Withdraw or suspend the FSAs Retail Distribution Review

At a time when the government wants everybody to have less reliance on the state new regulations are proceeding from the previous regime which will deny thousands of lower and averagely paid people access to sound independent financial advice. The regulations are being proposed as a way to increase professionalism among the practioners. However this is just a sop to the extreme consumerist lobby because of a few bad apples historically. The biggest cowboys have been booted out of the industry already. No existing practioner has any argument with wanting to be regarded as a true professional, and those currently practicing, can usually point to many years of adapting to higher standards imposed by the regulator of the day.

The new rules affect mainly independent financial advisers (IFAs) and also direct/tied sales outlets (eg Banks)

The unintended consequences of the rules are many but the most important are as follows:

It is estimated in various media that up to a quarter or even a third of existing advisers, will leave the industry when the rules take effect at the end of 2012. These are mainly advisers in their 50s and 60s who may have an unimpeachable record of giving advice, but are being told that in order to continue to practice they will have to take yet another set of exams of semi-degree standard to 'prove' their professionalism. What incentive is there for them to undertake yet another round of red-tape, box-ticking compliance when they are usually the most experienced people in the industry.

What other profession treats its proven, and most experienced practioners in such a way?

Secondly is the dirty word "commission".

Commission is flawed (but could be mended?) but it has worked for a century. Historically this has always been the way that intermediaries got paid. (Albeit that some in the consumerist lobby think IFAs shoud work for free) The proposal is to ban commission and replace it with customer agreed fees. The problem here is how many people are willing or able to pay fees?

The argument is that commission causes bias and the only reason a product is sold is so the adviser can earn commission. An adviser should be able to expect a reasonable reward for their time and expertise, having trained and been examined to enable them to do the job in the first place. As long as a valid financial need is being dealt with commission serves a useful purpose by enabling customers to get advice without having to get their chequebooks out. Since 1996 commission has been openly disclosed in documentation so that customers can see exactly what the commission amounted to and what effect it had on their investment.

In 2005 the FSA commissioned Charles River Associates to report on commision and intermediary remuneration, which it did via a number of 'mystery shopping' exercises and interviews. It concluded that there was "no evidence of bias being prevalent across the market" and "no evidence of bias to oversell".   Strangely, however the FSA decided that it would ignore its own commisioned report.

Any IFA will tell you that when a customer is offered the choice between the adviser being paid by commission or a fee, overwhelmingly the customer chooses commission. Commission is only a dirty word among those who don't understand it.

IFA businesses are the biggest aid to reducing reliance on state welfare because they advise people how to provide for themselves by saving for the long term and by protecting against loss of life, loss of job, ill health. Without them, people will be reliant on the state for such benefits, because few are motivated to do these things for themselves without advice.

The FSA seem to favour banks over IFAs. However we have seen what happens with the banks when corporate greed is more important than customer care. The Financial Ombudsman's own statistics show that more than 90% of all complaints it gets are in relation to banks, only a very small proportion in relation to IFAs.

The government have said that they will provide access to free financial advice but have yet to detail how that will work. Will the 'advisers' be fully qualified? How will they get paid? Who pays? What will be the scope of their advice?

Wouldn't it be better to encourage financial advice through experienced advisers rather than re-invent the wheel or restrict it to a financial elite?

There are other ways of ensuring protection for the consumer. Removing the perfect solution from the industry is not one of them

Allow experienced advisers to continue and allow commission to continue. The simple result without doubt will be that less people will be financially dependent on the state.

Why is this idea important?

The effects of the Retail Distribution Review on the average person with real financial needs and those with little financial understanding will be disastrous.

There will be significantly fewer advisers – the consequences of this is that customers will be driven to the banks (who's motivation is likely to be to sell its own products) and the few IFAs left will be dealing mainly with the wealthy or those willing to reduce their savings to pay the fees involved.

Anecdotal evidence says that when willing, people are prepared to pay something like £50 per hour for advice. Whereas the cost of running an advice practice with the current regulatory regime mean that fees are more likely to be around £150/£200 per hour.

There are no votes in a government scaling this back, possibly the opposite. However if no one in this new government gets to grips with it, and tells it like it is, then we will all, as taxpayers, end up paying the consequences.

The untintended consequences for the people of this country and the likely additional burden on the state cannot be understated.

David/Nick, you've shown that you are prepared to take tough decisions, are you listening now?

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