17Janaury 2011

Retail Distribution Review- response to call for written evidence from the Treasury Select Committee

  1. I am writing in response to this call for evidence on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Highlight our concern that FSA’s current approach to the RDR will reduce consumer access to advice and add unnecessary complexity;
  • Stress that FSA’s approach is not consistent with the original ambitions and cannot now be effectively delivered by 31 December 2012.
  1. The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies. Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.
  1. AFM currently has 57 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £80 billion.

Missed opportunity

  1. Theterms of the call for written evidence confirm it is focused on whether the RDR will achieve the stated outcomes[1] and whether the outcomes could be achieved in other, potentially better, ways.
  1. To summarise our position, we believe the RDR will only go some way to achieve these outcomes. RDR will result in greater clarity on the cost of advice (versus the cost of products); independent financial advisers, who have always sought equal recognition with other professional advisers will benefit from the higher reputational standards that better qualifications imply; and consumers will be better informed about the nature of advice.
  1. However we believe the RDR is a missed opportunity to fully and finally address areas of potential failure in the retail market. Theoutcomes that FSA’s Chief Executive presented to the Committee were not those stated at the review’s outset[2]. The revised outcomes have therefore been developed with the benefit of hindsight, and fit the emerging construction of the RDR rather better than they do the aim of achieving good outcomes for consumers. In our view the outcomes FSA should have sought to achieve were that post-RDR financial advice would be readily available to all consumers, and that consumers would have been better informed and better able to purchase investment products confidently- this is much closer to the originally stated outcomes.

The failure of the FSA approach

  1. In our assessment, FSA should reinstate the original stated aims of this project. As it is, the FSA’s revisedoutcomes are achieved even if the result of the RDR is that the majority of consumers are unable to access financial advice, and as a result unable to buy the (investment) products they need. Indeed we are concerned that this is very likely to be the result of the RDR, as this economic description demonstrates:
  1. FSA accepts that post-RDR the number of fully qualified investment advisers will fall;
  2. In any market where there is scarce supply, prices tend to increase;
  3. As a result the supply curve will move upwards, meaning that in future the price (ie adviser charges) rises, and the quantity purchased/ demand falls;
  1. Where this happens, the reduced number of IFAs will spend all or most of their time servicing the needs of the most affluent, who are best able to absorb the higher costs of advice;
  2. So to the extent that the RDR offers better protection to consumers, the advantages will be enjoyed mainly by the most affluent who, it can reasonably be argued, need that protection less.

Mass market problems

  1. The majority of consumers, including vulnerable groups, will have less access to independent advice and their needs are likely to be unmet, or they will need to purchase products differently. With no independent advice available to them this implies a combination of:
  • non-advised purchases, where the consumer identifies their own needs and takes on all the risk of assessing the suitability of the product;
  • non-advised purchases supported by generic advice, which may help to identify broad needs and eliminate unsuitable product types; and
  • purchases conducted wholly or partly with the benefit of ‘simplified’ advice.
  1. Members of AFM are already active in the first two of these, with many mutual providers having built strong businesses on the back of directly marketed or introduced business. However for this to be successful the provider needs to invest heavily in brand building and support tools; in addition there is a threat that new European proposals (in PRIPS and MiFID) will prevent consumers from purchasing many products on a non-advised basis.
  1. Furthermore, direct marketing in particular works most effectively with financially confident consumers, and FSA’s research indicates that there is a significant minority of the population that lack the skills, confidence and knowledge to purchase products without more hands-on guidance.
  1. Most large mutuals conduct much of their business nowadays through independent advisers. We are concerned that the supply chain post-RDR will be constrained by a fall in the availability of advisers, and providers will need to consider other routes to the market to maintain their market ambitions, or else explore different markets.

