Independent Financial Advisers

David Nuttall Excerpts

Wednesday 20th October 2010 Westminster Hall

[Harriett Baldwin]

My hon. Friend, who is also a member of the Treasury Committee, makes an extremely important point, which I will mention in a moment.

The impact of the proposals has been brought to my attention by a range of independent financial advisers, who are also constituents. Acting independently of one another, they all came to see me in my advice surgeries. Under the RDR proposals, each IFA should pass a set of exams and then spend at least 35 hours per annum on continuous professional development. Hon. Members should note that the requirement is 35 hours and that 34 hours would not be acceptable. IFAs also need to obtain a statement of professional standing from an accredited body. Someone who, today, is a qualified and approved IFA but who does not meet those requirements by 31 December 2012, will no longer be able to practise his or her profession, despite many years’ experience.

[Mr David Nuttall (Bury North) (Con)]

Is not the problem with the RDR that many of our constituents will be left without appropriate financial advice because of the introduction of the new rules? Often it is the most experienced IFAs, with the most years of experience, who will be forced out of the profession.

[Harriett Baldwin]

My hon. Friend makes a good point, which I am about to make myself, so I thank him for his helpful intervention.

Advisers will have to charge explicitly for their services and will not be able to accept commissions. Oxera, the market research firm employed by the FSA to assess the costs and benefits of the changes, expects the net present value of the compliance costs to the industry to reach between £1.4 billion and £1.7 billion. Worryingly, the estimate in 2008 was £600 million. That cost will be passed directly to consumers. The latest estimate represents an astonishing 180% increase.

Oxera expects the increase in compliance costs to be passed on to consumers, so they will pay for the changes. Charges will be higher, so sales of financial products will decline. The majority of adviser firms expect a reduction in turnover. Consumers with smaller amounts to invest are much less likely to seek advice if they have to pay for it explicitly. Smaller firms of IFAs are the most likely to exit the market.

--- Later in debate ---

[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 Nuttall]

rose—

[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.