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      • 2007

Speech by Clive Briault, Managing Director, Retail Markets, FSA
FSA Retail Distribution Conference
27 June 2007

I begin this morning by praising the man who today becomes Prime Minister, not least because one of Gordon Brown's earliest decisions as Chancellor, ten years and one month ago, was to set up a single financial services regulator.

So the FSA was given four objectives, including the need to ensure adequate protection for consumers. We have always been clear that this objective can best be delivered through an efficient and effective – and thus competitive and innovative - retail market. And that, in turn, the best outcomes can be achieved by our working closely with industry, consumer bodies and others to identify ways to solve the difficult and complex structural issues in the retail investment market.

The retail investment market

That is why we have spent the last year listening very carefully to what you have been telling us about the:

• issues you think need to be addressed;
  
• ideas that you have to improve the way the market works;
  
• initiatives you have already launched and that are already working;
  
• enthusiasm you have for taking these ideas forward;
  
• blockages you want to be removed; and
  
• enablers you want to be put in place.

So my particular thanks go to the five chairs of the Groups we established, all of whom are speaking today, to the 37 members of the Groups, the observers, and to everyone else who has contributed so thoughtfully, constructively and enthusiastically to our Retail Distribution Review.

What I hear you saying is that you see great opportunities here:

• to grow your businesses, and to be more profitable;
  
• to do so by attracting, satisfying and retaining your customers, and treating them fairly;
  
• to make it clearer to consumers what you have to offer and what they are paying for; and
  
• to develop world-class approaches that can be rolled out in other countries in which you operate.

We want you to seize these opportunities to improve the quality and accessibility of retail investment financial products and services; to enable consumers to make better informed decisions when buying these products and services; and to give consumers a real say in how they want these products and services delivered to them.

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When Callum spoke at Gleneagles last September he identified a number of severe failings in the present retail investment market, which make it appear unattractive to providers, distributors and consumers in that market.

You have told us consistently since then that Callum was right to highlight these failings, and that they need to be addressed. The problems remain

• low levels of financial capability among consumers;
  
• poorly designed and unnecessarily complicated products;
  
• a lack of persistency for life and pensions policies;
  
• commission structures that create risks of product bias, provider bias and churn;
  
• poor professionalism in parts of the advice sector; and
  
• unintended barriers to change created by regulation.

And you have told us that there is considerable room and need for improvement in this market. It is in everyone's interest that it does improve, since a better deal for consumers and better outcomes for firms should go hand in hand. So we need to have a thorough debate about how the market is structured and how best it can serve consumers.

That is why I announced last November that to explore these issues in greater depth, and in particular to identify your solutions to them, we were establishing five Groups drawn from the industry, consumer and professional bodies.

Proposals from the five Groups

The chairs of each of these Groups will be speaking later, so I will not describe their proposals in detail. I will, however, set out the overall story that we are hearing, not just from the five Groups but also from a large number of other contributors who have been keen to participate in the Review. It is these ideas that have formed the basis of the Discussion Paper that we are launching today.

This Review is more than just about debate – it is about action. It is about addressing, together, the concerns that led us to launch this Review. We cannot – and should not even try – to fix this alone. It is not, and should not be, the job of a regulator to dictate business models or market solutions.

Of course there were different degrees of support for various suggestions, and some varying views. But the good news is that we found a broad consensus of views.

The proposals from the five Groups, and from the market more generally, demonstrate your strong appetite for

• high standards of services and products to give consumers the confidence and trust to buy them; and
  
• enabling all consumers who would benefit from accessing the industry's products and services, and who can afford to do so, to do so cost-effectively.

In other words, to improve quality and to improve access to advice and to products.

The Groups have told us that to achieve the first outcome – the high standards – we may have to raise requirements for those firms and advisers supplying full range and specialist financial advice on investment products.

Let me give you some more detail on what the Groups and others have proposed here. For those with more complex needs there may be scope for two different types of adviser:

• First, professional financial planners; and
  
• Second, general financial advisers.

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Professional financial planners

The Groups have proposed that we should require minimum practices and standards for advisers to call themselves professional financial planners. That may make it easier for consumers to know exactly what type of service they would receive under this particular advice brand.

So to become a professional financial planner might require standards attained through 'Chartered' status, 'Certified' status, or something similar.

We may also require that, for professional financial planners, remuneration practices operate in a way that effectively reduces any conflicts of interest that might otherwise work against the best interests of consumers, for example by requiring all remuneration to be determined with the agreement of the customer and not be influenced by the product provider.

