The recent Treasury Select Committee (TSC) response to the FSAs Retail Distribution Review directive was released to much fan fare and instantly rebuked by the FSA with a slight lack of tact. A war of words has ensued and angered MP’s want the FSA to reconsider their response. The FSA are now having to re-think their position in particular to the possible waivers to the RDR. What seems certain (at present) is the RDR will go ahead on January 1st 2013. This still leaves time for change, certainly with issues such as grandfathering of qualifications, a sunset clause for legacy trail commission payments, and any possible solution to the long-stop concerns and clarifications on rebates.

I have compiled a table below which will appear in my book “Winning Client Trust” to be published in September (hence the references to chapters in comments column) on the key issues are raised by the TSC and given the comments as I see it on the possible solutions and interpretations of the issues raised. There’s still plenty to play for and time to debate and garner support for the major issues surrounding VAT, Grandfathering, Long-stop, Consumer awareness and financial capabilities, and legacy/rebate issues.

 

Treasury Select Committee –TSCRDR report

 

TSC OPINION

 

Comments

 1. Level 4 qualifications and ‘grandfathering’.  FSA argument for level 4 is weak. Nevertheless there is some merit in move to higher qualifications.Cliff-edge nature of RDR & ban on Grandfathering could be mitigated with 12 month extension to deadline i.e. January 2014. Supervision of unqualified advisers an option as TSC are concerned at potential loss of expertise. There is no doubt that higher qualifications in any profession can only be a good thing. I would not argue for a longer lead in period, so I disagree with the TSC view on a 12 month delay to the RDRimplementationindeed the FSA’s determined stance is for a 2013 RDR start.Supervision is always an excellent approach to be encouraged within the industry with mentoring and coaching no matter what the experience of qualification levels. There’s still time for the FSA to change their mind, for e.g. the Australian regulators had a change of heart of rebating in the late 1990’s.

 

 2. Commission.  Customer Agreed Remuneration (CAR) may create a market price for advice Problem is with customers viewing advice as free under commission arrangements thus setting of a price for advice may lead to reduction in consumption. Yet this may also increase customer scrutiny in advice.Trail commission needs to include advice and impact analysis needed on removal of trails. Industry needs to guard against increase in trail up to RDR deadline, currently 2013.

Factoring to be bannedandTSC agree with FSA.

As stipulated in chapter 6, the CAR involves shades of a ‘commission mindset’ and such a ‘hangover’ should be avoided by contemplation of the ‘bare faced fee’. Due consideration of ICAAP rules and ring-fencing the client monies need to be addressed by the TSC with escrow accounts in place to protect client monies against liquidation or other adverse circumstances.Trail commissions are essential to advisories thus need to be protected yet evidence that advice is being given and clients paying trail are serviced. Again imagine the perfect storm, we have a market crash, trails collapse, yet fees remain consistent.

 

 3. Level Playing Field.  RDR is for all retail providers i.e. banks as well as advisers. FSA (FCA) to report after one year and annually thereafter on RDRimpact on vertically integrated firms’ remuneration structures. This is to cover any potential breaches.Transparency is key to ensure the IFA community can evidence it is not unfairly impacted bytheRDR. It is essential to understand that the RDR is potentially beneficial to all retail market participants, thus the current loss of Barclays, HSBC and now CO-OP advisors and bank focus on platform only models maybe a ‘knee jerk’ and premature reaction.IFA’s may still benefit from banks withdrawal as long as transparency on RDR impact is evidenced as fair for all.

 

 4. VAT Confusion abounds on when VAT is and isn’t payable and how much it will raise the cost of advice. TSCrecommendthe HMRC and FSA liaise with them on when payable and why it has not in the past. This along with additional revenues and whether further reform is needed are essential for clarity on impact on advice. My consultancy engage partnership ltd are already working with the HMRC to bring definition to the VAT issues. As we have seen with cases such as insurance wide vs HMRC, which illustrate that intermediation tied to product is non VAT-able. (Chapter 8).
 5.Types of advice.  Confusion may abound with customers around independent vs restricted advice. Public information needs to be made available on such distinction and in particular that restricted may mean restricted by product or by firm.Simplified advice should be championed and has potential to serve the ‘mass market’. This may involve straightforward products and services, highly automated with internet-based offerings. Qualification standards need definition.

 

Advisers are already determining where they are taking their advice business models. Regulatory arbitrage is a factor where non-advice (execution only) is concerned and we are already seeing IFA’s and life companies moving towards this route.Restricted advice needs careful consideration as does simplified advice to potentially facilitate advice to the mass market. Does this mean that such distribution channels can then facilitate level 3 qualified advisers?
 6. Transition.  Adverse incentives such as commission leverage and increased trail pre RDRimplementationneed to be avoided. Pre-implementation churning and post implementation holding of clients (where it is not appropriate) need to be pre-empted by the regulator.  Obviously it would be detrimental to the longer term industry/client relationships if  increased trail or commissions were to be taken before January 2013. Behavioural economics need to be understood with hyperbolic discounting to be managed. 
 7. Costs and benefits.  Overall the RDR aims are laudable yet there maybe some market capacity loss with advisers non compliance. The potential reduction in adviser numbers may disadvantage savers by reducing cost and competition.Regular reports on adviser levels are needed and a 12 month delay to RDRimplementation will aid those advisers wishing to remain in the industry and temper the cliff-edge nature of theRDR and required qualifications.

