Current and future regulatory issues
Speech by David Kenmir, Managing Director, Regulatory Services
Inaugural Personal Finance Society Conference
21 November 2005
Good morning ladies and gentlemen. I am delighted to be here to speak at the inaugural PFS conference following the merger of the Society of Financial Advisers (SOFA) and the Life Insurance Association (LIA). We at the FSA have our own experience with mergers of different organisations and we know that it can take some time for changes to bed down. From the regulator's perspective it is therefore encouraging to see that you are using your combined resources and clout to focus on increasing professionalism in the sector. This is something, that as you know, we are keen to promote.
PFS is a 'professional body', it therefore has a central role to play in improving the standards of conduct and knowledge amongst advisers; it must also police their standards so that the reputation of its members is maintained. PFS is therefore different to the various trade associations that represent this sector, whose legitimate role is primarily to promote the interests of their members. Ultimately, the more professional the industry the less intrusive the FSA needs to be. We at the FSA therefore share your interest in the PFS' future success.
This is the last time I will be speaking for the FSA as retail intermediaries sector leader as I have handed my responsibilities over to Stephen Bland, Director of our Small Firms Division, who will also be covering the mortgage and general insurance sectors. I will still be involved in financial adviser regulation as I am responsible for the Firm Contact Centre, regulatory reporting and the FSA fee process, Stephen will be your main contact on issues specific to your sector.
Change remains a central feature of the market in which you operate. You have had to deal with many changes during my time as FSA sector leader such as the tail end of the pension review, endowment and precipice bond problems, increased FSCS levies, difficulties in getting PII, the falling stock market and a lack of consumer confidence. I have been struck by the resilience shown both by individual advisers and the market as a whole -according to our figures 65% of your firms have been in existence for over 10 years- and am therefore confident that you will be able to deal with some of the changes that I want to outline now.
One of the biggest changes to the retail investment market of recent times has surely been depolarisation. The purpose of our new regime is to give consumers access to a wider choice of good value products. We wanted to achieve this overall aim by: removing regulatory barriers to competition and innovation; exerting a pro-competitive force on commission levels and through them, on charges; and improving consumers’ understanding of the cost of advice. To accompany this liberalisation we also sought to improve consumers’ understanding of the status of their adviser and reduce the risk of commission bias.
Naturally, in the wake of such a change we need to monitor the impact of depolarisation on the market as a whole. There are two stages to this monitoring: maintaining a general understanding of how the market is developing on an on-going basis, and a more formal assessment. Though I would like to stress that it's too early for us to make any formal assessment, our initial monitoring suggests that the market is responding to the new opportunities available and that this is resulting in a diversity of strategies. A number of single tied firms are moving towards multi-tie distribution, for example Barclays, Zurich and HSBC: and in doing so they are bringing a wider range of products to their customers. In this context let me reiterate: The FSA does not have a "target size" for firms in any sector of the financial adviser industry – whether they are single tied, multi-tied, whole of market or fully independent.
We are also seeing a general preference amongst IFAs to remain independent by providing whole of market advice and offering their customers a fee only option of paying for that advice. I hope these early indications will reassure those among you who feared the impact of depolarisation on the IFA sector. It is encouraging to note that many of you clearly place value on providing a true independent service to your clients. We firmly believe that there continues to be a very significant role for firms to provide 'independent' advice. The new disclosure requirements will help consumers to distinguish between the different levels of service available. IFAs providing a professional service should be well placed in the depolarised world.
As depolarisation is such a significant change to the functioning of the financial adviser market, we also committed in our Business Plan to start a more formal assessment of whether depolarisation will bring about its intended effects. We will be doing this through a "post implementation review of depolarisation". This is one of a number of such reviews we are carrying out and it represents a renewed determination by us to ensure that our regime is effective. There has been some interest amongst firms and the industry regarding these plans and so I thought it would be helpful to outline to you how we see the more formal depolarisation review progressing.
