The Retail Distribution Review Interim Report

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Speech by Amanda Bowe, Head of Retail Distribution Review, FSA
Westminster & City Retail Distribution Review Conference, London
1 May 2008

Introduction

Good morning and thank you David for those helpful opening remarks. I should also start by thanking Westminster & City for organising a conference to coincide with the publication on Tuesday of our Interim Report on the Retail Distribution Review. Given the status of the report - providing at a high level the feedback we received to our June Discussion Paper, indicating how this might shape the landscape going forward, and not providing any decisions at this stage – we had not ourselves planned a formal launch event. That will come later in the year when we publish the full Feedback Statement and set out in more specific terms what we are going to do and when. So it was with some pleasure that I accepted the invitation to speak at someone else's conference today.

I'd also like to thank the other speakers at today's conference for their patience and willingness to prepare their own remarks with less than 48 hours to read the report.

This morning I will set out only the broad contents of the report. In recognition that many of you here will be RDR experts (and capable of reading 30 or so pages yourself), I want to spend quite a bit of time on some of the big questions that have arisen so far. So, I am going to recap on the broader context for and approach to the interim report, what we've heard from the feedback, how we've taken that forward into this report, and the tricky issues ahead before we make final decisions and move to policy options. We also published this week our Feedback Statement on our Review of Prudential Rules for Personal Investment Firms. This important piece of work is very relevant to the RDR so we have deliberately aligned the timetables. I don't have time to cover this today, I'm afraid.

I should say, that in addition to my 'slot' this morning, I am joined today by Alan, Jeremy and Bill – the rest of the RDR team – and we look forward to taking questions and hearing your views throughout the day.

The context

First, it is important to set out the wider context. Our more specific aims for the RDR were set out in the June Discussion Paper. These remain central to the review, as relevant now as they were then.

We recognise that everyone's attention has been somewhat diverted in recent weeks due to the global – or domestic – 'credit crunch' with its potential far-reaching consequences and un-known impacts. We too have had to shift our emphasis in many respects. But rather than reducing the importance of our retail priorities, we believe this makes them all the more important: we remain committed to making the lasting changes anticipated from the RDR that will be relevant well into the next decade and – of course - beyond the existing market conditions. And we remain determined to ensure that customers are treated fairly – our end-year deadlines for which make that clear. So the RDR remains a key retail priority for the FSA, complementing our long term work to improve financial capability, and our more pressing work to ensure firms treat their customers fairly.

Our approach

Our approach to the RDR since its launch in 2006 has been to work with the market to identify and stimulate market-led approaches, wherever we can, to getting the outcomes we want for consumers and for firms and for us. In doing so, we have used the ideas of market experts, through our formal groups, and listened carefully to what we have been told through the discussion process; and we have been transparent as our thinking has developed.

By working with our groups of practitioners and consumer representatives in the early part of last year, we were able to identify some very clear and sensible ideas about how to tackle the root causes of some of the problems we've seen in this market for many years. This sort of collaboration on the issues is proving to be invaluable in getting consensus on the need for change.

We set out the ideas from those groups in our June Discussion Paper in a way that gave us a view of the future possible market and opened the debate to the entire market. In doing so, we were open to change, accepting that this picture was not the only one and we remained very open to other ideas. Our aim was to play back the specific ideas that came from the groups, but to do so in a way that gave incentives for firms to step up to higher standards, or offer new services to consumers where demand might exist. This resulted in our proposed two tiers of advice and our three tiers of adviser: professional financial planners, general financial advisers, and primary advisers.

There is no doubt that the Discussion Paper generated significant debate with a very wide range of stakeholders: this was precisely our aim and the reason we spent so much time last year either speaking at or holding events to discuss the RDR and listening to peoples' views.

And we realised quickly the importance of taking time to get things right and ensuring that we could be flexible in our thinking. This led to our decision before the discussion period closed to provide feedback in two stages: now, by giving high level feedback and what we think this means for the future in this Interim Report, and then later this year when we publish the full Feedback Statement.

Of course there are risks in this approach. Publishing an Interim Report risks giving too much information up front without having time to prepare all the answers. Indeed we don't have all the answers as no decisions have been made. In many ways we are posing more questions and I'll cover some of the difficult ones later. But having seen the level of engagement, effort and energy that so many have put into the discussion process so far, we think it is right to keep the momentum up, to retain the collaboration we have generated and to continue to be transparent - where appropriate and safe to be. So we firmly believe it is better to give an indication of the feedback now, show you the possible direction of travel, and give our view of what looks sensible. In doing this, however, we acknowledge that there are some significant and potentially insurmountable challenges for us. And there are some significant and potentially difficult choices for firms, not least for those who may not be able, or willing, to meet all the criteria we have set out, or at least not straight away. We are clear in the report that we have much more to do to understand the consequences, to understand the impact on firms, on different sectors and on consumers. We must do this work, including understanding whether the structure is economically viable, before we can decide how far we want to and indeed are able to go to achieve the landscape we describe.

