FSA retail distribution review

scotsgirl_3

Hi all,

I'll declare my reasoning/interests upfront - I'm a final year student working on my dissertation topic. I do also work for a major pension provider, although this work is nothing to do with them - it just means I know a bit about pensions and have an interest in the area.

I'm looking for some opinions, thoughts, comments, complaints etc, regarding the forthcoming RDR - in particular with regard to pensions. The below aren't so much specific questions, more discussion openers!

So, what do you think of the RDR? Good, bad, indifferent? What flaws are jumping out at you? Potential unforeseen consequences?

Do you think this is where resources need to be concentrated, or are there bigger financial consumer abuse issues out there that should be prioritised.

How much of this do you think is driven by the media and ropey reporting - Yes, Panorama, I mean YOU!

I'm particularly interested in the views of the advisors who hang out here, although everyone is very welcome!

I do have a lot of thoughts of my own - but I'm trying to keep an open mind and consider view points I haven't thought about.

Thanks in advance all

dunstonh

So, what do you think of the RDR? Good, bad, indifferent?

Indifferent really as I already work to that basis, as do many IFAs. It will get rid of a lot of old school advisers who have very close client relationships but perhaps their knowledge is old school as well.

What flaws are jumping out at you?

It will push more people towards the banks which does no-one any favours (as most banks seem to be going with restricted advice). There will be less IFAs as they are typically older and many of those in their 50s are calling it a day.

Potential unforeseen consequences?

Smaller transactions are likely to be more expensive. Whilst commission had its flaws, it did allow for cross subsidy.

In future, people used to being able to phone or email their IFA to ask an opinion or question or do a bit of servicing may have to get used to being charged for that explicitly whereas in the past it would have been done at no cost (assuming transactional clients here and not servicing).

Do you think this is where resources need to be concentrated, or are there bigger financial consumer abuse issues out there that should be prioritised.

The FSA have completely missed the problem. IFAs have under 2% of complaints at the FOS yet they are the main distribution channel for most regulated retail products. Banks have over half the complaints. The RDR effects all types of adviser but surely the FSA should focus on where the complaints are and look at what is good and try to turn bad into good.

The FSA staff tend to be less qualified and experienced than the advisers they are regulating. I know a firm local to me that had an FSA thematic review on pension switching. Three graduates turned up without any financial services background and started making judgements on the advice without actually knowing most of the rules other than RU64. The FSA doesnt have the staff with the skills or knowledge and how can it be expected to regulate an industry that is more qualified and experienced than the regulator.

How much of this do you think is driven by the media and ropey reporting - Yes, Panorama, I mean YOU!

There is plenty for the media to report on if they really wanted to dig into things. However, they tend to find issues that either do not exist in real life or only apply to a tiny minority. They then blow it up out of all proportion and scaremonger the majority who will never have the problems being reported.

Some other quick points....
1 - increased qualifications - no problem with that but its an expensive and pointless exercise for many as once you pass the exam, much of the extra knowledge gained will be lost as its not required for the majority of people in the real world. However, it will ensure the lower skilled advisers either have to come up to scratch or get pushed out.

2 - Commission being abolished. Not a bad thing. However, its not as big an issue as you might suspect as many products have been explicitly charged for a while now. The biggest problem is the lack of factoring. An establishment charge should be allowed for regular premiums as long as there is no additional charge for the client and the period is not excessive (say 12-36 months). If you dont have the establishment charge, then you will be asking people to pay up front. Many people wont and will end up doing nothing.

3 - it fails to encourage saving. Partly covered in previous comment. Whilst it is an advice industry, some products need a greater push on the public than others. i.e. you need the disturbance to show what could happen. If the adviser is paid the same irrespective of premium paid then they may just accept what the person says and not put pressure on them to pay more.

4 - This is already happening but it will increase. Transactional clients are likely to end up with a more basic level of recommendation than servicing clients.

Loughton_Monkey

I am not an advisor, and so will restrict my observations. I generally support payment of fees rather than commission. But my biggest fear relates to one of the three objectioves:

"To improve the clarity with which firms describe their products to consumers."