The Groups have also proposed that we should limit the use of the term 'independent'. For example, we might restrict the use of 'independent' to firms with advisers who are predominantly professional financial planners, and whose remuneration is agreed with the customer – whether by traditional fees, annual management charges, or something like Customer Agreed Remuneration. It may not matter if these planning firms only want to offer a limited range of products, as long as it was clear to consumers that 'independence' meant real freedom from potential bias in advising on a product.

Some of these professional financial planners may be subject matter specialists, offering expert advice in areas such as pensions and tax planning.

General financial advisers

The other type of full adviser would be general financial advisers. Under the proposals, they could continue to provide similar services to now, but this type of adviser would not have the same range of in-depth knowledge or qualifications as professional financial planners.

However, it is proposed that we should be seeking higher professional standards even for these advisers. We might look to increase the current minimum standards for these advisers, and encourage all advisers to sign up to the ethical code of a professional body. A clear career path could exist for someone to move from being a general financial adviser to a professional financial planner.

These firms could be paid however they choose – the proposal is that we would not restrict them if they want to be paid only by commissions, but that we should act to reduce the risks that arise from this type of remuneration.

It is also proposed that we should not let general financial advisers call themselves independent, because these firms would not be free from the conflicts of interest that arise from commission-based remuneration.

Depending on the set-up of the firm and the actions it takes itself to reduce the risk of consumer detriment, we could adjust both the intensity of our supervision of the firm and the capital that the firm is required to hold. We are considering a more risk-based approach to capital and other prudential requirements for personal investment firms in a companion discussion paper, to be published early next month. We want to find ways to incentivise firms to move to higher professional standards and to remuneration structures that carry less risk for consumers. And we want firms with lower standards and higher risks to hold more capital both to protect consumers and to reduce the likelihood of other firms having to meet compensation payments if a firm goes into default.

Higher standards of professionalism, and higher capital requirements for some of these advisers, could make these types of full financial advice more costly, limiting their availability. It could increase the number of people who are not served by this market, simply because they cannot afford it.

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Primary advice

Moreover, it must be desirable – provided adequate standards of consumer protection can be achieved – to drive down the cost of distribution so that consumers on middle to low incomes can afford to take some advice on actions that could make a large difference to their financial situation. These consumers may have less complex needs and therefore may not require an expensive full financial advice service.

Meanwhile, the Thoresen Review is considering a range of models for providing generic financial advice on a national scale. Generic advice will not be regulated, and will need to fit in alongside other, regulated, advice services. Generic advice could, in some of its possible forms, end up with advice to a consumer that he or she should take actions that could easily be implemented by taking out one or more simple products. There might then be a short step from generic advice to the sale of a product to meet the identified consumer need.

The proposal in response to these factors is that we should encourage and facilitate the development of alternative, less complex advice – what we call primary advice – to improve access to financial advice.

This is not a new idea. When we introduced the Basic Advice regime for stakeholder products we said that we would review the outcome and would be prepared to consider extending the idea of a simplified advice regime to a different range of simple products.

Primary advice could be a new type of regulated advice service covering a broad range of a consumer's needs. Such advice might point the consumer towards a limited range of savings, investments and possibly protection products that would be broadly appropriate for that consumer.

The potential benefit of this is a much reduced (and less costly) advice process than a full advisory process. A less complex and less costly approach offers firms more opportunities to price such services more attractively for consumers, some of whom might not otherwise be served at all.

Large numbers of people – the mid-market in particular – could benefit from primary advice. And, from time to time, other consumers may want to access these services, just as there will be circumstances when those in the mid-market need to access full financial advice.

Several ways have been proposed to make primary advice cost-effective.

First, by limiting product ranges according to some form of product selection. Such ranges might include, but could be wider than, the current Stakeholder set of products. And not to have any charge-capping.

Second, by standardising advice processes and requiring the use of accredited advice "tools" to further streamline advice processes.

Third, by reducing significantly some of our existing suitability requirements, and by working with the Financial Ombudsman Service to clarify up-front the extent of the obligations on a firm offering primary advice. Otherwise we will not overcome the general reluctance of product providers to distribute products on anything other than an “arms-length” basis. We are certainly prepared to play our part in making a market for primary advice work, subject of course to it delivering an appropriate level of consumer protection.

And fourth, by ensuring as far as possible that consumers are aware of the nature and limitations of a primary advice service, and of the underlying risks of any products they purchase.

