure this cultural change is achieved and costs are held in check, it is important that the checks and balances to hold the FCA and PRA to account are properly monitored. AIFA believe that it is not adequate to state that a culture of transparency and openness will be adopted, but there needs to be an explicit process setting out how this will be realised and measured. This plan needs to address the leadership, staffing and experience. Success will lie in both the FCA and industry recognising the value of a collaborative arrangement on the basis of open consultation and clear dialogue. This should yield a regulatory dividend for firms if compliance is easier to understand. The new regulator will not be successful if simply seen as an extension of the previous. Measures of a change in approach, attitude and hence effectiveness, should include a rationalisation of the Handbook (a particularly large and complex set of rules that promotes a tick box culture and necessitates a large compliance industry – reducing its length would make a considerable contribution to the government’s Better Regulation agenda) and outcomes for consumers (are they able to access the products they need – has progress been made in improving take up of savings, protection and pensions; do they have confidence in buying financial products; do they have the necessary support to buy the right products for their needs). The cultural change needs to be real, observed and measurable. To ensure this happens, the government should commit to reviewing progress after 2 years.


7. Regulation without the necessary checks and balances can lead to poor decision making and costly mistakes. Historically the regulator has heavily relied on systems of internal self-assessment that have not alwa ys proved adequate. AIFA endorse the FCA’s direct accountability to HMT and welcome the greater role for the National Audit Office (NAO) and Public Accounts Committee in reviewing the new regulatory structures including the responsibility to audit the FSCS, FOS and CFEB. On paper, the FSA operates under a framework of checks and balances, but in practice the FSA has had a free hand. AIFA would like the government to commit to reviewing the effectiveness of the new oversight arrangements within 2 years, to see whether it is delivering the right outcomes for consumers (see above) and serving customers’ interests in facilitating a vibrant financial services sector.

8. We fully support the new statutory footing of the Smaller Business Practitioner Panel, the maintenance of the Practitioner and Consumer Panels, and the creation of the Markets Panel. However, we suggest that the operation of the FCA would be further enhanced by giving the same statutory footing to the Regulatory Decisions Committee (RDC). The RDC was established following an in-depth FSA review recommending that investigation and recommendation functions are carried out separately from the taking of decisions and issuing of statutory notices. The review was commissioned after failures of the previous system. The RDC represent the public interest and are drawn from practitioners and non-practitioners. As the Bill is drafted, there is no check on enforcement activity, as was deemed appropriate by the FSA’s own review. The proposed s.395 only requires the agreement of a person "not directly involved in establishing that evidence". Presumably this could be just a member of the team not involved in the investigation but might be accountable to the enforcing manager. Hardly a material check to the enforcement process. The RDC has played an important function in improving the quality of enforcement actions and its role becomes even more relevant when we consider the proposed FCA pre-emptive powers in relation to warning notices. The Regulatory Decisions Committee should be put on a statutory footing.

FCA Powers

9. While AIFA support the FCA’s requirement to consult on the publication of warning notices, we are concerned about the effect they will have on firms’ and individuals’ reputation. We recognise that early publication may be of benefit to consumers but given that in two-thirds of cases potential enforcement is not publically ‘concluded’, it results in firms bearing an inaccurate unlimited on-going risk of ‘pending action’ without any way of publically confirming their innocence. We think this may severely damage the reputation and financial stability of smaller firms, who will be presumed guilty without investigations being formally concluded. AIFA believe that a more appropriate balance needs to be achieved between early intervention and the treatment of firms. We recommend that the FCA introduce a clear process that will make explicit that firms are exonerated when it is concluded that no wrongdoing has taken place. AIFA believe we need further clarity and reassurance on how these powers will be used and how a fair balance will be achieved.


10. AIFA support the need for a cap on adviser liabilities in-line with other professional advice firms. The lack of a limit on the time a complaint can be brought against an adviser means that firms face an open ended liability. This means that firms, particularly smaller ones, have the burden of making provision within their accounts for the increasing risk of complaints as well as the proposed increases to capital-adequacy provisions. Additionally, it impedes investment, recruitment and retention in the profession, thereby undermining the further development of a sustainable, competitive and accessible advice sector.

11. AIFA believe an appropriate solution would be the introduction of a longstop on the time within which a complaint can be brought. The FSA has long promised to consider the issue of IFA liability and a clear, fair and workable way forward, but this has not been taken forward. We recognise that any limit needs to provide the right balance with consumer interests. We believe that a 15 year limit would strike a balance between the ability of individual customer’s ability to bring a complaint and supporting the development of a sustainable, competitive and accessible advice sector. AIFA research shows support for this from consumers, who favour such a move: 73% of consumers believe that there should be some time limit for advisers to be legally responsible for advice given, of which 23% believe that the responsibility should end when the relationship between the client and IFA ends (YouGov, Sep 2007).

12. AIFA are positive that bringing financial services into line with other advice sectors would also encourage consumers to take more responsibility for their financial well-being, thereby supporting one of the government’s key agenda items. We believe that whilst in some cases additional responsibility may deter consumers, many will engage with financial services with greater attention to their requirements and the value of products and services.


13. AIFA remain concerned regarding the incompatibility between the proposed twin peaks approach separating conduct and prudential regulation, and the European sectoral approach comprising three European Supervisory Authorities each with prudential and conduct remits. AIFA supports the government’s commitment to maintaining clear communication channels with Europe but suggests that a coordinated approach is formalised to prevent significant confusion, duplication and cost inefficiencies.

February 2012

Prepared 24th February 2012