The Future of Distribution Seminar - The Retail Distribution Review
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Speech by Dan Waters, FSA Director of Retail Policy and Themes
Building Societies Association Annual Conference
7 May 2008
I would like to begin by thanking the Building Societies Association for holding this seminar at its annual conference. I recognise that you and we have pressing issues to deal with in the here and now. In challenging market conditions like these it is difficult to set aside time to focus on the future. Nevertheless what we're doing today is important, and I'm pleased to see the BSA is committed to forward thinking. The timing of your conference turns out to have been prescient, as it is only a week ago that we published our Interim Report on the Retail Distribution Review (or 'RDR'). This allows me to update you on some of our latest thinking before you hear other perspectives from Matthew and John.
I took over leading the RDR last week, but I've been involved since the beginning. I chaired one of the industry working groups that contributed to the proposals in our Discussion Paper last June. We had a building society representative on that group, and they, like the others from industry and consumer organisations, contributed truly constructive ideas to help us get to where we are today.
So, why have we published this Interim Report? Principally to maintain the momentum that has built up during the review. Even in these turbulent times, where there are many short term issues that we must all deal with, we are totally committed to following through with the RDR and the lasting benefits we believe it will deliver.
We have received a record number of responses to the review – nearly 900. We have not analysed each of them in detail yet, but have obtained an overview of the key messages that are contained in them and from all the engagement we had throughout the discussion period. So I will outline those for you today. We have also formed the main elements of our vision going forward, and the Interim Report exposes those for continued debate and development.
We have not, however, made any policy decisions and none are recorded in the Interim Report. But we are much clearer now on the direction we would like to go. The questions we want to explore are whether and how our vision can be delivered in practice. We will do this through further debate, as well as our continuing market research, consumer research, and analysis of legal issues.
So this Interim Report gives you a window on where our thinking has progressed and on the many challenges and questions that remain to be met and answered before we publish our full feedback statement in October. That statement will not contain the final answers. To the extent that there are industry solutions, it will include those. To the extent that there are possible policy interventions by us in terms of rules or guidance, it will outline those at high level and point to a formal consultation in 2009. This may seem like a lengthy process, but given the fundamental issues that are on the table in this review, it is absolutely critical that any regulatory interventions and other industry-led initiatives are the right ones and will deliver the outcomes that we seek.
I will give you an overview today of where we are on the review. Let me first, however, briefly put the RDR in context. It is an important component of our overall retail market strategy, complementing our Treating Customers Fairly and Financial Capability initiatives. The RDR and Financial Capability are working to longer timescales than the TCF programme, which has a target of end-December 2008 for all firms with retail business to be able to demonstrate, through use of their own management information, that they consistently treat their customers fairly.
We set out six desired outcomes for the RDR in the Discussion Paper we published last June. Its aim is for more consumers to have sufficient confidence in the market to want to use its products and services more often. I'm sure you'll agree with this. The difficulty is agreeing how we will achieve it, and over what time.
Our June Discussion Paper proposed two tiers of advice: full financial advice delivered through professional financial planning or through general financial advice, and 'primary advice'. This was our initial view of how we could achieve the outcomes. We've reflected on what we heard during the consultation period. This led us to modify our view, although the outcomes remain unchanged, along with some of the underlying themes, such as higher professional standards. Before explaining how the feedback has informed the Interim Report, let me give you some of the key points raised.
First, people, including the BSA, felt the Discussion Paper's proposals to separate the market into different tiers of advice were too complex. They would be too confusing for customers. So a clear message from many was to keep things simple. The BSA told us we should not be afraid to substantially modify our proposals to reflect what consumers need.
Second, and following on from this, there were clear views that we should not dilute the "advice" brand. For example, the BSA told us that primary advice was not 'advice' as such and should not be called advice. Others told us there should be a clear distinction between sales and advice. It should be clearer and easier for consumers to distinguish between a process that focuses on their needs (and may or may not result in a product sale) and one which is only intended to sell them a product.
Third, there was general support for our proposals to raise professional standards for those giving advice, with general agreement that professional standards must include skills, ethical behaviours, on-going competence, and so on. We have been pleased to see early progress in this area 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 freedom from conflicts.
Fifth, some respondents said existing methods of remuneration should not be closed down – we should apply a more principles-based approach. Others thought we should be more interventionist. Some also felt we shouldn't blame intermediaries but should tackle the product providers direct.
What does this tell us?
We like the idea of keeping things simple. The UK retail financial services market is characterised by a wide, and for consumers, often bewildering array of business models, service propositions, products and processes. In some respects our regulation has simply held up the mirror to that complexity. The feedback here is an important challenge to the status quo, for the industry and for us. We think that to make a real difference to consumers in this market changes may need to be radical.
So, our starting point is that the future should be as simple as possible so that consumers understand the different services available to them. We know that this may be difficult to achieve but it helps everyone if we are clear and bold about what we think is the right outcome even if we know we face significant challenges in getting there.
We think this means a starting point made up of three 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 replaces the proposed split between professional financial planners and general financial advisers in the DP. 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, anyone calling him or herself an adviser would need to be independent, both in terms of status and in their practices, operating remuneration determined without product provider influence and recommending products from across the whole market. They would also all have to meet higher minimum professional standards.
Sales – This is consistent with the underlying aim of 'primary advice' - simpler services for those with less complex needs. Our starting point for sales is services that are strictly non-advised. These services are intended to encourage higher levels of savings and protection so that the needs of more consumers are met. They can operate within the current regulatory framework, but we recognise we may need to do more here to give guidance to firms about where the boundary between and advice and sales lies.
