Independent Financial Advisers (Regulation)

Jim Shannon Excerpts

Monday 29th November 2010 Commons Chamber

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

I congratulate the hon. Member for Wyre Forest (Mark Garnier) on securing this important debate. I am pleased that the hon. Member for West Worcestershire (Harriett Baldwin) referred to the Kensington Friendly Collecting Society, which is a very good organisation in my area.

As a Co-operative Member, I represent the interests of some people on low incomes who have been denied access to financial advice and products provided by friendly societies and mutuals as a result of the qualification requirements contained in the retail distribution review. The Kensington is a friendly society that has existed in Middlesbrough for 106 years. Mark Brooks, who is the chairman of its committee of management and a constituent of mine, and James Lancaster and Phil Carey wrote to me from the Kensington to raise their situation. The Kensington has 10,000 members throughout the Teesside postcode area. It provides savings and insurance products to those members for as little as £1 per week and a maximum of £5.70 per week. It provides opportunities for its members to obtain basic financial products. Without this provision, members of the society would largely be excluded from financial services and have to go to more expensive services, namely the banks, or to loan sharks.

The RDR is currently being finalised by the FSA. Its most likely outcome will be that the society will close down, which will mean that 10,000 members will lose their ability to save small sums of money for their funeral or for a rainy day. The reason is that the FSA is proposing a blanket qualification for any person offering financial advice—a qualification that is considerably higher than the current requirement. The FSA will not permit exemptions to this qualification structure, and it will not permit a gradual increase in qualifications vis-à-vis the risk and complexity of the product being advised on. The advisers at the Kensington and other societies will be required to obtain degree-level qualifications to sell a simple endowment or whole-of-life policy for a maximum premium of £5.70 per week. This is the only type of product that they sell, and the level of qualification required is disproportionate to the advice that they give.

The syllabuses of the proposed qualifications are irrelevant to the needs of those on low incomes. The exams focus on trusts, inheritance tax, capital gains tax and portfolio management. Those on low incomes may aspire to require this level of financial planning, but in the here and now they need advice on issues such as debt and benefits. The qualification requirements will mean that members of this society and others will be denied access to financial advice after 2012. The society will be unable to recruit new members because its advisers will be unable to offer advice to prospective members. A lack of new members will mean that this society and others will close. As a result, their members will lose access to financial products that they can afford and, in all likelihood, will be excluded from financial services thereafter.

That outcome seems to contradict the aims of the FSA and the Government in tackling financial exclusion. The RDR, while seeking to protect the interests of high net worth consumers, is by default taking away one of the few opportunities that those on low and insecure incomes have to obtain financial products. If the Government and the FSA are keen on promoting financial inclusion and financial literacy, then the existence of friendly societies like the Kensington is essential in delivering such benefits to those on low incomes. The concept of mutuality appears central to the idea of the big society, yet the consequences of the RDR would be to remove the remaining friendly societies that promote this notion.

[Jim Shannon (Strangford) (DUP)]

Does the hon. Gentleman agree that the reduction in IFA numbers would also have an impact on the volume of new insurance policies and the work that would come from that?

[Tom Blenkinsop]

Yes, I certainly agree. We would lose skills and experience, as well as putting people out of jobs for no good reason whatsoever.

The qualification requirements would deliver no discernable benefit to the vast majority of consumers beyond the wealthiest few. Let me assure hon. Members that by arguing against the proposed qualifications, I am not saying that such members deserve less than the better-off, but merely stating that they require different things.

The Kensington has increased its premium income by over 40% in the past seven years despite the fact that tax-exempt premium limits have not been increased during this period. That indicates that there is a demand for the service and the products. The Kensington delivers products that fulfil real needs for those on low incomes. For example, in the Teesside area, owing to bad debt difficulties, undertakers will not proceed with a funeral unless the deceased’s relatives can provide a deposit of £750. The Kensington, among others, can fulfil that need because its minimum premium is £1 per week, which is enough to generate £1,000 of death cover. It has a local presence, which means that the agent can deliver a death claim cheque to the family directly within two working days of the member dying, and the whole process is conducted by someone whom the family knows.

