The Treasury Select Committee has this week published the evidence they received from independent financial advisers and other interested parties.
They called for this in December, calling for written evidence on “whether the RDR will achieve the stated outcomes and whether the outcomes could be achieved in other, potentially better, ways”.
Informed Choice executive director Nick Bamford submitted the following evidence, which we can now publish here:
We are pleased to have the opportunity to submit our evidence to the Treasury Select Committee.
The Retail Distribution Review (RDR) is likely to bring about great change to the way in which the UK consumer of financial services interacts with the retail financial services sector in general and the independent financial adviser community in particular.
We would be available to submit oral evidence to the committee if asked to do so.
About Informed Choice Ltd
Informed Choice Ltd is a firm of Chartered Financial Planners based in Cranleigh, Surrey. It is a family owned and managed business and employs (including the Director Shareholders) 12 staff. Executive Director, Nick Bamford, the author of this evidence, is a Chartered Financial Planner. He has an honours degree in Financial Services and served for four years on the board of the Society of Financial Advisers (SOFA) and as Chairman for two years.
Executive Summary
• One of the key changes brought about by the RDR is the abolition of commission in respect of savings, pensions and investment products to be replaced by “Adviser Charging”. The Committee may hear evidence that Adviser Charging is about the consumer paying fees and that is incorrect. Adviser Charging can be paid from a financial product in the same way as commission currently is paid, albeit without the remuneration being funded from future product charges. Adviser Charging is transparent and a very viable alternative to the commission system.
• The RDR introduces a requirement that advisers are qualified to QCF Level 4 by the start of 2013. The current benchmark entry level of formal qualification is QCF Level 3. In the highly technically complex world in which financial advisers operate, Level 4 should be accepted as a minimum qualification level. Level 3 is simply inadequate in ensuring competent advice to the consumer.
• It is argued that the independent financial adviser is poorly treated under the RDR by comparison with the Banking sector. In our opinion this is incorrect; the independent financial adviser and the adviser working at a bank are treated the same under the RDR proposals.
Retail Distribution Review our evidence
Adviser Charging
Commission is an amount determined by product providers and paid to advisers to recommend and implement their products. Whilst commission has to be disclosed to the consumer by the intermediary, it seems inappropriate that the price paid to an independent intermediary acting on behalf of their client should be determined by a product provider.
It should also be noted that commission is not a “no cost to the consumer” option. Commission costs to the consumer are borne by charges paid by the consumer for their financial product. Commission, despite disclosure rules, can be opaque and poorly understood by the consumer.
Adviser Charging is a price determined by agreement between the consumer and the intermediary. Adviser Charging when coupled with a clear statement of needs and wants and a documented engagement for services delivers transparency to the consumer and allows the consumer to determine value for money in a competitive market place.
Despite claims to the contrary, the abolition of commission does not mean that the consumer has to pay a fee directly to the intermediary. The agreed price for services can still be paid from the monies invested in a financial product. This may well be the most effective way for a consumer to pay both from a taxation perspective and from a cash-flow perspective but let me reiterate it is not about the client having to pay a fee for services.
It therefore follows that the intermediary who offers a bundled advice/implementation/commission remuneration service now can after the RDR offer a bundled advice/implementation/adviser charging service. This means that the availability of advice from the independent financial adviser does not have to be reduced as a result of the implementation of the RDR.
The distinction between the two is simply that of greater transparency to the consumer’s benefit in respect of adviser charging.
Level 4 Qualification
The current benchmark level for qualifications is at QCF Level 3. The RDR proposes to introduce a minimum level of qualification of QCF Level 4. The claim is made that the timescale available to existing independent financial advisers to achieve this new level is two years (to the start of 2013) but we would argue that the Level 3 qualification requirement has been in existence since 1995 and thus the time frame to achieve the incremental increase to Level 4 has been closer to 17 years by the start of 2013.
Some financial advisers chose to improve their qualification levels for the benefit of their clients and others chose not to.
It is often claimed that the experience of an IFA is more important than the level of their qualifications. This is we believe disingenuous. It is possible for an adviser to have a significant number of years of experience and still not have the relevant experience to advise a consumer on a technically complex aspect of their financial wellbeing.
For example, an adviser might have 25 years or more of experience advising consumers about making good choices about their mortgage product. This experience would have little or no value in advising a consumer about their “at retirement” options and choices.
Equally though, qualifications on their own at or above Level 4 may not make for a competent adviser. Our contention is that an adviser, to be deemed competent, needs both relevant experience and relevant qualifications. Level 3 is simply no longer a relevant qualification level. It must surely be only hygiene factors that the adviser advises with skill and integrity
The challenge is then how to determine if the experience of the adviser is truly relevant? The professional bodies within the financial services sector are already working on alternative assessment approaches that will allow advisers claiming relevant experience to bring that experience to bear by presenting a case study to a suitably qualified and experienced panel.
This alternative assessment approach means that those advisers who feel that formal examination of their knowledge is inappropriate have a viable alternative to demonstrate that they meet the required standards.
The suggestion that age is a barrier to the attainment of Level 4 qualifications through formal study and examination or through an alternative assessment approach is quite frankly offensive.
Summary
The RDR is very much about improving the delivery of financial advice and products to the UK consumer. It is challenging for some advisers to comply with the required changes but this is not a valid reason for delaying or significantly changing its implementation.