Now our governments have a 'good' track record of setting out with an objective that most people support, and then end up doing the very reverse and c*cking the whole thing up. And I can see very clearly that this is where they are going to slip up.

Just look at food labelling. Years ago, many people generally understood (broadly) a balanced diet, knowing quite well what's fattening or not etc. Relatively few people 'demanded' food labelling but our Nanny State insisted. Now we have packaging with so much [EMAIL="!!!!"]cr*p[/EMAIL] on it that was supposed to inform consumers, but actually ended up confusing them more. Nonetheless, they are still continuing full steam down that road because they know better than us.

In fact regulators have already 'tried' this. Reduction in yields? Key Features Documents? Commission disclosure, etc. These generally have served to confused the customer, when their intention was to do exactly the reverse. Then they will have colour coding. Traffic lights. Disclosure of detailed share dealing costs, stock borrowing costs, actuarial advice costs inherent within the management charges will become compulsory.

In fact I just cringe at having to read through piles of paper to see whether Legal & General spends so wisely on toilet paper as to get a 'green light' whereas Invesco might earn an "Amber Light" because it has a rather questionable accruals policy when buying paper clips (see appendix 186 for accruals policy, also available in Braille and Urdu on request....)

Anyway, I await with interest this superb 'clarity'.

scotsgirl_3

Thank you both for such detailed answers.

Loughton, I have to agree regarding the "clarity" aspect - it's getting ridiculous, some of the things we have had to write in new illustrations etc are just crazy. As you mention, they've tried this already - it was only a couple of years ago that they introduced massive new rules which meant companies had to completely redesign their documentation and sometimes products. So are they ever going to be happy!? There was also a survey done fairly recently, I'll need to try and track if down, which included figures for how many people actually read and understand documents like product illustrations, and the figures were scarily small.

Although it does make you despair a bit when shows many people trust - e.g. panorama - get it quite so wrong, using b.s. numbers, comparing values 40 years in the future with money paid in today, and saying that effect of deductions is the same amount as charges. At least, I think that's what they did, they didn't exactly provide much explanation but some quick calcs suggest that was what they were on about.

Dunston - thanks for such a comprehensive reply, I really appreciate it! Reading through some of the RDR I do kind of wonder why. I agree that many customers don't realise how much commission they are paying, although that in itself can be frustrating as I know how upfront we are about it now, and I'd imagine most of the other big players are the same. I can't help thinking the same people who don't read their illustrations will be the same people who don't pay attention to the IFA fee documents allowing advisor charging to be removed from the product. It seems to be like they are trying to tackle the more dishonest parts of the sector, yet if I was looking to, I could see plenty ways that the cowboys will still get away with murder. The wonderful Panorama example of the blind man for eg - to they really think calling it "advisor charging" and making them detail it on a different piece of paper will stop folk like that?!

The qualifications sound good up front, but like you say there is a risk of pushing older, more experienced people out who maybe can't face the prospect of retrianing at 50-odd, but may offer truly excellent service. Are we likely to see their business being hoovered up by bigger companies - thinking people like Tower here who's reputation isn't great.

In the case of more simle products at least, do you think the commission offered by product providers actually affects recomendation that significantly now? I haven't yet looked in great depth at the commission offered by different firms, but I know that in our case, whilst the max commission available is quite high on some (new)products, very very very few people actually take these maximums - historically it may have made a difference but i wonder now how much it influences a good advisor who will probably be able to get their required level of commission from almost every provider.

Do you think this is going to cause a reduction in take up for group schemes if each employee is faced with having to pay for advice upfront? Most hpeople I know have joined group schemes without giving it much thougt, either taking the employers contributions, or paying in a small amount which will often be matched, and not paying a huge amount of attention to the investments. OK, it's not ideal, but disinterested saving is surely better than no saving at all. Or are they going for the GPPs to push people towards NEST?

Loughton_Monkey

Maybe they should turn it round a bit.

"License to buy".

Us public simply take exams, with different steps allowing us to do different things. No license? Then you are allowed one Current Account only. Level 1, can get Cash Isa and Credit Card. Level 2, S&S ISA and can take out a mortgage.......