The majority of members of the Kensington and other friendly societies in Teesside live in the poorest and most socially deprived council wards in the UK. Our people require honest and appropriately qualified agents who understand the benefits system, can provide advice on debt issues, and can generally assist in all forms of financial planning for those with limited disposable incomes. It is difficult to imagine that any such member would ever require advice on IHT planning, trusts, corporate financial planning, portfolio management or CGT.

The QCF level 4 is a disproportionate qualification for the home service market operating within tax exempt limits. It will not add value to consumers, nor improve the service that they receive. It will make home service sales forces even more expensive to run and will generate further financial exclusion. A more considered qualification that focused on the real, everyday financial issues that affect those on low incomes would be welcome. Current academic thinking reinforces my view, which I assume is shared by other hon. Members, that the only effective method of accessing and engaging those on low incomes in savings and protection products is a direct sales force. Indeed, the Department for Work and Pensions website states that tenant engagement teams are being piloted to increase take-up of home contents insurance,

“particularly as all other traditional methods of promotion (leaflets, flyers, competitions, prizes etc) have not resulted in large scale increases in the number of policy holders.”

In conclusion, the RDR qualification requirements for advisers selling tax-exempt, small premium assurance products are disproportionate and irrelevant to the needs of those on low incomes. The RDR will reduce the access of those on low incomes to basic assurance products at a time when significant amounts of energy and money are being invested in promoting financial inclusion in that area.

--- Later in debate ---

[Jim Shannon (Strangford) (DUP)]

I congratulate the hon. Members for West Worcestershire (Harriett Baldwin) and for Wyre Forest (Mark Garnier) on introducing this apt motion. It has certainly galvanised a lot of interest in my constituency. Like all hon. Members, I have received e-mails, letters and phone calls, and I have held personal interviews, so I have had lots of information. My constituents have made it clear to me from the outset that this is not just about advisers who provide help to wealthy people who can stay at home and watch their money work and grow. I am speaking tonight on behalf of people who have a small sum of disposable income and who wish to enhance their small pensions at retirement age and seek help and advice from financial advisers. They have asked me to speak on their behalf, and I happen to know that some of them are watching the Parliament channel to see that I say what I said I would say.

One constituent sent me some background information, which sets out the situation very clearly. The retail distribution review appears to offer solutions—at least on paper—to matters which the FSA has identified as problematic within the industry. I am not aware of those problems, which concerns me. The FSA believes that the measures set out in the RDR proposals will provide for greater consumer confidence and engagement within the industry. It is planned that all advisers attain the qualifications and credit framework level 4 qualification by 31 December 2012.

A constituent of mine wrote:

“I have attended seminars at which RDR and the future of Independent Financial Advisers are discussed. They all have the same line…segment your client base…they give guidelines how to do this so that we have an income stream from a fee base structure. If I were to follow this suggestion I would have 3 clients left. When I question this approach, on every occasion the reply is…I need to change my market.”

Did anyone ever hear such advice in all their life? Goodness me!

[Tom Blenkinsop]

Building society closures and the exodus of the large phone service companies have reduced almost to nil the supply of premium products for those on low incomes, particular the 4 million who still feel disengaged. What do the hon. Gentleman’s constituents think about that?

[Jim Shannon]

I thank the hon. Gentleman for his comments. I have the same concerns.

It is estimated that it takes 400 hours to do the exams. That is approximately 10 weeks when people do not have the opportunity to earn money or do what they normally do. Advisers in Strangford have painted a different picture to that painted by the retail distribution review. Most of the customers of advisers in my constituency are working class. I have been informed by many financial advisers that they have spent time with people without receiving any financial reward—we have heard that from hon. Members on both sides of the House tonight.

