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Speech by Jon Pain, Managing Director, Retail Markets, FSA
FSA Retail Distribution Review Conference
25 November 2008

Good afternoon ladies and gentlemen.  Thank you all for attending today’s Retail Distribution Review conference, whether in person or online. As Adair has already said, it is very encouraging to see so many firms, consumer representatives and policy makers from across the spectrum of the market here today. As we launch this important feedback statement on the RDR, let me stress again that we are hugely grateful for the feedback and engagement we have received from small and large firms alike.

I’d like to start my remarks by reaffirming the FSA’s commitment to the retail market. We have always challenged firms to be well governed, to be financially sound and to manage effectively the risks inherent in their business models and markets. Over the coming year this will be more important than ever as we face an economic environment as testing as we have seen for well over a decade. So there is no doubt in my mind that we in the FSA must have distinctive retail priorities which will provide the backdrop to our RDR proposals:

• We will continue to focus on consumer outcomes and ensure firms treat their customers fairly. 
• We will act to prevent and deter financial crime.
• We must continue to apply a more principles-based regulatory approach, intervening pro-actively and proportionately to deliver a credible deterrence. 
• And of course, we must continue to drive forward our work on consumer capability, enabling consumers, to engage proactively and responsibly with their financial affairs.

Let me just dwell on that last point for a moment. I don’t think any of us can be in any doubt that it is absolutely essential, for the future success of the retail financial markets, that we collectively work to rebuild consumer confidence and trust. This has been the case for many years and in the face of recent economic turmoil, it is ever more so.  We can not allow the public to believe that the financial services markets cannot provide the solution for their longer term investment and retirement needs. Through the RDR we are putting forward proposals that seek to empower more consumers, to have confidence and trust in the retail investment market. We simply want more consumers to have the confidence to engage with the market more than they have ever done.

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We believe it is enormously important, to get consumers to engage with their own financial affairs. This doesn’t mean that we expect all consumers to become financial experts; we know this is unrealistic and that there is, an important market, for financial advice.  But it is both reasonable and realistic to help consumers take responsibility, for their own financial futures where they can, and for them to be able to rely on professionals to help them, when they need to.  This aim, is at the heart of our work, to improve financial capability in the UK. We are already making real inroads through our partnership work to deliver financial education in schools, in higher education and in the workplace.  Shortly, the Money Guidance pathfinder that the Government has asked us to lead over the next two years, should provide help to consumers looking for direction on their own financial needs, either by web, phone or face-to-face.  The pathfinder is due to launch in early 2009, initially covering the North-East and North-West of the UK, and will be a very important part of the future landscape for financial advice, whether regulated or not.   

In addition to improving consumers’ understanding, we want – and need - consumers to have sufficient confidence that the financial firms they deal with today will be there not just tomorrow but 10 or 20 years from tomorrow.  After all, if, you are putting aside money now for your retirement in the future, it is only reasonable that both the provider of the policy, and the firm who gave you the advice are there to see things through.

With this consumer backdrop, and the clear opportunities for change, I am certain that the outcomes we want to achieve through the RDR remain as important today as in 2006 when the review was launched.  We wanted to address the many persistent problems we had seen in, what is now, over 20 years of regulation of the retail investment market. Insufficient consumer trust and confidence in the market lay at the root of what we are seeking to address. The poor standards of practice that we continue to observe in our supervision of some firms serve only to exacerbate this issue. With the RDR we decided to go beyond simply treating the symptoms of these problems and sought to address the root causes. And to do this bearing in mind a changing and evolving market.

We led this review in a different way to our usual policy-making process, especially in renewing our efforts to closely work with the market; listening to practitioners up and down the country; being consultative and engaging and searching out market consensus.  This has resulted in 2 ½  years of very open consultation, through the establishment early on, of industry and consumer representatives to help us formulate ideas for the Discussion Paper, to the almost 900 formal responses to that paper, to the finalising of ideas for the Interim Report and now for the Feedback Statement.   All that I have heard suggests that this approach has been welcomed by market participants of all sizes and across all sectors and that it has been both successful and appropriate for this type of review.