By Level 15, we will be deemed competent to understand Unit Pricing, perhaps buy a SIPP, and even understand how to get the £100 Reward from Santander!

sandsy

I think the increase in qualifications is a good thing. Advisers like to think of themselves as professionals but currently, the requirement is only the equivalent of A-level. Even the new Level 4 is only the equivalent of 1st year university. I don't know of any other professional which requires a qualification that is rated less than degree level. I know people with many years experience of advising are up in arms about it but without qualifications, no-one knows if they have the requisite knowledge or if their 30 years of experience is actually just 1 year's experience 30 times over!

The impact on pensions specifically is difficult to predict. I think a key driver of RDR was persistency levels and churning of policies for commission and nowhere is this more pronounced than in pensions. More than half of all regular premium pensions policies are non-premium paying or have been transferred to another provider within 4 years of commencement - and IFA policies actually have slightly worse experience than those sold by tied advisers:

http://www.fsa.gov.uk/pubs/other/Persistency_2009.pdf

The FSA's review on pensions switching supported this as a significant proportion of switches were identified as being unsuitable.

Post 2012, for regular premium policies, there will still be an option to spread the cost of advice on regular premium policies. The key thing is the extent to which advisers can manage their own income flows in order to be able to absorb the delayed income stream if they offer this as an option. I guess the key thing will be the extent, if any, to which consumers engage with paying fees more than they did with commissions.

I disagree that the banks are hugely advantaged. They have to offer adviser charging in exactly the same way as independent advisers. And their advisers have to be equally qualified - which I imagine must be a huge headache for them as they haven't exactly chosen them in the past for their ability to pass Level 4 exams.

As far as I know, the FSA haven't made any pronouncements on what disclosure will look like post-RDR. I think the bigger concern is whether pensions will be included in the European Commission's PRIPS review of disclosures.

scotsgirl_3

I don't think we'll ever understand how to get money or service out of Santander!!!

To an extent though, there is a truth in what you say - I think a lot of this tinkering is trying to counteract a lack of knowledge and understanding across the wider public. Problem is, brutally, a lot of customers are kind of lazy - not the majority here who are normally trying to learn - and just want to be told exactly what to do and then never touch their products again, and that's unlikely to lead to the best possible outcome. I've done finance based contact centre work, and the number of customer who would say " I didn't know my APR was x%, I didn't agree to that" when the APR was written in bold directly agove the box they put their signature in..............

I don't see how you can ever regulate for that. But they seem to be trying!

scotsgirl_3

sandsy wrote: »

I think the increase in qualifications is a good thing. Advisers like to think of themselves as professionals but currently, the requirement is only the equivalent of A-level. Even the new Level 4 is only the equivalent of 1st year university. I don't know of any other professional which requires a qualification that is rated less than degree level. I know people with many years experience of advising are up in arms about it but without qualifications, no-one knows if they have the requisite knowledge or if their 30 years of experience is actually just 1 year's experience 30 times over!

The impact on pensions specifically is difficult to predict. I think a key driver of RDR was persistency levels and churning of policies for commission and nowhere is this more pronounced than in pensions. More than half of all regular premium pensions policies are non-premium paying or have been transferred to another provider within 4 years of commencement - and IFA policies actually have slightly worse experience than those sold by tied advisers:

http://www.fsa.gov.uk/pubs/other/Persistency_2009.pdf

The FSA's review on pensions switching supported this as a significant proportion of switches were identified as being unsuitable.

Post 2012, for regular premium policies, there will still be an option to spread the cost of advice on regular premium policies. The key thing is the extent to which advisers can manage their own income flows in order to be able to absorb the delayed income stream if they offer this as an option. I guess the key thing will be the extent, if any, to which consumers engage with paying fees more than they did with commissions.

I disagree that the banks are hugely advantaged. They have to offer adviser charging in exactly the same way as independent advisers. And their advisers have to be equally qualified - which I imagine must be a huge headache for them as they haven't exactly chosen them in the past for their ability to pass Level 4 exams.