We regard the interim report as very much a continuation of the discussion process – it is not the final analysis. We want to use it to maintain the momentum for change and so we are also making three specific challenges to the market to accelerate progress towards a better future for consumers and firms.

The feedback to the Discussion Paper

So what have we read and heard since last June? We received 888 responses to the DP from a very broad range of stakeholders. This is in addition to the feedback we received from all the events we ran or participated in during the discussion period.

There are a number of areas where feedback suggests widespread consensus between respondents. It is perhaps true to say that, on closer analysis, some respondents may not have thought through to the next level of detail how their ideas might be implemented in practice. Some have very different views on how they would implement what appear to be the same high-level ideas.

But there does seem to be agreement on the need to deliver the RDR outcomes as set out and, most importantly, to make it easier for consumers to understand the market. We set out many areas of apparent consensus in the Interim Report. I'd like to pick up on a few key points.

First, people felt the DP proposals to separate the market into different tiers of advice were too complex and would be too confusing for customers, particularly when you add additional dimensions such as the possibility for advisers in different tiers to be tied, multi-tied or independent. Some of you will have heard Paul Lewis describe the 'complexification' of financial advice! So a clear message from many was "keep things simple".
Second, and following on from this, there were clear messages that we should not dilute the advice brand. There are two points here: one is that our proposals for 'primary advice' as set out in the DP should better be described as 'guided sales' so should not muddy the waters of advice. (Indeed, we have seen some models emerging in this space that are clearly non-advised and we are keen to make progress here as I'll come on to explain.) And the second point is that there should be clarity between advice and sales. In other words, it should be clearer and easier for consumers to distinguish between a process that focuses on their individual needs (and may or may not result in a product sale) and one which is intended to sell them a product and that at present this is often not the case.
Third, there was general support for our proposals to raise professional standards for those giving advice. Although much of the debate in the early days focused on the relevant qualification for those in different categories, this has moved on to more general agreement that professional standards include skills, ethical behaviours, on-going competence, standards of practice, recognition of professionalism by consumers and so on. We have been pleased to see progress across many of these elements and a real commitment by those able to deliver change to do so.
Fourth, independent means 'whole of market' – in other words choice and range of offering as well as free from conflicts. We heard that loud and clear on about day two but, as I'll explain later, we need to have further discussions about what 'whole of market' means in practice in a world where wraps and platforms are becoming more prominent.
Fifth, existing methods of remuneration should not be closed down. Some feedback suggested that the FSA should apply a more principles-based approach to remuneration to enable a variety of methods to flourish. But others thought we should be more interventionalist: we have tried various ways to remove the potential for or perceived bias from provider-driven remuneration over the years, some firms have made change already but we shouldn't rely on all players to do so. Some also felt we shouldn't apply change to intermediaries alone but tackle the product providers directly.
And finally, on liability risk, there is a clear sense that this is a real barrier to market development. Many firms supported the introduction of 'long-stop' limitation period for complaints although consumer groups were strongly against this and some firms thought this would adversely impact the industry's reputation. Our own work has found it difficult to justify on cost benefit grounds. But we know that this is very important to some so we remain open to further persuasion and are not closing this down, as I'll cover later.

Clearly, with so many responses there are other important points of feedback. These are just a few of the common messages – perhaps the most important – that we have heard through the feedback process. So what does this tell us?

What does this tell us?

We believe there is significant merit in the need to keep things simple. We want to build on what many say is the most important test of regulatory change: the extent to which consumers will be able to understand the different services available to them. This reflects the feedback that the original proposals were too complex, and the current landscape is confusing. We also think that to make a material difference to consumers in this market, changes may need to be radical.

So, our starting point for the future landscape should be as simple as possible.

In addition to simplicity, we remain committed to ensuring the market can meet the longer term needs of consumers. There are big changes ahead – with the introduction of personal accounts, a potential national Money Guidance service, decline in house prices to name a few - and it is hard to know yet how these might play out.

A simple landscape

Our starting point, as we say in the Interim Report, consists of three distinct services for consumers: Advice, Sales and Money Guidance.

