Independent Financial Advisers (Regulation)

Mark Garnier Excerpts

Monday 29th November 2010 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I beg to move,

That this House has considered the matter of regulation of independent financial advisers.

I am delighted that my hon. Friend the Member for West Worcestershire (Harriett Baldwin) and I have secured this debate. As all hon. Members will know, this country finds itself in a dire financial situation, which extends deep into the private lives of many of our citizens. This country has the lowest personal savings ratio in the G20 and the highest level of personal debt, with half of all the personal debt in the EU borne by the inhabitants of these islands. We face a well-known problem of pensions underfunding, involving not just a deficit on pension liabilities but the fact that people are not putting enough aside for their retirement. Mortgages were taken out at the height of the boom, in some cases at levels higher than 100% of the value of the property to which they relate, and mortgage lenders worry about the next time bomb that may hit our economy—a trend towards interest-only mortgages. These are mortgages where the borrower hopes that inflation and an opportunity to downscale will pay off their mortgage. We also have a housing market in which many commentators still consider there is more readjustment to come.

It is against that background that we are debating the regulation of an important group of professionals, namely independent financial advisers. I am particularly keen to talk about that group because if we are even to begin to deal with the problems that I have outlined, we need a resource of professionals who will be able to spread the word and give sound financial advice to the wider population. The marketplace for retail investment advice in the UK is very diverse, involving banks, building societies, stockbrokers and some 33,000 independent financial advisers, as well some other players. It is fair to say that there have been problems in the past, and the Financial Services Authority suggested in its evidence to the Treasury Committee last week that there was and still is a significant amount of mis-selling every year; a figure of some £250 million a year was volunteered, but that is based largely on assumption and extrapolation from previous mis-selling scandals.

[Mr Brian H. Donohoe (Central Ayrshire) (Lab)]

A number of constituents have come to me because they are very concerned about what the hon. Gentleman is talking about, as they are going to have to revalue themselves and go through another examination. Can he shed some light on why that should be?

[Mark Garnier]

I trust that the hon. Gentleman is referring to the independent financial advisers, who will have to do that. I will come to that a little later in my speech, if I may, but I will address it specifically.

The point I was making is important because it highlights the significant amount of money being drawn out of the net savings pool of the country. It is only right that the FSA and the regulators should address the problem. They looked into it and surmised that in this marketplace competition is hindered by opaqueness and incentive conflicts, resulting in the interests of firms versus those of customers not being fully aligned. The FSA set up the retail distribution review—RDR—in 2006 to address those problems, and the new rules are due to come into force in January 2013. Specifically, according to the FSA, the RDR aimed to bring about three principal changes. The first was an improvement in the clarity with which firms describe their services to consumers. Secondly, it sought to address the potential for advisers’ remuneration to distort consumer outcomes. Finally, it aimed for an improvement in advisers’ professional standards.

[Tony Cunningham (Workington) (Lab)]

On that final point, I have also had a number of people writing to me. Would the hon. Gentleman agree that one of the overriding concerns—I have had letters from people with 29 or 30 years’ experience—is that experience does not seem to count for anything?

[Mark Garnier]

That is a recurring theme and I shall come on to that point, but the hon. Gentleman is right to raise it. It has been raised by huge numbers of IFAs who have got in touch with me, my hon. Friend the Member for West Worcestershire and with many other Members.

The three aims that the FSA has talked about are, I believe, laudable in principle, overall. It is not our intention tonight to derail the retail distribution review, which will improve standards for consumers. I suspect that not a single professional in the industry would disagree with the overall principles. Indeed, Which?, the consumer champion, strongly supports the measures contained in the RDR, and states that its members

“firmly believe that the IFA industry is best placed to offer this advice”.

However, the devil is, as always, in the detail.

In addressing the problems, the FSA has, through the RDR, introduced issues that disproportionately affect the IFA community. The IFA trade organisation, the Association of Independent Financial Advisers—AIFA—suggested in evidence to the Treasury Committee that although some 30% of IFAs strongly supported the RDR and 40% were rather ambivalent towards it, 30% would not put up with the RDR. The 30% who are against the RDR suggest that it would be better to leave the industry altogether, so the community of IFAs would shrink significantly.

