Due for introduction in
just over 18 months, the UK’s Retail Distribution Review
is facing criticism from many insurance industry players who
believe it will do more harm than good. The sweeping regulatory
change is now the subject of a parliamentary probe which has major
implications for the UK life industry.
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Financial advice is free, or
at least that is what the majority of consumers in the UK believe.
For the life industry this poses a serious problem as it readies
itself for the introduction of the Financial Services Authority’s
(FSA) Retail Distribution Review (RDR), which brings with it a
switch from a commission to a fee-based remuneration structure for
financial advisers.
At present, 64% of consumers
in the UK believe financial advice is free, according to a
late-2010 study undertaken by Aviva. Not surprisingly, a study
conducted by the Association of British Insurers (ABI) in
early-2011 has found little enthusiasm among the majority of
consumers to pay for advice.
According to the ABI study,
more than half of people surveyed may not be prepared to pay for
financial advice, and a third thought such advice would be worth
less than £300 ($480). The ABI estimates that the actual average
cost of advice is £670.
Commenting, ABI acting
director of life and savings Helen White said: “For the RDR reforms
to deliver good outcomes for consumers and the industry, we need to
both convince sceptical consumers that full advice is worth paying
for and also come up with a model of simplified advice for those
consumers who cannot afford or do not need full financial
advice.”
The RDR, to be introduced in
January 2013, also requires that independent financial advisers
(IFAs) meet minimum qualification levels. To continue trading after
January 2013, IFAs will need to have obtained the diploma for
financial advisers (DipFA) which, according to Aviva, is the
equivalent of the first year of university study.
IFA exodus
predicted
Many IFAs are unhappy with
changes to the remuneration system and/or the need to obtain the
DipFA, prompting virtually all observers to predict an exodus of
IFAs from the market. At the low-end of predictions, the FSA’s
director of retail financial firms Sheila Nicoll anticipates that
between 8% and 13% of IFAs will turn their backs on the
industry.
According to Matrix-Data
Solutions there were 28,714 IFAs in June 2010, down from 30,198 at
the end of 2009.
A survey of 1,800 IFAs
conducted by research firm CoreData Research indicates that the
FSA’s estimate of the number of IFAs likely to leave the market is
conservative. The survey found that 15% of IFAs anticipate exiting
the market between 2013 and 2015, while a further 17% had yet to
decide.
A worse outcome than that of
the FSA’s and CoreData’s is forecast by Aviva. Based on a survey of
IFA’s, the insurer predicts that up to a quarter may leave the
industry when the RDR takes effect, “potentially leaving a hole in
the heart of the advisory market”.
Among many organisations
opposed to the RDR in its current form is not-for-profit body the
Adviser Alliance, which in November 2010 set out its concerns in a
submission to a parliamentary committee probing the RDR.
The Adviser Alliance referred
to a study undertaken by the FSA in 2008, highlighting one of the
FSAs conclusions: “Surprisingly, we [FSA] find no relationship
between the share of advisers who passed the qualification exam or
the share of competent advisers.”
“Unsurprisingly, the FSA has
been mute regarding this conclusion,” noted the Adviser Alliance in
its submission.
The case for
commission
In another submission to the
parliamentary committee, the FSA was taken to task for ignoring the
findings of a study on the commission remuneration system it
appointed research firm Charles Rivers to undertake on its behalf
in 2002.
In its study, Charles Rivers
found that:
- the advice market is not
riddled with bias; - there is no detectable bias
on regular premium products; and - there is no evidence off any
provider bias in either the stakeholder pension or the
non-stakeholder personal pension recommendations.
Charles Rivers concluded:
“Despite anecdotal evidence that some IFAs and IFA networks do take
advantage of their position to recommend product that yield them
the greatest commission, there is little sign that this is
happening on a large scale.”
In a second study on
commissions undertaken by Charles Rivers in 2005 at the behest of
the ABI, the research firm came to the same conclusion that it had
in its 2002 study. In the 2005 study, Charles Rivers noted that on
the issue of commissions, “the problems of perception are greater
than the reality”.
The minimum qualification
that IFAs will be required to hold has also drawn criticism from
many quarters. Among those that have aired their reservations is
John Amey, an IFA with 23 years of experience.
Amey told the parliamentary
committee in no uncertain terms that he regarded the DipFA, which
he has obtained, as a waste of time and of little practical value
for IFAs.
In his submission, Amey
wrote: “The [DipFA] coursework article of 8,000 words was more a
test of journalistic ability than anything else.”
On the final exam, he noted:
“It was simply a feat of memory and speedwriting.”
Amey added that work he put
in obtaining the DipFa “has made no positive difference to my daily
working life”. However, it took up an enormous amount of his time –
some 500 hours – which he said could have been spent on business
building and clients
“It has cost me some £20,000
in lost business which I am desperately trying to catch up,” he
stressed.
In his conclusion, Amey
echoed many of the sentiments of other critics of the
RDA.
He wrote: “The RDR if
implemented, will be seven years-old and completely out of step
with the present government and the current post-recession
financial world. It will fail to provide better and easier access
for consumers to independent financial advice. It will fail to
address the savings gap but it will have succeeded in massively
reducing the number of IFAs who currently provide a tremendous
service to the public.”
The RDA is a product of the former Labour government era.
Undoubtedly much attention will be focused on the conclusions that
the current coalition Conservative/Liberal government will come to.
Hearings by the parliamentary committee are ongoing.
