Independent Financial Advisers (Regulation)

Tessa Munt Excerpts

Monday 29th November 2010 Commons Chamber

[Tessa Munt (Wells) (LD)]

I have taken feedback from my local independent financial advisers in rural Somerset. The general approach to the retail distribution review has fundamental flaws and will inevitably fail in one area—which is surely to encourage people to buy more financial products and to take responsibility for their financial futures. The RDR will fail because the regulator is trying to impose on the industry an advice process and a particular bids model without recognising or understanding the realities of what the public want.

Surely it would be better to find a way of developing an environment in which product providers and advisers have the freedom to develop their own business models, providing that they were honest and straightforward with clients and treated them fairly. That would allow innovation and would have some chance of success. The whole situation is similar to what happens when central Government try rigidly to control everything, instead of delegating responsibility to local authorities. Central Government do not always understand the issues at the grass roots and may get it all wrong. This Government should move us away from a prescriptive approach to one that allows an element of freedom.

[Neil Carmichael (Stroud) (Con)]

Will my hon. Friend give way?

[Tessa Munt]

I want to be brief.

We should consider what an IFA’s clients are seeking to buy when they look at financial products, look at what they do not like about the present procedures and consider whether the RDR will change anything. A constituent of mine has stated that when his clients buy their financial service products, they are seeking a similar experience to that when they buy other goods. First, they want the buying process to be a simple and pleasant experience. If the Government wish the public to buy more financial products and take responsibility for their future, they should not forget that fundamental point. That is not easy to achieve in the current environment. For a start, most clients do not like to be issued with mountains of complex paperwork. They find it quite intimidating.

Secondly, a lot of people visit an IFA with a specific purpose in mind—to invest some spare funds, to discuss their pension, and so on. They wish to restrict the conversation to those points that they believe are relevant and, having listened to what the IFA has to say about the matter, will wish to make up their own minds about whether the product under discussion is suitable for their needs. However, once in discussions, people often have to go through the IFA’s “advice process”, and are no longer responsible for their own decisions. The IFA has to be sure that the product is right for them, so these people find themselves undergoing a time-consuming and irritating process, having to answer personal questions that they often consider an invasion of their privacy.

Thirdly, clients quite rightly seek value for money. Unfortunately, the whole regulatory procedure is so cumbersome that it is no longer cost-effective for those with limited funds to seek an IFA’s advice. The cost of many financial products has risen dramatically. For example, 30 years ago the annual management charge on a unit trust was usually 0.25% or sometimes 0.375% per annum, but now it is usually 1.5% per annum. Much of the increase has arisen purely as a result of regulatory costs. A significant part of the cost increase is driven by regulation, so everyone suffers.

Will the RDR change any of the above? Not in my opinion: there is little evidence that any of those fundamental issues will change as a result of the RDR. We are all in favour of raising standards, but further examination passes will not address any of those issues.

[Annette Brooke (Mid Dorset and North Poole) (LD)]

Does my hon. Friend agree that it is quite surprising that even where IFAs are well on their way to getting the new qualifications, they are still against the system and see the exams as pointless? The new qualifications will not weed anybody out, which might have been their objective, because everybody sees them as inappropriate for the job that these people do.

[Tessa Munt]

Absolutely, and I thank my hon. Friend for her intervention.

The cost of paying for the IFA’s time will not change. We are all in favour of raising standards, but further examination passes will not address any of the issues that I have set out, and clients will not mind whether they pay commission or fees. To improve matters, the regulator must lessen the threat of litigation by giving clients the freedom, if they so wish, to take an element of personal responsibility in their decisions and to buy from an IFA after those discussions. The regulator must also stop telling IFAs how to structure their business models and must allow them be innovative. Without the mountains of regulation, most experienced IFAs could significantly improve the service that they offer their clients while dramatically reducing their charges. Also, they could probably employ more people and could significantly improve the customer’s experience.

I would like to quote from two small independent financial advisers in rural Somerset. One says:

“If the RDR goes through in the current format I am likely to lose the adviser…I employ. He is highly intelligent (a university graduate) and has over 20 years relevant experience. He is very competent to undertake the work that he does. However, he is in his…fifties and is busy with two children still at home and another at university. At this stage of his life he simply does not wish to use all of his spare time studying for further examinations. So this will be another person in your constituency without a job—so unnecessary.”

The second person said:

“I am lucky, I have all the necessary exams. I just hope they do not raise the bar again. I really could not face the pressure of having to pass more exams at my age. If it happened, I would have to close and more people would lose their jobs.”

The FSA in this case is judge, jury and executioner. I ask the Ministers to reconsider the rules for 2013, and to reopen talks with the FSA, to make it possible for independent financial advisers to offer the high-quality service that they want to give to their customers.