Money Guidance – this is a newly proposed information and guidance service. In partnership with the Treasury, we are taking forward a pilot following recommendations made by the Thoresen Review, to determine whether and how this national service might develop. Although the FSA will be leading the 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. We agree with the view, expressed in the BSA's response to the DP, that it is vital to understand how Money Guidance might interact with the regulated financial services market.
Some have asked if we have plans to read-across the RDR proposals to the mortgage or general insurance markets. We don't, at least not for now. However, the creation of a simpler landscape for distributing investment products, when many consumers will also be buying products from other market sectors, may have implications for consumer understanding of the wider market. If the feedback and our own analysis suggest a wider application then that is something we will consider and discuss openly with the market. For mortgages, this could be part of the wider review of the MCOB regime that we announced in our Business Plan. We are still open-minded about this.
The RDR has clearly moved on from where we were last June. The Interim Report builds on the proposals in the DP, and the view set out reflects some of the strongest feedback. The big difference is the greater simplicity for consumers, with one tier of advice, and a clear separation between advice and sales.
We think it is necessary to start with this pure vision of the future landscape as the basis for further work. I stress the words 'as a basis for further work'. No decisions have been made. We now have to determine how close we can get to this, and, in the context of the outcomes I talked about earlier, how close we want to get to it. This involves considering the consequences for consumers, firms, the legal implications, and whether this stacks up commercially. Potentially we face some difficult decisions.
A possible consequence of the way in which we might limit the services that can be described as ‘advice’, is that some who currently offer advice services would have to describe themselves differently. Alternatively, such services may not be able to continue without modification. As you will have seen from reading the Interim Report or the press coverage, this includes 'tied' and 'multi-tied' services, which means some building societies. I am sure you have asked: 'Why?". The driver for our approach is to provide simplicity for consumers, so that they can easily distinguish between advice and sales services, and demonstrate more clearly that advisers are only working in the best interests of their clients. The driver is not concern about the quality of tied and multi-tied advice.
It is important to note that this would not just affect 'tied' and multi-tied' advice. Some firms who offer independent advice would not presently meet, for example, the minimum professional and remuneration requirements in the simpler landscape. This may apply to those building societies who offer independent advice.
I said a moment ago that we need to consider how close we can and want to get to the simpler landscape in the Interim Report. We need to understand the economic impacts, for example the effect on the availability of advice and the implications of this for consumers. We want to know what you see as the barriers to changing from a 'tied' service to one that recommends products from across the whole market, where professional standards are higher and where product providers do not influence remuneration.
I recognise that those of you with 'tied', 'multi-tied' and independent advice services may see the simpler landscape as a threat to your business model. I hope that you will also think about whether it also offers opportunities.
In thinking about consumer access we need to think about advice and sales services together, as well as in isolation. Our starting point for sales is services that are strictly non-advised, and which can be provided at present. The BSA's response to the DP urged us to look at guided self-help that stops short of a recommendation to the consumer. We recognise that to encourage such services we may need to do more to give guidance to firms about where the boundary between and advice and sales lies.
However some feel that, having gone through a non-advised process, customers may still need to be persuaded to go ahead and buy a product. So a non-advised approach may not attract enough demand or may not deliver the necessary conversion rates to ensure commercial viability. It may not allow enough consumers to recognise their savings priorities and then to address them.
So a sales process that involves an element of 'persuasion', and operates within the legal definition of regulated advice, may be needed to deliver good outcomes for consumers and firms. Firms who have talked to us about such processes appear to want them to be fast and streamlined to attract sufficient demand (perhaps 30-45 minutes), and say they want greater certainty about how their services will be judged by us and by the Financial Ombudsman Service (FOS). So we are willing to consider some form of action – for instance individual guidance or even designing a new regulatory regime – for these services to be offered.
FOS has been providing input to help our consideration of the liability issues arising from potential business models for guided sales, including those that operate within the legal definition of advice. Some thoughts on possible ways forward are in the Interim Report. One approach might be to judge the service against a standard appropriate to the service being provided, and the customer’s understanding of the service. That standard that could not be below the standard the general law (including EU law) would expect, because consumers could then refer cases to the courts instead of the FOS.
We won't take action to enable sales services that involve an element of 'persuasion' unless the industry makes a solid case for it. The Interim Report challenges the industry to make that case. Our overriding consideration will be ensuring an appropriate degree of consumer protection. This includes being satisfied that consumers would understand the limitations of the services.
I'm really interested to know whether you think such services would be both an economically viable opportunity for you, and increase consumer access. I'm also interested in the extent to which you might want to substitute them for existing 'tied' services, if at all. We do not intend to design business models or systems, nor take a lead in doing so, but will consider what role we might take if you wish to do so.
I've focused today on the potential implications of the 'simpler landscape' for Building Societies, rather than for consumers. I haven't had time to discuss the UK and European Union legal constraints that may limit the changes we can make, our challenge to the industry to develop a common framework for professional standards, or our challenge to product providers to end their role in determining advisers' remuneration. You can read about these in the Interim Report.
I hope you see opportunities in the Interim Report as well as threats. We will be interested in any help you can give us in understanding the consequences of the simpler landscape, for example any consumer research you may have done. I look forward to discussing this with you in the panel session with John and Matthew.
Thank you.