As of January 2013, the way in which people in Britain are sold financial products and are given financial advice will change fundamentally. This may at first seem a trivial matter. However, the banks who are presently setting aside billions in order to pay off claims by consumers who were mis-sold payment protection insurance would disagree.
In increasingly uncertain times, with interest rates low, financial advice relates to the questions facing an ageing society. People are paying more for healthcare and education; they move between jobs more often and have to provide for their pensions. The question of how they will plan and pay for the future requires attention.
The Retail Distribution Review of consumer financial services has been rumbling on for six years. Its findings will be implemented by a descendant of the soon to be dismantled Financial Services Authority, called the Financial Conduct Authority. The designated CEO of this new body is Martin Wheatley, who on Friday addressed a joint Private Investor-Prospect conference on the RDR, hosted by London Stock Exchange.
“We think the market’s ready,” said Wheatley, in his opening remarks. “We hope the market’s ready.”
Financial products in Britain have predominantly been sold to consumers by Independent Financial Advisors (IFAs) who have made their money by taking commission on what they sell. This system of payment by commission is at the heart of the problem. It encourages IFAs to sell products, even if they are not suitable for the consumer in question, because they get their commission anyway. The result is that instead of the adviser serving the consumer, the consumer serves the adviser.
So under the RDR, the commission system will go. Consumers who want professional financial advice will have to pay a fee to get it, which was not the case before. IFAs will have to sit exams.
The RDR, Wheatley told the audience, “is about making the cost of advice transparent and making what advisers do clear to consumers and to make advisers better qualified.”
But questions include whether the number of advisers will shrink dramatically and whether lower value customers will not have access to advice. First to respond was Tim May, the CEO of the Association of Private Client Investment Managers and Stockbrokers (APCIMS), who said that the length of time taken to develop the RDR is itself a fundamental problem. In the six years of gestation, the market has changed dramatically. The RDR is from another age. It comes from before the financial crisis. Now, he noted, people have much less money free for investments.
As a result of the new qualifications, said May, many experienced financial advisers will simply leave the profession, taking their expertise with them. The RDR will lead to a decrease in the amount of financial advice on offer, he warned, citing figures produced by the consulting firm Deloitte, suggesting that as many as 5.5m consumers will be disenfranchised. Some high street banks are leaving the advice business.
Amanda Davidson, director of Baigrie Davies and a board member of the FSA, pointed out that the present IFA business model was “weird.” The income stream of an IFA was in the hands of the firms that paid the IFA’s commission. Through the RDR, noted Davidson, IFAs will gain control over their income.
But Gina Miller, CEO of SCM Private, was worried that “the RDR might kill financial advice.” Miller cited research by BlackRock, showing that only a third of financial consumers would be willing to pay for financial advice. If the effect of the RDR is to encourage consumers to do without financial advice when making their investment decisions, then the FCA will have to do more on financial education, she said.
Questions, which followed, included whether people who do not want to pay for advice would rely on financial journalism. Would journalists be regulated in the same manner as IFAs? No, said Wheatley, we just have to accept this risk. The same goes for financial advertising. One audience member suggested that this was an area where the FCA could act immediately.
The RDR is coming, and soon. Martin Wheatley says he hopes the market is ready for the consequences of its introduction. But then as Gina Miller asked, “if we in the industry are struggling with the RDR, then what hope is there that the consumer will get it?” What investors like above all is clarity. At present, it is not certain that the RDR will give it.
Private Investor is a quarterly magazine published by Prospect in partnership with London Stock Exchange