From what you have told us, we expect a wide variety of firms might be interested in offering this service - for example, banks and building societies through their branches, call centres and over the internet. Or a primary advice service could be run alongside the core business of mortgage or general insurance brokers. There are many possibilities through which consumers could access this type of advice.

Some may say that simple advice has been tried before and has not worked. But, based on recent discussions with a number of firms, you also tell us that you are more optimistic that a primary advice service could be economically viable to provide if there is no charge-capping on the products, if it could appeal to a wide range of consumers, and if there is sufficient certainty up-front that firms will not be subject to disproportionate regulatory or complaint handling risks if they follow the approach agreed by the regulator when the service was provided.

I have no intention as a regulator of trying to create a market for primary advice by writing detailed rules. What matters is to find an approach that is economically attractive to potential suppliers, that generates sufficient demand from consumers, and delivers an adequate level of consumer protection. This will require considerably more debate and evidence-gathering over the months ahead.

So that is how it might look – a market with different levels of advice to meet different consumer needs. A market with higher standards of professionalism at one end, and simpler and less costly ways to deliver advice at the other.

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Consumers

It is hard to argue with the view of the Groups that if all financial advisory firms aspire to high standards of professionalism and provide good quality advice and services then consumers are more likely to be treated fairly and the general level of trust in the sector would increase.

But everyday life shows us that a wider range of services can make things more confusing.

So how would consumers know how to navigate this new market? If we have different levels of advice to meet different consumer needs then consumers will have to be able to identify clearly what advice service they need and to be confident that it will meet their needs.

Clearer labelling of the advice and services on offer will help, as will our initiatives, in partnership with others, to improve levels of financial capability. But plain English is not enough. Consumers need easy access to information and advice that helps them to navigate to the appropriate next steps – especially those consumers not currently engaged with the advice market. Generic advice can play an important role here, guiding them to a particular regulated advice service, to non-advisory sales channels, or even to doing nothing.

So consumers could receive a clearer service that better meets their needs, and a clearer route to that service.

And primary and generic advice can bring into the market consumers who need – but may not currently be taking - advice on how best to meet their needs.

Firms

All firms can benefit from the expanded market that this may bring.

In addition, an important implication of the proposed wider definition of fee-based advice is that product providers would have to compete more on the basis of the quality and price of their products, rather than on how much commission they pay.

There are clear benefits for firms of professional financial planners. The lower risks of significant bias from remuneration structures and high professional qualifications should limit the potential for mis-selling and generate more financially sound and sustainable businesses based on more consistent income streams. We may be able to offer these firms a real regulatory dividend – through less intensive supervision and lower capital requirements than for other types of financial adviser – to reflect lower levels of risk to consumers.

General financial advisers could continue with their current remuneration arrangements – albeit with higher professional and prudential standards – but we hope the market moves on. If these firms continue as today, in a way that has proved itself over the years to be a poor way of providing consumers with the advice and products they need, then life may be tougher for them.

Impact and next steps

We do not have all of the answers to the problems in the retail investment market. I have not presented any "FSA solutions". Instead, I have outlined here the ideas and proposals put forward by the five Groups and others.

I welcome the strong engagement and commitment shown by the market on this issue in the last six months. Tackling the root causes of the problems within the retail investment market is a challenging and complex issue and is not something that can be solved overnight.

We believe that, taken together, these proposals offer potential benefits for consumers, in terms of the quality and availability of advice, and through better designed products. That, in turn, would help to improve their engagement and influence in the retail investment market. That must be a benefit for firms as well. There is clear potential for a step change here.

To move this ahead continued engagement is vital. The major changes that have been proposed could have many consequences on the market. A full and lengthy debate with consumers and industry is therefore required. We will play our full part in continuing to facilitate and enable market-led change. Once it is clear that significant benefits can be achieved then this will be reflected in the final proposals.

We want to hear your views on the combination of proposals emerging; on whether you want to carry them forward; on the potential costs and benefits, and consequences for different sectors of the industry; and on whether, if implemented, they would go far enough to address the problems in this sector.

We are therefore providing an extended consultation period of six months on the Discussion Paper we have published today. And we will be holding various events, and attending conferences, meetings and seminars – whatever it takes - to listen carefully and to engage in a real debate with firms, consumers, and everyone who has a stake in this. Of course, you may not agree with this picture, or at least elements of it. You may feel that there are better solutions. If that is the case, we also want to hear from you.

There are important opportunities here to deliver positive change. From what we have heard, we are confident that this is what you want. I hope that in a few years’ time we can all look back to the challenge of this Review, to having changed our ways, and to having made a real difference to the lives of millions of people as a result.

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