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The Financial Secretary to the Treasury (Mr Mark Hoban)
I think that that commentator was my right hon. Friend the Member for Wokingham (Mr Redwood).
I congratulate my hon. Friend the Member for West Worcestershire (Harriett Baldwin) on securing the debate. She said that it is the first debate we have had on IFAs for some time, which surprises me given the amount of interest it has generated and the volume of correspondence that hon. Members received during the previous Parliament about the RDR.
The structure of regulation in the UK means that regulation is the responsibility of the FSA, not the Treasury. Treasury Ministers cannot dictate to the FSA how it should do its job. That might seem to my hon. Friends an attractive idea in the present circumstance, but they may be able to think of other circumstances where it would be less attractive. Today of course we are announcing the settlement in relation to Equitable Life. Those losses arose when the Government were responsible for the regulation of financial services, so do not be tempted down the route of suggesting that the Treasury should do all financial regulation.
Access to high-quality and independent financial advice is vital to increasing confidence in the financial sector and to ensuring that people are encouraged to save, plan for the future and make appropriate choices. As my hon. Friend said in her speech, the impact of receiving poor adviser advice can be financially disastrous for the consumer. We do not need to go far to find evidence of that—look at cases of widespread mis-selling of products such as pensions and endowments and, more recently, of structured products.
The Financial Services Authority’s view is that the regulation of independent financial advisers, in particular through the retail distribution review, is essential in rebuilding trust in the industry when confidence in financial services is at an all-time low.
Dan Rogerson (North Cornwall) (LD)
The Minister is clearly outlining that risks are involved in the advice given by independent financial advisers. Does he agree that a risk-based approach, which is responding to complaints and which might require longer-standing financial advisers to undergo retraining, could be a better way of tackling the issue?
Mr Hoban
That is an interesting point, but my hon. Friend should bear in mind that with some products, which might be long term, it can be some time before an issue emerges. If people buy a product in their 30s—a pension product, for example—they might only find out in their 60s that they had been mis-sold something. There is a real issue about looking at complaints records in that way.
The retail distribution review aims to address the structural problems in the distribution of retail financial products, such as conflicts of interest, transparency and professional standards. Although the RDR is the responsibility of the FSA, I fully support its aims—all colleagues should support those objectives. I hope that the RDR will lead to increased confidence, simplicity and clarity in the financial advice sector.
On professionalism, hon. Members are familiar with the fact that the rules seek to ensure that all financial advisers adhere to common professional standards, including an increased minimum qualification level, effective maintenance of knowledge and subscription to a code of ethics. The current minimum financial adviser qualification is at the same level as a diploma in shift management offered by McDonald’s. We should all reflect on that for a moment: the products being sold by IFAs are infinitely more complex and more long-lasting in their effect than a Big Mac.
The rules aim to improve trust and the service offered to consumers. Consumers will have confidence that their financial adviser is up to the job. Investment advice will be seen as a professional activity, financial advisers will have a new status and fresh talent will be attracted to the industry. The FSA reports that, rather than being put off by studying, many financial advisers are going on to obtain more advanced qualifications than those required by the RDR. One of my constituents, who is an IFA, has said that when the FSA raised the minimum bar he wanted to go even further, to demonstrate that his qualifications, knowledge and technical expertise went beyond those of his peers. The FSA also noted that take-up for financial planning degree courses has increased.
I know that many financial advisers have concerns about meeting the increased qualification standards required by the RDR, but almost half of advisers already meet the required level, with two years to go before the RDR is introduced.
Many financial advisers feel that the new rules should be “grandfathered,” so that those advisers with experience are exempt. However, how do we know how good those advisers are? Someone might have been in the industry for some time, but is that necessarily a guarantee of the technical expertise and quality of advice?
Mr Hoban
I only have seven minutes left and my hon. Friend the Member for West Worcestershire gave way quite a lot, so I would like to make some progress.