[Glyn Davies (Montgomeryshire) (Con)]

Does my hon. Friend agree that that is particularly damaging in rural areas, where all the independent advisers are either one-man businesses or very small businesses, and that a huge proportion of the 30% who do not like the RDR are likely to come from such rural areas?

[Mark Garnier]

My hon. Friend makes an important point. Small businesses in rural areas are likely to be most affected because they have so few resources in their offices. As a direct result, poorer communities in rural areas will be denied access to independent financial advice. That is not a good thing.

Lord Turner, the chairman of the FSA, suggested that reducing the number of IFAs might well reduce the overall cost of investor advice. How can reducing competition possibly result in improved service to consumers? The key issues facing the worried community of IFAs can be reduced to just a handful of salient points. The first concerns qualifications, which are probably the cause of the biggest mailbags on this subject. It has been said, perhaps a little harshly, that IFAs hold a qualification no better than that of a McDonald’s burger bar employee—a qualification and credit framework level 3 pass, which is equivalent to an A-level.

The RDR requires all financial advisers to attain the QCF level 4 pass and, in the broadest sense, that is not unreasonable. However, it does not take into account the fact that a great many IFAs have a wealth of experience but, with an average age of 47, little enthusiasm to start taking exams. It is estimated that the exams will require 100 hours of study for each of four modules—that is 400 hours of study. We must bear in mind the fact that that is for a full-time professional who needs to earn a living and who may, as my hon. Friend the Member for Montgomeryshire (Glyn Davies) mentioned, be working by himself in a rural community with little support.

[Mr John Baron (Basildon and Billericay) (Con)]

Can my hon. Friend come up with any explanation of why grandfathering rights could not be applied to those with long experience as IFAs, given that such experience is much needed in the marketplace by savers who are desperate to make good financial decisions?

[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.

[Mark Pawsey (Rugby) (Con)]

Does my hon. Friend agree that if experienced independent financial advisers are driven from the market, those who will lose out most will be those with the smallest amount of assets, who will not get the advice that they receive at present?

[Mark Garnier]

Absolutely. The other group of people who will lose out because of the removal of these grey-haired sage IFAs will be the younger ones. Who will mentor the young, aspiring and highly qualified but short on experience new trainee? The FSA has no answer.

Let me turn now to fees and commissions. The FSA is further proposing that from January 2013 consumers will no longer be able to choose how their adviser is remunerated.

[Tracey Crouch (Chatham and Aylesford) (Con)]

Does my hon. Friend know of any survey that has been conducted of whether consumers have any appetite to pay fees for their financial advice?

[Mark Garnier]

My hon. Friend will not be at all surprised to hear that there are a number of surveys. Which? Undertook a survey that showed that 85% of people would prefer to pay fees, yet a survey by Harris Interactive showed that only 6% of the public said they would be happy to pay fees as opposed to commissions. That is a big problem, I think.

In future, customers will need to agree a fee with their adviser. That means that no longer will a client pay for advice via a commission charged on a transaction.

[Justin Tomlinson (North Swindon) (Con)]

I congratulate my hon. Friend on securing this excellent debate. Does he agree that if it is believed that commission makes advisers more inclined to promote products with higher commission, the same would surely apply to banks that offer their staff product sales incentives? Should changes not be consistent across the sector?

[Mark Garnier]

Yes, they should, and it is fair to say that the FSA is looking at the whole sector.

At the moment, every client is given the option of paying for their advice via a fee or commission. Since 1991, every client of every IFA has been given full details in writing of the adviser’s commission, and the overwhelming majority of clients elect to pay by commission. During that period, the market share of the IFA sector has increased from 29% to more than 65%—based on commission charging—with consumers demonstrating a clear understanding of and preference for independent financial advice. It should be noted that independent advice is not the preserve of the wealthy. Some 60% of IFA clients are ranked as C1 or below. If consumers are forced to pay a fee for advice, it is inevitable that many who would benefit from independent advice will not seek it, resulting in only the well-off accessing a significantly reduced IFA sector. The subject of commissions is extensive and I am sure that many hon. Members will want to expand on it in their speeches.

