Independent Financial Advisers (Regulation)

Graham Stuart Excerpts

Monday 29th November 2010 Commons Chamber

[Mark Garnier]

I can see no reason at all for not introducing grandfathering rights. Indeed, when the FSA was set up it introduced grandfathering rights when IFAs came over from the personal finance authority.

[Mr Graham Stuart (Beverley and Holderness) (Con)]

I congratulate my hon. Friend on opening this important debate this evening. Jon Marris, a constituent of mine and an IFA, came to see me on Friday. He has already passed the exams that will be required—he has done the 400 hours of study—but, even from his position, he believes it is ridiculous that those who have been in the industry for many years should be forced to go through that. Although he has been able to do this, he thinks that the removal from the market of people who are perfectly capable of doing their job but who might not be able to get through the exams, even though they have shown for many years that they can look after customers, is completely wrong.

[Mark Garnier]

I think my hon. Friend’s constituent agrees with us all.

The IFA community is broadly in support of raising excellence in the profession, and many are opting to take qualification exams on their own initiative without the dead hand of the FSA pressing them to do so. Indeed, the website unbiased.co.uk lists IFAs by their qualifications, so the move towards improved excellence is already going ahead under its own steam. A significant number—possibly as many as a third—feel that their 20, 30 or 40 years of experience not only trumps any exams but covers a significant depth of knowledge in their chosen areas, which will surpass any exam requirements. In taking exams, they will also be tested on areas they choose not to specialise in. As I and many hon. Members have said, the FSA seems blind to their expertise. The FSA does not recognise that experience and is determined to put out of business any IFA who is reluctant to take their exams or to subject themselves to the FSA’s ill-thought-through in-house assessment.

--- Later in debate ---

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I congratulate the hon. Member for Wyre Forest (Mark Garnier) on initiating this well-subscribed and, so far, very moderate and well-tempered debate on behalf of the 33,000 independent financial advisers in the industry. Clearly, the matter is of concern. I suspect the Minister is thanking his lucky stars that we do not have a votable motion at the end of tonight’s portion of the debate, as we did in the earlier section on banking reform.

The Financial Services Authority started the retail distribution review many years ago. A consultation paper came out in 2009. Earlier this year, we had the proposals, although they will not come into force until 2012, so this is a useful period when the House should debate and consider them. It is a matter of regret that too few of these crucial regulatory issues are subject to parliamentary scrutiny, as Government Members have observed.

Some extremely legitimate points have been made about the need for sensible transition—if we are to have change—to new arrangements, which, in the words of the hon. Member for South Derbyshire (Heather Wheeler), do not throw the baby out with the bathwater. That is one of the phrases in the debate that particularly comes to mind, but a number of points were very well made, especially when we think about the comments of the chief executive of the FSA. Is it really acceptable that between 10 and 20% of the profession could leave as a result of the retraining requirements, shrinking the availability of independent advice? The hon. Member for West Worcestershire (Harriett Baldwin) rightly questioned what would happen if a Minister were to stand at the Dispatch Box and announce the demise of a similar proportion of an industry.

It is important that we take a pro-consumer approach to regulatory change—as the Opposition certainly do. Undoubtedly, it is necessary from time to time to look at the framework within which consumers get that advice, and I do not begrudge the FSA’s moving in that direction. However, there are some serious questions. On balance, it is right that we move away from fee structures that are, to a certain extent, hidden in the margins, where sometimes commission may not be transparent for customers and products are recommended even though it does not necessarily say on the tin how much of the fee will be returned to the adviser, but—

[Mr Graham Stuart]

Will the hon. Gentleman give way?

[Chris Leslie]

I just want to make a point about the ending of the commission system and the placing of the fee, perhaps straightaway, in an up-front form for the consumer. There may be risks that are similar to those related to the argument about up-front tuition fees, because people may be deterred from taking the advice in the first place. They may feel that the system is too difficult. As my hon. Friend the Member for Barrow and Furness (John Woodcock) said, we have to ensure that any fees are disbursed throughout the period of the product.