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We were clear back in 2006 that we wanted the RDR to stimulate delivery of a number of specific, interconnected, outcomes. These are as relevant today:

• For an industry that engages with consumers in a way that delivers more clarity for them on products and services;
• For a market which allows more consumers to have their needs and wants addressed;
• For standards of professionalism that inspire, consumer confidence and builds trust;
• For remuneration arrangements that allow competitive forces to work in favour of consumers;
• For an industry where firms are sufficiently viable, to deliver on their longer term commitments and where they treat their customers fairly; and
• For a regulatory framework, that can support delivery of all of these aspirations and which does not inhibit future innovation, where these benefit consumers.

I have never been in any doubt that the aims of the RDR, and the approach that we have taken, are challenging and far-reaching.

As you know, I was keen to ensure, that we thought carefully as to how best to achieve these aims, so one of my key priorities has been to challenge and review the approach that has been taken, and the proposals being developed. It is now my intention that the changes introduced through the RDR will be fully embedded by the end of 2012.

Of course, the RDR’s success relies on interdependencies with other key FSA aims – in particular our work on financial capability of course, but also our Treating Customers Fairly principle as well as our effective supervision of wholesale and retail firms.

But we have only come so far, and none of us must underestimate the challenge of implementation ahead. Later, Amanda Bowe will discuss the detail of our recommendations, but let me run through what for many will be the highlights of the feedback statement.

Overall, the FSA’s role here is to set out regulatory interventions that level the playing field and mitigate risks. Our approach is to have one regime for all, so we will work to ensure firms do not get around the spirit of what we are trying to do. We believe the regulatory framework we are establishing gives firms complete scope to develop viable business models, for the benefit of consumers. In fact, we know that many of our proposals can be, and are already being, operated by firms and individuals in the market today. This is the case with high professional standards; and with fee-based advice. There is actually no need for us to intervene with regulations to enable these good practices, but we do need to ensure that the rest of the market follows. And we need to mitigate risks that emerge from new practices.

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So we have now decided on the changes we want for the retail investment market. There are four measures that we regard as most fundamental to delivering the market outcomes we set out to achieve, which will materially alter and improve the interactions between consumers and the industry. Set out in the Overview section of the Feedback Statement, these are:

• providing greater clarity for consumers, about the advice service, being offered;
• modernising the way advice is paid for;
• introducing a new standard, for independent advice; and
• raising the professional standards of all advisers.

We believe that we have a coherent set of proposals, that we can consult on, representing the most effective package for delivering our intended market outcomes. Let me expand briefly on these, before handing over to Amanda to cover in greater detail. 

First, clarity of services.

• Providing greater clarity to consumers by distinguishing between independent advice and sales advice.
• Independent advice will be truly independent. With advisers providing recommendations that consider all the products and providers that could meet a customer’s needs. All independent advisers, not just those advising on packaged products, will need to provide unbiased, unrestricted, advice that targets the best outcome for each customer, based on a comprehensive and fair analysis of relevant markets.
• Sales advice will be where firms recommend the products of one or a limited range of providers, and make this clear to customers.
• And firms will also embed the broad characteristics of the Money Guidance service into their advice and sales processes where relevant. Money Guidance itself will make clear where consumers should go if they need help. 

On remuneration,

• we will modernise the way that advice is paid for by requiring advisers to agree the cost of financial advice with customers up-front, removing the possibility of commission bias and ensuring the cost of all advice is clear to consumers whenever it is given.
• For consumers to understand clearly the different services being provided and to recognise the value of advice, we will require separate disclosure of the costs of advisory services from product costs for both independent and non-independent advisory firms.