We are conscious that depolarisation needs time to bed in, and many of its intended outcomes will take some time to materialise, or be measurable. As such the review will be a rolling programme looking at the market at various stages. As an initial step, we are assessing the degree of compliance with the new requirements. We are, for example, presently analysing the results of an exercise to check the compliance of firms' initial disclosure documents and menus. We are also undertaking some mystery shopping to see how advisers are adapting to the new disclosure requirements. We will be assessing depolarisation against its objectives, as discussed in the consultation phase, to see whether it is making a difference to consumers and achieving its intended outcomes. To be able to evaluate the situation before and after depolarisation took place we have gathered baseline data on various aspects of the market, including research about consumer attitudes as well as basic product information and the activities of firms. We will use this baseline data to compare against the same measures in future: for some indicators in June 2006, but in much more detail in June 2007.
We intend to make a first formal assessment of depolarisation looking at the market two years on from full implementation. Some outcomes may take longer to be seen and the effects of depolarisation will be a part of our monitoring of the retail investment market for sometime to come.
I will now move on to another area that represents more change for you: A day which of course, takes effect on 6 April next year. It is clear that much work is going on but, with less than five months to go, you now urgently need to start planning for the changes if you have not already done so. While many consumers will not be affected by the new regulations, we consider the challenges for all market participants including financial advisers to be substantial. Where customers are affected we urge you to prepare and implement appropriate training programmes for staff. I don't plan to go into technical detail about the forthcoming changes, other speakers at this event are much better placed to do so than I am. However you need to decide how to respond.
In this context, we are not suggesting that all advisers should contact their customers to tell them about the changes and challenges of A-Day. In line with our risk-based approach to regulation, the decision on whether or not to communicate will depend on the nature of your firm's relationship with the customer. Where the relationship is an ongoing one, the FSA believes that it would be consistent with the principles of Treating Customers Fairly to contact customers who will be affected by the A-Day changes. It is, of course, up to you to decide how to do this, but AIFA has recently produced a consumer factsheet for use by firms, which could be a useful starting point.
We also have a job to do in relation to A day: it is to assess the likely risk to our statutory objectives arising from A day. For this reason we are currently looking at the state of readiness of a sample of regulated firms, and will use the information we obtain to inform future communication with the industry and work programmes.
I have just mentioned Treating Customers fairly in the context of A day. As you know, we consider it a key requirement that firms treat their customers fairly.
Our work in this area covers a number of issues including measuring Quality of Advice currently provided by advisers and explaining the legal and regulatory responsibilities of providers, distributors and consumers. This is a subject close to the hearts of many IFAs.
Another large area of change that will affect how you conduct your businesses will come from the changes to the conduct of business rules that will come about as a result from the Markets in Financial Instruments Directive (MiFID). This is the successor directive to the Investment Services Directive. As you know, the directive has been agreed but there is ongoing work on the detail, known in EU jargon as Level 2.
Now the good news is that most personal finance firms will not be within the scope of MiFID; but you compete for retail business in the same market as banks and building societies that will be within its scope. In the interests of fair competition and consumer protection we need therefore to decide how far to align the standards for non-MiFID retail firms with those for MiFID firms. For example, it would be odd if, when selling a unit trust, a bank had to adopt a different suitability test from a personal finance firm or provide different information; or, could receive an inducement that the personal finance firm could not. We shall not however just dumbly equalise the requirements for the two sets of firms; any policy change needs proper cost-benefit justification.
We aim to consult on much of this in the early part of next year in our first MiFID implementation Consultation Paper. We shall be setting out separately our proposals for the financial promotion regime which we have been subjecting to fundamental review and through which we shall also implement part of MiFID. We are also looking to simplify the Conduct of Business sourcebook more widely; deleting redundant material, rationalising the structure and making it easier to deal with, with a significant shift towards a principles based approach characterised by high level rules. These, together with further consultation on the product disclosure regime and the integration of the findings from our ongoing study of the costs of regulation, will allow us to introduce a new Conduct of Business sourcebook in time for MiFID implementation – currently timed for 1 November 2007.