[Mr Stuart]

There will always be some form of bias in the system, at least conceptually, regardless of how we reward IFAs. Whether or not there is a fee-based system, they will still be more likely to receive a fee if they propose the sale of a product. Does the hon. Gentleman believe that getting rid of commission is the right way to go? Why not regulate from the product end? Why not get rid of 10% commission, if that is felt to be a gross abuse? Why not limit the size but allow commission, which the public understand and quite like if it does not force them to pay up front, which it seems from surveys they do not wish to do?

[Chris Leslie]

As I say, this is a good time to debate those matters. There are options that must be explored. We have not bottomed out the debate. Perhaps the Financial Services Authority can consider not necessarily the hon. Gentleman’s suggestion in particular, but why commission changes are not being made across the wider financial services sector. There have been historic problems with mis-selling of products, not solely from an IFA perspective, and I can see why many people feel that these changes are necessary.

I would not counsel hon. Members to take issue with every section of the RDR—many of those who spoke in the debate did not. It is right, for example, that there should be proper clarity between independent and restricted market advisers, and that rather than waiting for the customer to inquire, there should be full disclosure on that up front.

--- Later in debate ---

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Wyre Forest (Mark Garnier) on the way in which he opened the debate this evening. He gave a balanced perspective on the changes that we are trying to make to improve standards for consumers, how that sits with the IFA sector and some of the challenges that a change in standards will create.

It is worth reflecting for a moment on the responsibilities of Parliament and of the FSA. Parliament set out the framework by which the FSA operates. The Financial Services and Markets Act 2000 sets out its objective, powers and how it goes about exercising its responsibilities. For example, there is a requirement to consult. As we know, there has been a long process of consultation on the RDR since the previous chairman of the FSA raised the matter in 2006. There have been a number of iterations and debates about consultation documents and discussion papers. Consumer groups, product providers, IFAs and their trade bodies have participated in a very lively debate, but the FSA is rightly responsible for implementing day-to-day regulations, and I know that it takes very seriously parliamentary scrutiny of its role. I spoke to the chief executive this morning about the Treasury Committee’s scrutiny last week and the debate this evening, so the authority is well aware of parliamentarians’ concerns. It is right that the FSA gets on with its job but listens to the issues being raised.

I counsel caution, however. It is all very well to think that we should engage in the regulatory regime when we think we are going to help one group or another, but there are times when regulators make difficult decisions on behalf of Parliament and our constituents, so we need to think very carefully about where the balance is struck. It might be very attractive in the context of this debate for Parliament to take more responsibility, but hon. Members might feel it less appropriate at other times.

[Mr Graham Stuart]

Will my hon. Friend give way on that point?

[Mr Hoban]

No.

[Mr Stuart]

On that point?

[Mr Hoban]

No, I will not give way to my hon. Friend, because I have—[Interruption.]

[Mr Hoban]

I have about nine minutes to respond to quite a long debate in which a number of points have been made, and I want to take the opportunity to address some of those issues.

Let me put on the record the importance that I place on independent financial advisers. They play a key role in helping people make financial product purchases and financial choices. High-quality, independent financial advice is vital in ensuring that people are encouraged to save and plan for the future and make the most out of their money. I have used independent financial advisers and been happy with the service I have received, because they have provided me with good-quality advice.

I cannot overstate the detriment to consumers from poor and biased advice. Indeed, the FSA estimates the detriment to consumers from inappropriate advice to be £200 million per annum, and it thinks that the figure could be significantly higher. Consumer detriment has led organisations such as Which? and the consumer panel that advises the FSA to support the measures in the retail distribution review. We need to get that balance right and to address some of the issues that undermine consumer trust in the IFA sector, and the FSA has sought to do so through the RDR.

I have become very conscious—in particular, over the past six or seven months as a Minister—of the financial services sector’s increasing complexity, and consumers must be confident that IFAs are fully up to date and that their advice is underpinned by good technical knowledge. There can be few hon. Members who do not support that stance or recognise the benefits that increased professionalism can bring. Indeed, the FSA finds a clear link between increased qualifications for financial advisers and improved consumer outcomes. Under its reforms, consumers will be confident that their adviser has a minimum level of understanding and expertise that is maintained each year through continuing professional development.