One adviser offered advice to a female client who was about to go through a separation. She was stressed out about her finances, but the adviser spent a lot of his time on the phone to her. For all his work, he earned not a penny. The road that the regulator is pushing advisers down will mean that they will be unable to afford time if they do not get paid. Will we therefore end up with people being unable to afford sound financial advice, exactly as the hon. Gentleman said?

I represent a rural area, as do many hon. Members, including the hon. Member for Aberconwy (Guto Bebb). We are aware how the proposals will affect and impact on people in rural areas. Consumers will suffer substantial and unprecedented detriment owing to the unintended consequences of the proposals. Would it not be wiser or better to protect grandparent rights, as at least two or three hon. Members have intimated? Doing so would give the protection that many need. A substantial portion of the adviser population will leave the industry. Various surveys have been conducted and although there is no consensus on the figures, it is obvious that adviser numbers will fall drastically.

One of my constituents in Strangford wrote:

“I am 54 years of age…the heavy regulation is taking its toll. I am ¾ of the way through the new exam structure. Many advisers are finding it impossible to pass these exams as many are over 55 and are finding the stress unbearable.”

Another hon. Member referred to a 63-year-old adviser for whom contemplating exams will put him away in the head. The result will be anxiety, depression and stress. My constituent predicted a drastic fall over the next three years in the number of independent financial advisers. He continued:

“Advisers are finding the regulations unbearable, and many are having problems due to”

what is taking place. He made a statement that I found moving and honest:

“We are all starting to swallow the negativity thrown at us by the regulator over the past numbers of years, which is trying to kill us off”.

Now IFAs are facing another obstacle and barrier. We cannot afford for any businesses to be lost, especially ones that will take the financial burden off the state by enabling people to supplement their pensions and not need state aid and benefit. They are the people in my constituency and across Northern Ireland on whose behalf I wish to speak.

Robin Stoakley, head of intermediary business at Schroders, said:

“I do see up to 30 per cent of the IFA market leaving”.

How on earth could we support something that would take away 30% of the IFA market? Furthermore, Aviva UK Life marketing director, David Barral, said the firm predicts that by 2013, IFA numbers will fall to 10,000, leaving middle market consumers unserviced.

[Andrea Leadsom (South Northamptonshire) (Con)]

Does the hon. Gentleman agree that at a time when we desperately need small and medium-sized enterprises to be increasing their activity, not reducing it dramatically, this is a disastrous thing to be happening?

[Jim Shannon]

I agree wholeheartedly with the hon. Lady. The one great thing about tonight’s debate is that we have, I think, a united front—if that is the way to put it. All the parties are in agreement, which is good news.

Time does not permit me to go through the long list of people in the industry agreeing with the prediction of a sharp decline in the number of advisers owing to these proposals. However, it is clear that there is a definite problem with these regulations and their impact on IFAs. If the adviser population falls by about a third, as predicted, it will leave millions of consumers without an adviser. Some will migrate to other advisers—we understand that—but a great many will be left without a trusted source of advice. The UK currently suffers from the largest saving retirement and protection gaps in its history, and it is essential that these gaps and the current over-reliance on the state are reduced. I think that many in the House are prepared to accept that.

The UK can ill afford to lose 10,000 advisers. Such a catastrophe would intensify the existing problems. The UK’s leading consumer champion, Martin Lewis, of Money Saving Expert, remarked:

“There’s a worrying possibility that the FSA is about to kill off”—

his words—

“independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash.”

That is an expert’s opinion.

I speak not only for the financial advisers in my area who have been forced out of their jobs, but for the wee man and the wee woman who have asked me to come here and fight their case for them. I also stand for the thousands of people in my constituency who benefit from the current system. People who are forced to pay for all advice offered will be unable to invest much, and therefore will not invest or, worse, will invest somewhere they should not, with dire consequences. I am aware that it is the FSA that is making these recommendations, and I ask the Minister to do the honourable thing and support the alternative proposals put forward. They would benefit the larger advisers, as the FSA is trying to do. However, we also have to look after those disadvantaged consumers, so I urge the House to support them.

[Several hon. Members]

rose—