 

Issues that need to be addressed are product providers factory gate pricing and will a reduction in supply initially raise costs.Where adviser charging is concerned a ‘price for advice’ will initially be set, but there should be a period of trail and error before a realistic level is reached and clients become attuned and comfortable with fee based advice.

 

 8. European and international issues.  FSA should act to remove consumer detriment in financial services. The risk at present is on ‘front running’ Brussels with theEUPRIPS initiative which is yet to be fully defined and with no implementation date.Passporting may seem to be an opportunity for advisers to counter the RDRobjectives, Yet the FSA is clear that host state standards prevail and cannot be undermined or evaded. FSA to be vigilant on this issue.

Where High Net Worth (HNW) individuals are concerned they may not want to participate in RDRrequirements, thus FSA need to define direction of any modifications (e.g. opt outs) as necessary for HNWinvestors.

The fact that Australia are adding insurance into their regulatory regime remuneration changes and Holland is approaching their regulation of financial services in a ‘RDR’ way means the UK is not alone as the TSC seem to think.Where Europe is concerned, the PRIPS initiative seems to be garnering increased support and with pension reform (similar to UK’s) there is a consensus for more interventionist regulation to encourage increased professionalisation and aid better financial capabilities for the consumer.

 

 9.FCA.  FCA will have different objectives to the FSA and thus the Treasury needs to understand and state its contentions as to whether the RDR is consistent with the FCA objectives.Accountability of the FCAneeds definition, particularly with vague nature ofFSAaccountabilities.

Long-stop needs addressing and the committee on the Draft Financial Services Bill should consider if long-stop has a place in redress process. TSC believe long-stop would need to evidence consumer interest.

 

 

There is no doubt the regulator needs to be accountable. The TSC must be commended for its work so far on the suitability of the RDR reforms and the protection of market participants (e.g. IFA’s) in the unintended consequences as documented in chapter 1. 
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The end of another interesting week at engage partnership. Started with our latest Citywire interview on RDR change challenges being broadcast and ended with an interesting exchange with Lord Turner and Hector Sants at yesterday’s FSA annual public general meeting.

http://www.citywire.co.uk/new-model-adviser/mastering-your-business-moving-from-commission-to-fees/a501902

I am pleased to report that after much hard work and tinkering from our two highly motivated and enthused techy experts, Les and Chris, we now have 2 further analytic tools available for financial service organisations which add extra value for activity based management, in client facing activity and key performance indicators measurement for CEO’s and senior management.

Our Viability tool is designed as the first smartphone app to measure and analyse client focused activity which can be employed by financial advisers, wealth managers and stock brokers to assess time spent with the client and justify adviser fee charging. This pivot technology feeds back to a compliant centralised dashboard which may then produce detailed timesheets  and spreadsheets to give the business and the consultants the information needed to justify their fees and the ensures clients have no point of redress as the information is input whilst they are in their advisor meetings. We already have a client ready to go for a 3 month trial.

SYSC-Board is similar in monitoring and tracking CEO and senior management activity in ensuring they are up to speed with regulatory demands and their KPI’s and sits as a dashboard app on a smartphone or pc/laptop computer. Both analytic tools are easy to use and are built around the business, regulatory and clients needs.

We then move onto Related Vision software which for the first time means intermediaries and financial firms can measure their internal (departments) and external (clients) relationship capital. If you read my last blog on this subject then you can see how important it is to track where our relationships are with our associates and clients and ensure they are a true partnership which creates fair exchange and high trust. Related vision will be available in September this year and sits with our ‘Better Client Relationships’ modules.

We then move to Mr Sants. As some of you know I’ve spent the last 12 months writing my book entitled; “Winning Client Trust; The Retail Distribution Review and the UK financial services battle for their clients hearts and minds”.

Well as I was offered the opportunity to pitch a question to Hector and Lord Turner yesterday at the FSA annual meeting, I off course took the opportunity to pitch my book and low and behold, both the top tier regulatory officials will accept a copy (free off course!), If you don’t ask, you don’t get I guess. My question was tilted at the new ‘twin peak’ regulatory bodies the Financial Conduct Authority and Prudential Regulatory Authority and the fact that the risk with such an arrangement is, it’s good for the short term maybe, but what about the long term issues such as financial capability of the general public and education on behavioural economics? Hector Sants seemed to think this is in hand, yet more work needs to be done with help of 3rd party consultants, enter engage…..

We now have an active summer upon us, the books with the publishers and will need a round of formatting and we’ve got the book launch to organise for September. The Analytics tools licensing will be fully available in August and ready for distribution. Finally, but not least, the engage ‘Better Client Relationships’ programme will be launched 3rd quarter 2011 in synergy with our related vision software to assess the quality of organisation’s relations with their clients and give techniques and coaching to stop a ‘silo’ mentality where client acquisition processes can cause battle grounds and be detrimental for the long term benefit of all parties.

https://engagepartnership.wordpress.com/

So all in all an interesting week, much to build on and much to do to ensure we facilitate transparency for our partners services and products and engender and maintain their client trust. Enjoy the weekend.