One size does not fit all

  1. As mutual organisations that typically develop products for the mass market and for the financially less advantaged, our greatest concern is that FSA has so far done very little to articulate how people other than wealthy investors might gain access to advice. There has been some discussion of “simplified advice”, but the basis by which this will be differentiated from full advice has not yet been defined.
  1. FSA has indicated that even where the rules permit “simplified advice” there will be no reduction in the qualifications required for the adviser. In our view this is wrong- advisers that are selling a single product to a clearly defined need do not need to be fully qualified.
  1. When the previous government introduced the concept of “Sandler” products, FSA was charged with developing a regime for basic advice to accompany simple products. The resulting basic advice rules have proved difficult to implement and for the most part companies have not entered this market. We envisage similar problems with simplified advice unless there is a clear ambition to identify ways of helping to deliver adequate advice in a cost effective manner.
  1. FSA has indicated that some firms might need to accept that their current distribution methods, customer base and product pricing will need to change post-RDR. However FSA’s cost-benefit case should accept that this might not always be possible, and that some firms at acute risk of being forced out of the market. In respect of mutuals, examples include:
  1. we attach the transcript of part of the recent parliamentary debate on the RDR which focuses on the plight of one of AFM’s members. It is unreasonable to expect customers from low income communities to significantly pay higher premiums, or higher charges;
  2. some products such as the Child Trust Fund, have capped charges, as will be proposed simple products that Treasury is consulting on, so there will be no scope to raise prices;
  3. many mutuals are constituted to work entirely within a particular community or trade.
  1. FSA ought to abandon its “one size fits all” approach- to foster the availability of advice through different distribution channels and to accept that different types of advice should be provided. A recent and welcome proposal from FSA is to enable certain types of Holloway friendly society products to be exempted from the RDR. This indicates there is acceptance from FSA that a one size fits all approach doesn’t work and we suggest they consider this more widely.

Current timeline is no longer tenable

  1. RDR is due for implementation at the end of next year. Even if all the proposals had been finalised this would be a very tight timetable for providers, with significant costs and disruption to business. For example the proposals require a new disclosure regime: FSA consulted on similar though less ambitious proposals in 2002/3, which were abandoned at the time because it was not possible to identify benefits that would adequately offset costs estimated at £400 million. This work also estimated that the transition period would need to be two years from the point where the final rules were made.
  1. The insurance industry is also facing a host of other market developments to similar timescales, including new solvency rules, a new tax regime, new accounting rules, and a range of other regulatory and legislative changes. With scarce resources (by its own admission FSA has had problems hiring the actuarial staff it needs for this work), firms are being forced to manage a range of complex projects, and risk having to make difficult choices between them.
  1. But FSA needs to better recognise that its role is developing policy is changing, with the growing powers of the new European regulators, and the determination of the UK government to implement EU Directives with the minimum of variation. It is completely illogical for FSA to maintain its timeline for the RDR without taking account of changes being imposed by the IMD, PRIPS and MiFID, or indeed of changes being made elsewhere in its own rulebook. The absence of co-ordination is alarming.
  1. Ultimately, we remain concerned that some of our members will find it easier to temporarily close to new business rather than try to implement RDR requirements at the same time as other business critical projects. We also see some evidence of greater merger activity, and we believe that the combination of providers focusing on new markets, closing and merging will reduce choice and access to financial products.
  1. So in conclusion, the RDR is currently destined to fail to achieve its original objectives. To be successful, the priorities need to be reassessed, theremust be more attention given to ensuring that it achieves good outcomes for the generality of consumers, and the implementation deadline must either delayed or phased in over a more appropriate timetable.
  1. We would be pleased to discuss further any of the items raised by our response.

Martin Shaw

Chief Executive

Association of Financial Mutuals

Extract from RDR debate

Tom Blenkinsop (Middlesbrough South and East Cleveland, Labour)

I congratulate Mark Garnier on securing this important debate. I am pleased that Harriett Baldwin referred to the Kensington Friendly Collecting Society, which is a very good organisation in my area.

As a Co-operative Member, I represent the interests of some people on low incomes who have been denied access to financial advice and products provided by friendly societies and mutuals as a result of the qualification requirements contained in the retail distribution review. The Kensington is a friendly society that has existed in Middlesbrough for 106 years. Mark Brooks, who is the chairman of its committee of management and a constituent of mine, and James Lancaster and Phil Carey wrote to me from the Kensington to raise their situation. The Kensington has 10,000 members throughout the Teesside postcode area. It provides savings and insurance products to those members for as little as £1 per week and a maximum of £5.70 per week. It provides opportunities for its members to obtain basic financial products. Without this provision, members of the society would largely be excluded from financial services and have to go to more expensive services, namely the banks, or to loan sharks.