On professional standards,

• we would like to see an overarching Professional Standards Board to drive higher standards for advisers - a Board with similar powers to standards boards in other professions. And a principle will be established to require the same competency levels for the same advice roles, whether providing independent, or non-independent investment advice.
• For all investment advisers, there will be a benchmark qualification of at least QCA level four, and possibly higher levels for designated specialists, but all individuals will be encouraged to opt for higher levels to suit their specific needs.

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On consumer access, and to help firms manage their future liabilities, we will continue to offer to help firms provide simplified ‘guided sales’ processes for consumers with more straightforward needs. By giving firms greater clarity about how our rules apply, and greater certainty on potential liability. We will consult on removing the rules around Basic Advice, and will expect a handful of individual waiver requests that we will deal with on a case-by-case basis.

We intend to implement changes over a period running through to 31 December 2012, but we would like to see some elements arrive sooner, and for firms to adopt them sooner. The reforms are wide-ranging and will be challenging for the industry, but they also present significant opportunities to modernise practices, raise standards and treat their customers fairly. We know that there will be concerns about introducing such significant change at a time of market turmoil and uncertainty. However, given the market’s clear appetite for change, and the progress that many have made already to move in the direction we are proposing, we believe that we are right to set out our final proposals for consultation now and give the market sufficient time to implement the changes. The RDR provides a significant opportunity to re-build the confidence and trust of consumers at a crucial time.

Can I be clear that the FSA has consistently stated during the RDR that we welcome, and indeed encourage, firms and individuals taking the initiative before our proposals are finalised, as long as their actions are consistent with our intended outcomes. Professionalism is a good example of this. Our approach here is to recognise the efforts of the individuals who have already taken steps, and set out clearly the action required from those who have waited for our final proposals. For the most part, we support the proposals put forward by the Professionalism Working Group on transition, but we are not minded to change the position we stated in the Interim Report, which was that we do not support grandfathering.

We are grateful for the work of the Professionalism Working Group in overcoming the challenges of self-interest and politics in order to reach broad consensus on how to deliver the changes put forward in feedback to the Discussion Paper. We hope to see real effort put into continued collaboration and communication with the wider market.

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We are very clear that the RDR is a package of interdependent proposals that together need to be put into action to ensure we achieve our intended outcomes for the retail market. We believe that the package of measures we are outlining today is very workable, with great potential to deliver enormous benefits to providers, intermediaries and consumers alike.

Of course, we recognise that these proposals are not without risk. We recognise that some firms may actively look to get around the restrictions in the new regime, for instance by providers continuing to try and buy adviser loyalty through soft commissions, or providers offering ‘closing down’ commission deals to encourage a flood of new business in the run up to 2012. But we urge all participants to grasp this opportunity to improve the market and the wider industry and to be proactive in policing yourself as far as possible. I say this because I can assure you that we will take decisive action against firms that do not meet the required standards.

In closing then, our intention is that any new regulatory requirements and industry-led initiatives resulting from the RDR are implemented by firms in a manner that causes minimal disruption to consumers and to firms. Many of you told us that you believe it is better to take the time to make the right changes than to rush things. No one wants to do this all again in a few years time. To this end, we propose a final implementation deadline of end 2012, with earlier implementation possible by those choosing to do so. This will align RDR changes with the benefits brought by a potential national money guidance service, and with the introduction of Personal Accounts. We also believe this gives individuals the time to take any necessary examinations to meet the new standards. And let me be clear, on remuneration, this means that by the end of 2012 we will have moved to a system where the bias of product providers is no longer a feature.

I hope that you can join me in looking forward to 2012. It is a future where consumers will be better informed and better engaged about financial issues, where they have more confidence and trust in dealing with financial companies and where they are prepared to pay for good quality advice because that is what is on offer. Firms will have identified business models that are sustainable and which treat their customers fairly because they understand that doing so makes good business sense.

Earlier, Adair Turner described the Retail Distribution Review as a golden opportunity to regain consumer confidence and trust in the financial services industry. I couldn’t agree more, I know many of you agree too, so please seize this chance for lasting and significant change. I will now handover to Amanda, who will expand on our proposals.