[John Woodcock (Barrow and Furness) (Lab/Co-op)]

Does the hon. Gentleman not agree that this issue is not clear cut? Surely it is right that there is some concern about the idea of a commission. Is it not the case that the concern over not wanting to pay fees is about paying a fee up front? Could the fees not be back-ended in the way that commission effectively is, making it a flat rate?

[Mark Garnier]

The issue of commissions is complex and is surrounded by several other issues, one of the simplest of which is that the Office of Fair Trading has deemed it right that the providers of the products should be able to charge or incentivise IFAs and salespeople in a variety of ways. The difficulty with allowing different levels of remuneration to IFAs is that it creates some of the problems we have talked about, but the OFT will not allow a flat rate of commission, which is one solution that could have dealt with this issue.

The risk in being an IFA is a major issue. All professions carry an element of professional risk, which is covered by professional indemnity insurance. In pricing that risk, underwriters take into account the fact that there is a so-called long-stop of liability, which is usually about 15 years, but that is not the case for IFAs. It has been deemed fair for IFAs to have an unlimited period of liability, such that an 80-year-old retired sole trading IFA might be liable for a product sold half a century earlier. It might be that the claimant has a legitimate claim, but in our compensation culture it might be that he does not feel satisfied with what he has got and is just having a go.

In practical terms, for a limited liability company, as the business gets older it becomes less saleable as it accrues a large pool of risk on the products it has sold since it opened its door to trading. Is it fair that an IFA could be chased to the grave in a manner that no other profession allows? Will that indefinite level of risk be an incentive to newcomers coming into the profession? I think that the answer to both those questions is no.

The cost of implementing the RDR is high. Currently, a firm of IFAs with up to 25 advisers is required to put aside only £10,000 by way of regulatory capital. That minimum will double under the RDR, but there is a new element to come in. Under the new rules, firms may be required to put aside 90 days’ worth of operating costs. For the better-run firms with sophisticated systems and offices that could be a significant increase. It is not inconceivable that a firm employing 10 qualified IFAs supported by high-quality support staff could see its regulatory capital rise from £10,000 to £200,000, £300,000, £400,000 or even £500,000. That rule alone is an incentive for firms to go from providing a high-level service to a cut-price one.

But what does all this mean for the cost of the RDR to the consumer? The original estimates for the cost-benefit analysis of the RDR gave a net present value of £600 million for the first five years including one-off costs. That has now risen to a truly staggering £1.7 billion in order to address an unsubstantiated cost of mis-selling £250 million. Moreover, it is by no means the responsibility of the IFA community alone. In 2009, according to the financial ombudsman, just 2% of complaints in this area related to the activity of IFAs, while 61% related to banks, but 65% of the market share is held by IFAs.

[Dan Rogerson (North Cornwall) (LD)]

I congratulate the hon. Gentleman and the hon. Member for West Worcestershire (Harriett Baldwin) on securing this debate. Does the hon. Gentleman agree that in putting together the RDR, the FSA has throughout consistently ignored all the comment from the industry, this place and elsewhere and that the time has come for it to listen and to review the whole set-up?

[Mark Garnier]

The hon. Gentleman is absolutely right. The overriding message coming back from the IFA community is of being ignored by the regulator. It has been suggested that Adair Turner, as someone who comes from McKinsey, looks at the issue from a box-ticking perspective as opposed to considering the fundamental needs of the consumer, which is the important issue.

IFAs are going to bear the brunt of the changes, and especially those with small operations in rural communities.

[Mr Adrian Sanders (Torbay) (LD)]

Is not the problem with the whole process the fact that it is angled disproportionately at hurting small traders, often in the poorer areas of the country? That needs to be reversed if the changes are to receive any credibility in or support from this place.

[Mark Garnier]

That is absolutely right.

[Mr Andrew Tyrie (Chichester) (Con)]

I apologise for breaking up my hon. Friend’s excellent speech. Does he agree that a crucial point that we must get across to the FSA tonight is that the increase in these compliance burdens will be paid for by the consumer who will therefore lose out? The loss of perspective from the FSA and the inflexibility of its approach in implementing the changes are reflected in the large number of people here today.

[Mark Garnier]

Absolutely, and I am very grateful to my hon. Friend the Chairman of the Treasury Committee for bringing that up.