That's a heavy programme of consultations and we recognise that we need to provide help, in particular with MiFID. As a starter to that we will be publishing shortly an introduction to MiFID entitled 'Planning for MiFID'. This highlights the main areas you will need to consider in order to deal with your own implementation of MiFID. This paper is not consultation on the proposals themselves but is designed to stimulate your own thinking about what changes you may need to make.
Now, after that overview of the changes that you need to be preparing for, I also wanted to spend a few minutes this morning giving you some examples of the initiatives which aim to make it easier to do business with the FSA. This is my primary responsibility within the FSA, and will affect how many of you perceive the FSA on a day to day basis. Our work in this area is part of our response to the Government's better regulation agenda.
At the beginning of this year we set out what we would do to make it easier for you to deal with us: this included producing application packs specifically tailored to small firms of which there are now five different versions covering different types of applicant. You now receive one invoice for FSA, the FOS and the FSCS fees and can choose to pay the fees in instalments. Over 3,000 firms whose invoices totalled £19 million have chosen this option.
A recent revision of the small firms section of the FSA website is designed to make it more accessible to you. And we have cause to think it has worked: monthly hits to this part of the FSA's website have from gone up from around 5000 to between 16-25,000. The website contains a lot of useful information for you, for example we have FAQs specifically tailored for financial advisers as well as the top 20 questions that we are asked by smaller firms in general. There is also a reference guide to the obligations and processes that regulated firms need to know about. You can print this out and if you follow the folding instructions, it will fold small enough to put in a pocket.
In October we published our performance against our service standards during the six months from 1 April 05 until 30 September 05. Publication of our results is part of our ongoing commitment to transparency. I am pleased to say that we met our standards in three quarters of all cases. In others we only missed the standard in one or two out of several hundred or thousand transactions. This reflects our desire to make the right decision in the interests of firms and consumers. Nevertheless I know there is room for improvement in some areas, and I can assure you we are working on these as we speak. For example we are making improvements to the Firm Contact Centre by increasing the number of people answering the phone so that fewer callers hang up annoyed by the waiting times. We are also changing the types of questions you will be asked when you call the Firm Contact Centre so that we can put you through to the right person more quickly. You may have also noticed that in the first two weeks of November the Firm Contact Centre had extended opening hours as around 7,500 firms had reporting deadlines in that timeframe. We realise that completion of the new forms has been a learning curve for us all. It is therefore particularly pleasing to note the proportion of on-time submissions this month has been the highest yet. Thanks to those of you who submitted their returns on time; and no apologies for levying a £250 administration fee on those of you who didn't. After all, why should compliant firms subsidise the cost we incur chasing those firms who don't submit.
Next year we will be publishing the results of the work we have done to monitor the satisfaction of the firms that have completed one of 8 regulatory procedures; and we will set ourselves a target for the future. We are now piloting this technique in the firm contact centre.
Another issue of interest to you will be our review of the funding regime for the Financial Services Compensation Scheme (FSCS). Our main focus will be on the FSCS levy though this may have some knock-on effects to FSA and the Financial Ombudsman Service (FOS) charges. We have engaged independent consultants Oxera to help with the review and they have been working on a detailed analysis of the overall funding requirements of the FSCS and the impact of current funding arrangements on individual firms and specific parts of the financial services industry. Oxera's report is due to be delivered at the end of the year, and then the FSA will be issuing a Discussion Paper in February 2006. Our main aim with this review is to ensure that whatever system is agreed, it is practicable, sustainable, fair, cost effective and will provide adequate funds for those consumers that are entitled to compensation. I know IFAs in particular have seen significant increases in their levies over the last five years, so you might gain financially from this review. However any changes will not take effect until 2007/8; and funding the FSCS is a "zero run game": if one sector of the market pays less another pays more. Winners in the short term could equally be losers at some point in the future. We expect that this will be a controversial subject near year.
After this rather rapid overview of issues that are affecting you, or will do in future, I want to draw to a close in the hope that you will continue with Stephen the frank and open dialogue that you have had with me. I would like to encourage you to approach us proactively and in a constructive manner with emerging issues that impact on the sector so that we can work together to find solutions wherever possible. In turn we look forward to working with PFS in a similar way and wish it every success.
Thank you for listening.