The existing qualification requirements for advisers focus mainly on knowledge, whereas the new higher level is primarily about understanding and applying that knowledge, which are core skills for every adviser to demonstrate. The result is a level playing field where consumers can have confidence that their adviser meets a required standard.
IFAs are not the only people who have an interest in this debate. The consumer group Which? welcomes the FSA’s increased standard, as it does not feel that the current qualification level is sufficient.
Advisers are required to maintain competence under the FSA’s current rules as part of their approval conditions, and so those advisers that have actively engaged in maintaining competence by keeping up to date with market developments should not have to commit a significant amount of time to study. Continuing professional development can be used to fill any gaps between existing and revised examination standards, and financial advisers can opt to undertake an alternative basis of assessment, instead of a traditional written qualification. That addresses one of the points made by my hon. Friend the Member for West Worcestershire, about how someone who is slightly long in the tooth, as I am, might not be as exam-ready as someone straight out of university. The alternative assessment might well help advisers in such a situation.
On adviser charging, at present financial advisers earn different amounts of money as commission payments, depending on which particular firm they recommend a product from and on what product they recommend. That creates a potential conflict of interest which can be damaging to consumers and undermines trust in the investment industry. The RDR rules on adviser charging are designed to tackle the risk, as well as the perception that commission paid by product providers might bias advice.
FSA consumer research also found that only half of respondents understood how the value of their product would be affected by commission. To add to that, in October 2007, Which? conducted a survey of IFAs and found that 82% of advisers failed to explain the document on the key facts about the costs or to have a meaningful discussion with their client about how advice would be paid for. There is a big issue to be addressed—getting people to understand how they are paying for advice at the moment—and IFAs have a role to play.
It should be noted that consumers already pay for advice, through the commission structure in their product. We are not doing anything new by ensuring that consumers know how much advice costs. It is important that consumers understand the value that good financial advice can add and that we create a much more transparent market in which advisers compete on cost and quality. That is a good outcome for consumers.
My hon. Friend mentioned how banks reward employees for pushing certain products—I understand her point—and the FSA is to look into how the reward structures of in-house sales staff in banks affect their performance.
On ability to pay for advice, we need to bear in mind that not enough people are in receipt of financial advice. That is one of the reasons why our party, in opposition and now as part of the coalition Government, has been able to support the Consumer Financial Education Body, the introduction of a social responsibility levy on the financial services sector and the funding of a free national advice service, which will help people review their financial affairs regularly, plan ahead and ensure that they hold appropriate products. Such measures will help to tackle some of the advice gap. I hope that the industry will work in partnership with the CFEB and the Government to ensure access to financial advice.
A number of my hon. Friends raised the issue of the disproportionate impact of RDR on small firms. I appreciate that concern. Smaller IFA firms, in remote areas in particular, will feel the impact, and they are more likely to struggle to meet the challenges of the RDR proposal, unlike the larger IFA firms and the banks, and instead might decide to exit the market. However, the RDR will apply to all advisers in the retail investment market, not just to IFAs.
Although the change will bring challenges in the short term, it is important that we see the advice sector grow and strengthen in the long term. New and existing firms can increase supply in the long term to meet that demand, and indeed the FSA has found that a larger proportion of the costs of the RDR will be borne by larger firms.
In respect of the costs being passed on to the consumer, it is true that with the RDR come implementation costs. The Oxera research commissioned by the FSA found that such costs could translate into higher prices placed on consumers in the short term. However, over the longer term, it concluded that the higher prices could be competed away through increased transparency of prices, encouraging consumers to shop around.
I could respond to many more issues. I will write to my hon. Friend the Member for West Worcestershire on RDR and tax issues.
We all want to ensure that consumers have access to good-quality advice, delivered in a transparent and professional way, so that people understand what they are buying and have paid for. I believe that that will be taking a major step forward in improving the financial outcomes for our constituents.