Retail Distribution Review: BSA Comments on the FSA’s Interim Report

The proposals set out in the RDR represent an extreme, idealised, position – as the FSA itself acknowledges – and the FSA expects to move from this position in the next stages of the Review. We acknowledge that the FSA has challenged the industry to make the case for change.

In the BSA’s response to the FSA’s 2007 discussion paper on the RDR, we criticised the FSA’s proposals for suggesting a framework that would be too complicated and create consumer confusion.  The FSA’s revised proposals, as set out in its Interim Report, are certainly much less complicated. However, the revised structure is unnecessarily restrictive and would discard much that is good about existing arrangements. 

Building societies operate a variety of business models in their provision of retail investment products.  Theses include:

• single tied on an execution-only basis
• single-tie with advice
• multi-tied with advice
• guided self-help
• Independent financial advice 

Building societies enjoy high levels of trust from their members and other customers and a higher level of trust than, for example, banks. Societies have long been a natural first port of call for people seeking financial advice and serve, in particular, the mid and lower end of the market, which value the higher service levels that building societies offer compared to their competitors.

Advice
FSA’s proposals, as they stand, would make advice the preserve of those with high net wealth. This is in direct contrast to one of the main stated aims of the RDR – to promote “a market that allows more consumers to have their needs and wants addressed”.

If advice is confined to those IFAs able to offer a whole-of-market service, it will mean, starkly, that customers on middle and lower incomes will not have access to financial advice. A high proportion of people in these income groups will be those who are less financially literate and have less confidence about selecting financial products that meet their needs. As a result, fewer people in these groups can be expected to make adequate provision for long term saving and necessary protection products.

One of the FSA’s stated aims for the RDR is to engender “standards of professionalism that inspire consumer confidence and build trust”. It is difficult to understand how dramatically reducing the availability of advice can inspire confidence and trust.

Whilst guided self help arrangements of the kind described in FSA’s Interim Report have a part to play in assisting consumers to come to informed decisions about their financial needs, these work best for customers who have a degree of familiarity with retail investment and savings products. There is, we suggest, a much larger group of consumers for whom advice is necessary and in the absence of a firm recommendation from a trusted source, such consumers are unlikely to have the confidence to take the plunge and make adequate provision for their financial needs.

Sales
FSA’s suggestion to label as ‘sales’ any process that leads to a purchase of a retail investment product which does not involve full, whole-of-market advice is, in the BSA’s view, flawed for a number of reasons.

The FSA is proposing that no advice can be given by anyone other than whole-of-market advisers. All other intermediaries are to be deemed salesmen. Sales will be capable of being commission remunerated, but advisers may not be. FSA plans a ban on provider-determined remuneration for advisers. The prevalent model in the building society sector is for the building society to distribute the retail investment products of a single product provider. In many cases, advisers in building society branches are employed directly by the product provider itself. This model provides no scope for commission-driven provider bias by building societies. To the extent that there may be product bias – eg driven by differential commission levels associated with different investment products, this should be capable of being dealt with by conduct of business requirements relating to commission-remunerated business.

Higher professional standards – “for some”
Demand for whole-of-market independent advice is necessarily always going to be limited to the top end of the market – we support the FSA’s suggestion that all such advisers be qualified to the highest levels – ie QCA Level 4. But it is unrealistic to expect that this will ever be more than a niche market. For the vast majority of financial advisers, ie those who work as IFAs with limited product provider panels, and those employed by firms that operate on a multi or single-tied basis, there does not appear to be a place for their skills in the landscape envisaged by FSA. 

Whereas the FSA envisages advisers are to be required to be highly qualified, the Interim Report is silent on the qualifications required of sales staff – from which we infer that such staff will need only minimal qualifications, if any. Being precluded from giving advice, they will no longer have a need for the skills and qualifications they have gained in their careers to date. As such, FSA’s plans imply widespread de-skilling.  We fail to see how this can be in the best interests of consumers. 

It will also raise compliance issues for institutions – eg if staff who have been trained to give advice are then forbidden in the post-RDR world from doing so, that will create issues of confusion. It will be a management challenge for the firms which employ erstwhile advisers to ensure they stick within their narrower brief and do not stray into giving the advice they will no longer be unauthorised to provide.

Moreover, we question how trust will be engendered by post-RDR sales staff who will not be allowed to respond to customers’ questions with anything that comes close to providing advice. This will likely be a particular constraint for building societies - as trusted providers of advice, including independent advice, to those on middle and lower incomes. In the structure envisaged by the FSA, people on middle and lower incomes seeking help in understanding which financial products meet their needs may well be better served by the new money guidance service which will be outside FSA regulation, than by FSA-regulated ‘sales’ where advice is banned. This seems to us a perverse outcome. 

Ombudsman risk

The BSA’s submission in response to the FSA’s 2007 Discussion Paper flagged the need to address Ombudsman risk in the post-RDR world: ie the risk that FOS would apply unrealistic hindsight when assessing cases. FSA acknowledges this risk in its Interim Report and says it will be exploring with FOS how it might be addressed.  It is essential in regard to the RDR that a clear understanding is reached with the Ombudsman about the future handling of complaints relating to retail investment business.  Of particular concern is the handling of cases relating to a “sale” where the consumer perceives they have received “advice”. 

The way forward

Having put forward - what the regulator itself acknowledges is – an idealised vision in the Interim Report,  the FSA now needs to think more pragmatically about what is in the best interests of consumers and what is achievable.

This should include:

• A broader definition of adviser, coupled with greater clarity around the status of advisers and enhanced transparency of adviser remuneration.
  
• Recognition that in a single-tie arrangement there is no commission-driven provider bias: to the extent that there may be commission-driven bias between products in this model, this could be addressed via conduct of business regulation. But it should not involve a ban on advice by single-tied intermediaries
  
• Revisiting the ‘primary advice’ proposals aired in last year’s FSA discussion paper – as we noted in our response to the FSA  DP, Primary Advice, perhaps involving a range of simplified investment products, could be made to work and building societies are well placed to play their part in this.
  
• Lessons learned from mortgage regulation:  MCOB provides a useful read-across: under MCOB, firms may either provide information on mortgages or give advice. Most building societies provide advice or information on their own product ranges.  In building societies and banks mortgages are provided alongside investment products. There are clearly synergies between the two and it would make sense, from the perspective of customers - as well as lenders - for there to be an alignment of regulatory requirements for retail investment products and mortgages, and there would appear to be a strong case for retail investment regulation to follow that for mortgages.
  
• Raising professional standards. Rather than the de-skilling of existing mass-market advisers implied by FSA’s proposals, it would surely be in customers’ best interests for existing advisers to be encouraged to meet higher standards of competence and professionalism.  This, we suggest, would be much more in tune with the original aims of the RDR than are the ideas aired in the Interim Report.  In this way, customers’ needs for advice on retail investments could be met and they need not be left to their own devices, as implied by the Interim Report 

We note that the FSA has commissioned consumer research to inform the further stages of the Review. This is an important piece of work.  Consumer input has been largely absent from the early stages of the Review and it is essential that the views of consumers are factored into the Review’s next phases.