Advice would consist of only one type of adviser and a step-change in the standards required. This would build on the existing requirement that a firm must act honestly, fairly and professionally in line with the best interests of its clients. We think to do so, and to provide clarity to consumers, all advisers would need to be independent, both in terms of status and in their practices, so that remuneration is determined without any product provider input and products are recommended from across the market. They would also all meet appropriate minimum professional standards which are likely to be higher than now.
Second, sales - our starting point for sales is services that do not involve advice. I emphasise that this is the starting point. These services are intended to encourage higher levels of savings and protection; so that the needs of more consumers are met; and so firms can offer something in a way that is economical for them and affordable for customers. In fact, this 'sales' service can and does operate within the current regulatory framework. But we recognise the limits of pure 'execution-only' services for complex products, so we are prepared to give guidance to firms and help find a way to help their customers make the decision. Some refer to this as 'guided sales' and others as 'assisted purchase'.
And third, Money Guidance - the newly proposed information and guidance service that emerged from the Thoresen Review of Generic Financial Advice. In partnership with the Treasury, we are taking forward a 'Pathfinder' following recommendations made by the Thoresen Review, to determine whether and how this national service might develop. Although the FSA will be leading the Pathfinder work, Money Guidance is not an FSA regulated activity. Taken in conjunction with our work on financial capability, Money Guidance has, amongst other things, the potential to stimulate more consumers to seek out regulated advice and sales services. So this demand side initiative may well be highly relevant to the future for retail distribution and so should be considered as part of the wider landscape.

Challenges for the market

There are things that we can do to bring about the changes we want. Our preference for market-led solutions remains. So building on our desire to work with the market and maintain momentum whilst we carry out our further work, we are issuing three specific challenges to the industry to maintain the momentum for change. These relate to further progress on an agreed way forward for professional standards; for more product providers to stop influencing advisory remuneration; and for firms to make the case to us if we need to take actions to enable them to operate new sales services. I don't have time to cover these in detail now, but they may well stimulate some of the questions that arise during the day.

The big questions

I am sure that many of you will have questions or comments on the Interim Report. Some of you have already commented through press releases or other responses to enquiries from journalists.

So I thought it would be helpful to use today to anticipate some of your more burning questions and also take the opportunity to address some of the points raised in what I have read in the press in the last day or so.

Before doing so I would like to make one point very clear. That is, we have published an Interim and not a Final Report on the RDR. When we say in the report that we have more to do to consider the potential consequences of the simpler landscape we've set out, we mean just that. We have not completed the work necessary to answer every question you might have. Indeed, as I said earlier, we are still in the discussion phase, so comments and views expressed at events like today's could very well influence our thinking.

We have been asked why there appears to have been a sea-change between the DP and the Interim Report. There hasn't. The Interim Report builds on the proposals in the DP, and the simpler landscape we set out reflects some of the strongest points of feedback. But much of what was in the DP remains – including higher professional standards for advice and the possibility that we might develop a new regulatory regime to sell simple products. The big difference is that we've responded to your request to make it simpler. There is less complex tiering of services and only one type of adviser – and one that, in DP speak, is closer to the Professional Financial Planner than the General Financial Adviser, which importantly means a change in minimum standards for all. And we are not seeking to design a particular market structure; we want a market that delivers better outcomes for consumers and firms, that can accommodate forthcoming market changes such as Money Guidance and Personal Accounts, and that is fit for purpose for the 21st century.

I strongly suspect that the most obvious burning issue for you is whether we have now decided on the very simple, but prescriptive, split between sales and advice that we set out in the report and which would seem to prohibit a number of existing market services. I think my earlier comments should make clear to you that nothing is decided, and we have demonstrated our awareness of the consequential issues in the paper itself. But while we have had very many calls to split sales and advice, and to simplify the landscape for consumers, very few people appear to have worked these through to the next level of detail. So in putting forward the simpler landscape in the report, we have tried to reconcile the desire for simplicity with the calls for a clear separation. We have tried to look at this afresh through the eyes of a consumer – rather than seeking to simply tweak the existing landscape. Many of you have told us that there are ambiguities in the current market that should be addressed because they cause consumer confusion. In particular, some advice services are designed around selling particular products rather than acting in the best interests of the client. We recognise that this is possibly an over-simplification. But if we start with a view that consumers would expect their adviser to demonstrably operate in their interests, advisers must be truly independent and so make recommendations from across the whole market. We need to work out what we might mean by 'whole market' in a world where platforms and wraps are becoming increasingly prevalent, and we know there are many unanswered questions still to be tackled.

We think that by starting with this 'utopian' view of the future landscape – which was how one commentator described it earlier in the week - as the basis for our further work, we can then flush out what people really meant when they responded to the DP and then better understand how close we can get to delivering all the outcomes we are seeking to deliver through the review.

But won't moving to this simpler landscape mean that only the rich will be able to access and afford advice, so widening the advice gap? And the poor will have to self-serve - which means many won't make provision or will make the wrong choices? This is not an outcome we are seeking. So we will want to understand the consequences of the simpler landscape before any decisions are made, and of course such potential consequences will influence our thinking. But we also need to consider if it will necessarily be the case that only the rich will access advice. We suggest in the report that we might do more to give guidance to advice firms offering 'focused advice' to further encourage advisory services to be tailored to the needs of a particular customer. And if standards of advice are raised, will more consumers be confident enough to want to take advice, focused or otherwise, offsetting the affects of prohibiting certain current services? And we are also interested in how developments such as our Financial Capability work, the potential emergence of Money Guidance, and the introduction of Personal Accounts may help more consumers be confident enough and capable enough to self-serve.