The £1.7 billion costs being pushed on to the consumer mean that £1.7 billion will be taken out of the savings pool. We simply cannot take that approach if we are trying to encourage people to save and to pay off their debts. That is why the changes are so fundamentally wrong. IFAs will have to bear the brunt of them, especially those with small operations where the requirement to sit exams, recapitalise and install new compliance systems, as well as all the other requirements of RDR, will often be handled by the same individual who is offering advice to the customer. Hector Sants estimated that implementation might mean a loss to the IFA community of 20% of the professionals who work in this arena today. Adair Turner has said that this is an acceptable cost, but I do not agree. It is unacceptable that up to 3,000 professionals according to the FSA’s figures, and more according to other research, will lose their livelihoods. Among those who stay, the cost will be passed on to the consumer, as my hon. Friend the Member for Chichester (Mr Tyrie) has said.

There are many questions to ask. Will the RDR deal with the cowboys? Will a reduction in the number of IFAs encourage a savings culture or detract from it? Is it right that when we are encouraging entrepreneurs to set up new businesses, the outgoing regulator should be bringing about such devastating change to this industry? My constituent Mike Jeacock is typical of the type of IFA who is threatened by the RDR. He runs a high street shop in Stourport-on-Severn and he networks for new business among his mates in the Stourport Workmen’s Club. These are not high-rolling wealth managers prowling family offices in Mayfair. We are talking about people who earn a living honestly servicing the financial interests of people who can afford little but who need financial advice.

The retail distribution review is a significant market intervention, and market interventions, particularly of such a fundamental and far-reaching nature, require overwhelming evidence of consumer detriment and the appropriateness of the solution. In addition, any solution needs to meet cost-benefit requirements. Does the RDR satisfy these tests? It appears to be based on a combination of unfounded assertions, limited and contradictory research and, as regards some of its solutions, little more than a hunch that the outcome will somehow be better than the present system.

It is estimated that up to 10,000 experienced IFAs of good standing will be forced to retire for no valid reason.

[Teresa Pearce (Erith and Thamesmead) (Lab)]

The FSA says that only less competent advisers will not be able to comply with the new qualifications and that the changes will therefore act as a sort of natural selection for the industry. Does the hon. Gentleman agree that the opposite might be true because it will be the more successful and long-experienced advisers with well-developed client lists who will not be able to comply or who will choose not to, and that we will therefore lose their experience from the industry?

[Mark Garnier]

Yes, I agree entirely. It is absolutely the case that the harder-working and more successful IFAs simply will not have time to take the exams and start dealing with the dead hand of regulation from the FSA.

With up 10,000 experienced IFAs of good standing potentially being forced to retire for no valid reason, it is estimated that as many as 3 million existing clients, many of whom will be elderly, will lose access to their trusted adviser as of 1 January 2013. I fear that without the FSA looking again at grandfathering the experienced through the process of implementation and without a rethink about commissions, independent financial advice will become the preserve of the wealthy only.

[Alun Cairns (Vale of Glamorgan) (Con)]

Will my hon. Friend give way?

[Mark Garnier]

I have just about finished actually.

[Several hon. Members]

rose—

--- Later in debate ---

[Mark Garnier]

I am conscious that I have just over one minute to sum up this incredibly useful debate. There has been an extraordinary amount of unanimity on both sides of the Chamber; the debate has been completely unpolitical. We have talked about financial inclusion for those who need help and about protecting smaller businesses. We have questioned why the RDR was necessary and talked about grandfathering. IFAs are singular in the sense that they are not allowed to be grandfathered; long-stopping is something else that they are singularly affected by. We have talked about pushing savers into the hands of the banks, even though the banks have a worse track record than IFAs.

Importantly, we have also talked about the fact that we need more time to address this issue. I completely appreciate that we have already had six years, but we are entering a period when European legislation will be affecting these matters as well. We are also seeing the FSA moving into areas covered by the Consumer Protection and Markets Authority and the Prudential Regulation Authority. There are ongoing changes that give us an opportunity to extend the period.

I hope that three things have come out of the debate. First, Parliament has not had a chance to do this before because it is the first time that we have had such a Back-Bench debate, so will the FSA please listen following this new development? We have the feeling—