The RDR is currently being finalised by the FSA. Its most likely outcome will be that the society will close down, which will mean that 10,000 members will lose their ability to save small sums of money for their funeral or for a rainy day. The reason is that the FSA is proposing a blanket qualification for any person offering financial advice-a qualification that is considerably higher than the current requirement. The FSA will not permit exemptions to this qualification structure, and it will not permit a gradual increase in qualifications vis-à-vis the risk and complexity of the product being advised on. The advisers at the Kensington and other societies will be required to obtain degree-level qualifications to sell a simple endowment or whole of life policy for a maximum premium of £5.70 per week. This is the only type of product that they sell, and the level of qualification required is disproportionate to the advice that they give.

The syllabuses of the proposed qualifications are irrelevant to the needs of those on low incomes. The exams focus on trusts, inheritance tax, capital gains tax and portfolio management. Those on low incomes may aspire to require this level of financial planning, but in the here and now they need advice on issues such as debt and benefits. The qualification requirements will mean that members of this society and others will be denied access to financial advice after 2012. The society will be unable to recruit new members because its advisers will be unable to offer advice to prospective members. A lack of new members will mean that this society and others will close. As a result, their members will lose access to financial products that they can afford and, in all likelihood, will be excluded from financial services thereafter.

That outcome seems to contradict the aims of the FSA and the Government in tackling the issue of financial exclusion. The RDR, while seeking to protect the interests of high net worth consumers, is by default taking away one of the few opportunities that those on low and insecure incomes have to obtain financial products. If the Government and the FSA are keen on promoting financial inclusion and financial literacy, then the existence of friendly societies like the Kensington is essential in delivering such benefits to those on low incomes. The concept of mutuality appears central to the idea of the big society, yet the consequences of the RDR would be to remove the remaining friendly societies that promote this notion.

Jim Shannon (Strangford, DUP)

Does the hon. Gentleman agree that the reduction in IFA numbers would also have an impact on the volume of new insurance policies and the work that would come from that?

Tom Blenkinsop (Middlesbrough South and East Cleveland, Labour)

Yes, I certainly agree. We would lose skills and experience, as well as putting people out of jobs for no good reason whatsoever.

The qualification requirements would deliver no discernable benefit to the vast majority of consumers beyond the wealthiest few. Let me assure hon. Members that by arguing against the proposed qualifications, I am not saying that such members deserve less than the better-off, but merely stating that they require different things.

The Kensington has increased its premium income by over 40% in the past seven years despite the fact that tax-exempt premium limits have not been increased during this period. That indicates that there is a demand for the service and the products. The Kensington delivers products that fulfil real needs for those on low incomes. For example, in the Teesside area, owing to bad debt difficulties, undertakers will not proceed with a funeral unless the deceased's relatives can provide a deposit of £750. The Kensington, among others, can fulfil that need because its minimum premium is £1 per week, which is enough to generate £1,000 of death cover. It has a local presence, which means that the agent can deliver a death claim cheque to the family directly within two working days of the member dying, and the whole process is conducted by someone whom the family knows.

The majority of members of the Kensington and other friendly societies in Teesside live in the poorest and most socially deprived council wards in the UK. Our people require honest and appropriately qualified agents who understand the benefits system, can provide advice on debt issues, and can generally assist in all forms of financial planning for those with limited disposable incomes. It is difficult to imagine that any such member would ever require advice on IHT planning, trusts, corporate financial planning, portfolio management or CGT.

The QCF level 4 is a disproportionate qualification for the home service market operating within tax exempt limits. It will not add value to consumers, nor improve the service that they receive. It will make home service sales forces even more expensive to run and will generate further financial exclusion. A more considered qualification that focused on the real, everyday financial issues that affect those on low incomes would be welcome. Current academic thinking reinforces my view, which I assume is shared by other hon. Members, that the only effective method of accessing and engaging those on low incomes in savings and protection products is a direct sales force. Indeed, the Department for Work and Pensions website states that tenant engagement teams are being piloted to increase take-up of home contents insurance,