Let me pre-empt some of your other follow-up comments. Yes, we know that we may be constrained by legal considerations, both European and domestic, even if we decide that the 'utopian' view is the right approach. And we have already shared our thinking at a senior level in Brussels. But we need to challenge ourselves and the market to find the best fit with the desired market outcomes and we may not achieve this if we close our minds to radical thinking. There won't be a perfect solution, but we are confident that our approach will yield the best available answer.

I have seen some contradictory headlines on what we propose for remuneration. Some say we're abandoning Customer Agreed Remuneration or 'CAR' as it's now referred to. Some say – not for the first time – that we're banning commission. Well, we're not doing either but we do anticipate a significant change for some. In the report we have described, at a high level, how remuneration might work as part of the step-change in standards for advice. We say that we want to stop product providers playing any part in the determination of advisory remuneration. We recognise the difficulties here. We are not seeking to end the role for product providers in organising payments to advisers from clients' accounts or investments. So we are not stipulating that clients must pay fees by cheque (unless of course they want to), nor are we proposing to prevent product providers advancing payments to advisers and recovering the cost over time from charges on the investment or product. But in neither case can the provider play a part in deciding what gets paid. And, yes, this is effectively the CAR proposals we set out in the DP, but we have found, and are still finding, that by using this label different people conjured up different images of what they thought it meant. And as we made clear in the DP, this approach still allows a full range of payment options – a mixed economy as some refer to it - provided that the product provider does not have a say in what the advisory firm receives from the customer.

Other headlines say we've rejected the idea of a 'long-stop' (that is, changes to our rules to introduce a time-limit within which customer complaints have to be addressed). This is not what we say in the Interim Report. We say that to justify a long-stop we will have to identify wider benefits to consumers and to firms. But we have not so far found the case for these benefits outweighing the possible consumer detriment from time-barred complaints. The door is not shut here – we recognise that this is an important issue for many of you and still welcome information that will help our further thinking.

Next, is primary advice now 'dead'? We're not using the name 'primary advice' as feedback is telling us not to add to consumer confusion over what constitutes advice. But although our starting point in the report is that sales should be strictly non-advised, we recognise that a non-advised approach may not attract enough demand to make such a service viable or enable enough consumers to address their savings priorities. If this is so, we will consider whether we need to take action to allow services that fall within the legal definition of regulated advice - but only if the industry makes a solid case, and if there will be an appropriate degree of consumer protection. So the idea of a quick, economically-viable, service – along the lines of the DP proposals for Primary Advice - has not been ruled out. But you didn't want us to call it advice.

Finally, let me turn to another, frequently asked question. Will the RDR be applied to the mortgages and general insurance sectors? Our position on this is unchanged from the DP, especially given current market conditions. There are no current plans for a read-across of the RDR from the investment market to the mortgage or general insurance markets. But we recognise that the creation of a simpler landscape for distributing investments and investment products, when many consumers will also be buying other types of product, begs questions about the impact on consumer understanding of the wider market. As I have said, we still have an open mind about where the review goes, but if the feedback and our own analysis suggest a wider application then that is something we will of course consider and discuss openly with the market.

These are just a few of the big questions that have emerged already. There will be more, I have no doubt.

Next steps and priorities

We expect that whatever end-state is agreed for the future regulatory landscape there would need to be transitional arrangements. We will consider this in more detail in the Feedback Statement in October. How such arrangements would work, and how we might stagger any changes to our requirements, will depend on the extent of change required, including how far the industry has met our challenges.

We do not think 'grandfathering' will be a feature of change, but there are three main areas that are likely to require transitional arrangements:

Professional standards – most respondents have expressed concerns that there would need to be a transition period to ensure sufficient supply of services as advisers upgrade their qualifications.
Remuneration – particularly if firms need time to change systems as well as their practices.
Business models – if new requirements for advice mean that certain businesses would have to change their customer propositions

As I've mentioned already, we have some significant issues to consider between now and the October Feedback Statement. In summary, and in closing, we need to explore further:

what consumers understand, and the industry means, by 'advice' and 'sales';
the legal issues and possible competition issues of regulatory intervention; and
the economic impacts on the retail investment market of a split between advice and sales (the winners and losers, effects on the availability of advisory services in the overall market, and the implications for consumers).

Similar initiatives have not been implemented before in other countries, and the economic impacts are potentially significant. We look forward to continuing to find ways to work with you to deliver the outcomes we all want to see.

Thank you.

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