Out-Law News 4 min. read
21 May 2009, 5:25 pm
But many in the industry do not believe the changes will improve public confidence or deliver better outcomes for consumers.
In June the Financial Services Authority (FSA) will publish draft rules that will fundamentally change the way retail investment products are sold in the UK.
The proposed reforms are the last stage in the FSA's Retail Distribution Review (RDR), which aims to address low levels of consumer trust in the retail investment market by modernising the sector, raising professional standards and providing fairer treatment for consumers. Increasing public confidence will, it is hoped, encourage more people to save for their retirement.
But a survey of senior executives from 130 organisations involved in the investment, life and pensions industry suggests a large proportion of the market believes the FSA will fail in its original objectives.
Only 20% of respondents agreed the proposals would increase customer confidence. A large majority (77%) thought the proposals would not encourage more people to save for retirement.
The survey was commissioned by Pinsent Masons LLP, the law firm behind OUT-LAW.COM, and included respondents from independent financial advisers (IFAs), life companies, fund management companies, friendly societies and wrap platform companies, which provide an online service for viewing and managing investment portfolios.
One of the aims of the RDR is to make it easier for consumers to understand whether or not the advice they receive is independent.
Under the FSA's proposals, independent financial advisers would be required to provide unbiased, unrestricted advice based on a comprehensive and fair analysis of relevant markets.
Anything other than independent advice would come under the umbrella of "sales services", which would cover a spectrum of services provisionally labelled non-independent advice, guided sales (advised), guided sales (non advised) and execution-only sales.
The new regime would be backed up by Money Guidance, the proposed national service intended to provide consumers with impartial information and guidance on money matters.
80% of respondents to the survey approved of the new definition of independent advice. But there was much less support for the proposed categories of sales services.
Nearly half of respondents found the labels for the different services (other than execution-only sales) confusing. Around 90% thought the terms would not be clear to the public, with most confusion likely to be caused by the concept of "guided" sales.
And although most respondents (78%) supported the idea of Money Guidance, only 22% said their organisation would be providing Money Guidance services.
Another key proposal is the introduction of "adviser charging". Instead of agreeing a commission with the product provider, advisers would be required to set their charges and disclose them clearly to their clients before providing any advice. These charges would be disclosed separately from the cost of the product itself.
The aim is to remove any influence product providers might have over the amount financial advisers earn for selling their products.
Under the proposals, charges could be paid in a lump sum or by a series of payments over time. Since many consumers will not want, or be able, to pay up front, the FSA will allow the product provider to offer to deduct the charges from the investment and pay it to the adviser
There was a mixed response in the survey as to whether adviser charging would increase consumers' level of trust in the industry. All sections of the market, however, from small IFAs to the larger companies, expect the new regime to result in a significant decrease in demand for independent advice.
Many felt that consumers will not want to pay for something which up until now they have regarded as free. Three quarters of respondents agreed with the contention that, post RDR, independent advice would only be affordable by and available to the most affluent in society.
Overall, most respondents (68%) expected banks to be among the biggest winners under the new regime. 59% thought that IFA's – probably the strongest critics of the proposals – would be the biggest losers.
But Bruno Geiringer, a life insurance specialist at Pinsent Masons, was more optimistic about the future of the independent adviser.
"IFAs have proved themselves incredibly resilient and, despite the results of the survey, I believe they will eventually prosper under the new regime," he said.
"They will still hold a commanding position in the advice market post-RDR and with higher professional standards and qualifications they will be able to develop that position in a far more sustainable way than today."
The survey showed strong support for the FSA's proposal to create a professional standards board for organisations in the retail investment market.
96% of respondents were in favour of minimum professional qualifications for those providing financial advice. 97% agreed that there should be a system of professional standards and qualifications similar to that in other professions such as law and accountancy.
Geiringer sees raising standards as central to the issue of public trust.
"With better qualifications, increased capital adequacy and a professional standards board to monitor ethical behaviour and discipline offenders, there is every chance that trust and confidence in the industry will increase," he said. "One of the key issues in raising professional standards, however, will be the cost of meeting the new requirements."
Looking ahead, Geiringer warned that life companies will need to push ahead with preparing for the new regime.
"Life companies need to decide very quickly how to engage with customers and win new business in the absence of being able to pay commission to attract sales", he said.
"I anticipate a scramble for new distribution channels in the near future, whether it be via direct sales, platforms, an agency sales force or partnerships with receptive client banks. This is certainly an exciting time for the life industry to reinvent itself and meet customers' needs."