We should also recognise that a number of IFAs already comply with those standards. Just under half of IFAs already hold the required qualification and, indeed, many go beyond QCF level 4. Some 89% of advisers already meet the required hours each year for CPD, and we need to recognise the progress that has been made since examinations were introduced in 2008.

I recognise the strength of the debate about grandfathering, and it is an important debate to have, but we need to think about how much experience is sufficient for people to be grandfathers, and about how we can ensure that that experience covers the range of products necessary to provide whole-of-market, independent advice. We ask people to advise on a range of products, such as pensions, insurance bonds and ISAs, and they need such technical knowledge to do so. Consumers are entitled to know that their adviser has a high standard of technical knowledge, and a minimum qualification standard should deliver that.

The increase in standards will not discriminate against those who have kept up to date with market developments, and they should not have to commit a significant amount of time to study. As I have said, 90% of advisers already undertake the required number of hours for continuing professional development, and I think that over the next two years the measure can be used to fill any gaps between existing and revised standards. As a consequence of lobbying by the IFA community, the FSA has relaxed the regulations, so there will be non-exam-based alternative assessments, rather than formal written exams. That is an important move forward that the FSA has already made, but high standards of technical knowledge will be crucial to help IFAs navigate their clients through the increasingly complex choices that they have to make.

I want to touch on the issue of adviser charging. I am strongly committed to increased transparency in financial services; it is important that consumers—whatever they are buying, be it advice or a product—understand the charges and the returns that they are likely to get. That underpins a whole range of work that we are doing at the moment in the Treasury.

Currently, financial advisers can earn different amounts as commission payments, depending on which product they recommend and from which provider. How much they earn is not always transparent; indeed, Which? found that 82% of advisers failed either to explain the “key facts of cost” document or have a meaningful discussion with their clients about how their advice would be paid for. It is important that remuneration arrangements for advisers work in the best interests of consumers and promote independence of advice.

A number of IFAs have already moved away from commission to a fee-based approach. I know that AIFA, the trade association for IFAs, is helping IFAs change their business model. I do not doubt the integrity of the vast majority of advisers, but no one can doubt the financial detriment caused to consumers as a consequence of mis-selling scandals of the past. Following the FSA’s pensions review in 2002, 1.7 million consumers received compensation totalling £11.8 billion due to pension mis-selling alone.

Advisers should welcome changes in remuneration as a clear way of building consumer trust in the sector. Consumers already pay for advice, as commission is deducted from their premiums or initial investments. Advice is not free; that money comes out of the contribution that consumers make to their pensions, their investment bonds or their savings for the future. However, it is important that both the cost and the value of advice is clear to consumers. These reforms will provide clarity on price and service and that will promote competition. Just as we want transparency on interest rates paid on ISAs to promote competition among ISA providers, I believe that transparency on IFAs’ remuneration will also promote competition and provide a better understanding of the value of advice. It will increase consumers’ confidence in that area.

We want to broaden the range of advice available. A number of hon. Members have raised the annual financial health check that CFEB is going to organise. Let me be clear. The cost of that will be borne by a social responsibility levy that will be paid by institutions from Goldman Sachs through to the high street insurance broker. The cost will not be borne by independent financial advisers alone. The biggest firms, such as Goldman Sachs or Barclays, will make the biggest contributions, and they will make a far bigger contribution than IFAs. Furthermore, consumer credit organisations have also been brought into the scope of this; they will also have to pay their share towards the annual financial health check. It is important that the burden should be shared.

[Mr Stuart]

Will the Minister give way on that point?

[Mr Hoban]

I wish to conclude my remarks so that my hon. Friend the Member for Wyre Forest, who opened the debate, can conclude.

We want a more responsible savings culture in Britain, in which people can plan confidently for their futures and are better able to realise their plans. Financial advice has a key part to play in that, and I want to see improved levels of expertise and knowledge and much greater clarity over transparency. It is important that the FSA should work closely with IFAs to get to that point. This evening’s debate has helped the FSA understand the concerns of Members of Parliament. I am grateful to my hon. Friends for securing this debate.