As far as I know, the FSA haven't made any pronouncements on what disclosure will look like post-RDR. I think the bigger concern is whether pensions will be included in the European Commission's PRIPS review of disclosures.

I can't help wondering what weird and wonderful ways the banks WILL find to get around this though. "advisors" not charging fees, but being paid a "performance related bonus" perhaps with the costs absorbed and hidden so far in to the charges that they can never really prove they exist? Or charging a minimal fee for conducting a "review" that doesn't reflect the costs. I'm very cynical regarding banks sales approaches. I worked for a large high street bank in an outbound sales department and their techniques were disgraceful - you'd call customers, pretending that you couldn't see what products they had when and add really leading questions to get answers from them. The reality was, you were sitting looking at their account, and were trained to go through their current accounts to see where they spent money so you could target the information you gave about the products. twas horrid!

Pension switching is definitely an issue in the less honest sectors - the question is, as you say, whether customers will engage more actively with fees and ask questions, or whether the fact it can be invoiced back to the plan will stop them noticing!

sandsy

scotsgirl wrote: »

I can't help wondering what weird and wonderful ways the banks WILL find to get around this though. "advisors" not charging fees, but being paid a "performance related bonus" perhaps with the costs absorbed and hidden so far in to the charges that they can never really prove they exist? Or charging a minimal fee for conducting a "review" that doesn't reflect the costs. I'm very cynical regarding banks sales approaches.

It's actually worth having a look at the detailed rule requirements for banks and how they have to come up with their advice fees:

6.1A.9
R
If the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]firm [/FONT][/FONT]or its [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]associate [/FONT][/FONT]is the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]retail investment product [/FONT][/FONT]provider, the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]firm [/FONT][/FONT]must ensure that the level of its [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]adviser charges [/FONT][/FONT]is at least reasonably representative of the services associated with making the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]personal recommendation [/FONT][/FONT](and related services).
6.1A.10
G
An [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]adviser charge [/FONT][/FONT]is likely to be reasonably representative of the services associated with making the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]personal recommendation [/FONT][/FONT]if:
(1)
the expected long term costs associated with making a [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]personal recommendation [/FONT][/FONT]and distributing the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]retail investment product [/FONT][/FONT]do not include the costs associated with manufacturing and administering the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]retail investment product[/FONT][/FONT];
(2)
the allocation of costs and profit to [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]adviser charges [/FONT][/FONT]and product charges is such that any cross-subsidisation is not significant in the long term; and
(3)
were the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]personal recommendation [/FONT][/FONT]and any related services to be provided by an unconnected [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]firm[/FONT][/FONT], the level of [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]adviser charges [/FONT][/FONT]would be appropriate in the context of the service being provided by the [FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]firm. [/FONT][/FONT]


Obviously, it depends on how the FSA (or I guess the new CPMA by then!) supervise it but I think it will be quite difficult for banks to get away with advice fees that are much different to those in the independent sector unless they can justify huge economies of scale.

The difference with the independent sector is how the bank advisers get paid as, effectively, they could still be paid commission even though their clients are charged fees in the same way. But isn't there some other investigation going on into banking remuneration?

dunstonh

I disagree that the banks are hugely advantaged. They have to offer adviser charging in exactly the same way as independent advisers. And their advisers have to be equally qualified - which I imagine must be a huge headache for them as they haven't exactly chosen them in the past for their ability to pass Level 4 exams.

The banks can offer indemnity. The FSA has confirmed that as long as its not the product provider offering indemnity, then a another party can. i.e. the insurance company that the bank offers cant offer it but the bank can (or network).

Also, the restricted advice method allows for lower standards.

sandsy

dunstonh wrote: »

The banks can offer indemnity. The FSA has confirmed that as long as its not the product provider offering indemnity, then a another party can. i.e. the insurance company that the bank offers cant offer it but the bank can (or network).

Yes, the banks can pay their own advisers on an upfront basis. But they still have to follow the adviser charging rules for customers' payments. So effectively the bank is using its own money to advance payments to individual advisers but that doesn't alter the charging experience for the customer relative to going to an IFA?

dunstonh wrote: »

Also, the restricted advice method allows for lower standards.

In what way?