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Rt Hon. John Gummer MP, Chairman of AIFA - speech for AIFA’s Business Leaders’ Lunch
Date: Tuesday 24 April
Venue: The Brewery
Thank you Deirdre [Dame Deirdre Hutton, Deputy Chair of FSA, was the guest speaker]
At AIFA we feel it is extremely important to build and maintain relationships with all parts of the retail financial services community: those who manufacture products; those who represent the regulator; those who represent the media; and those who represent the consumer. Only by coming together can we discuss issues and exchange ideas which are relevant to all parties and which improve the service available to that group most important of all: the consumer. This is why we hold lunches such as the one we are at today.
We are delighted you were able to share your thoughts with us. In that spirit of open and frank dialogue, there are some FIVE areas our members feel strongly about and I would like to offer you our thoughts to better inform your, and the FSA Board’s, decision making.
The need to be positive
It would be easy to see my comments today as being defensive, offering just another set of views from a trade body protecting its membership. However, we at AIFA feel the time has come for change and a more radical agenda to be pursued. If we may take a leaf out of Sir Callum McCarthy’s book, we think that radical change is necessary. Whilst we cannot accuse the FSA of being “bust”, we can at least suggest that the current state of affairs has not helped the industry, nor the regulator, nor the consumer… but it has left us with a regulatory structure this year that will see the FSA spend over £300m for the first time ever.
So change is necessary and my comments today relate to the changes proposed by the FSA and how we at AIFA wish to respond to them - and to lead the debate into new areas. This is a positive, forward looking agenda and one that marks the start of a new era for AIFA.
1. Financial Services Compensation Scheme Review
First, I would like to praise you and your colleagues on the FSA’s Board for the courageous decision you took to carry out a radical review of the Compensation Scheme. We all know that there are many powerful vested interests who would try to de-rail this process.
We may be biased participants in the quest for change, but we are able to acknowledge the fierce lobbying the regulator has been subjected to - from all
sides - on this issue. And in the face of this onslaught, we respect your unwavering determination to continue with the task itself: to deliver a fairer and sustainable Scheme which is fit for purpose. A Scheme which spreads an even cost-burden across the sector to meet the valid needs of consumers who find themselves done a dis-service by the industry.
The purpose of the Review is to establish a more robust, fairer, sustainable Compensation Scheme which is based on the principle of “mutual financial interest”. We are within striking distance of achieving this goal and we simply ask that you now finish the job we all know needs to be done.
Of course, this would bring a major cost-reduction for our members – but that is not at a reduced level of protection for the consumer. The new Scheme would simply re-apportion the costs on a fairer basis: the professional advice community has paid too much for too long and the introduction of a more balanced system is only just.
Let me now turn to issues that affect us all more widely, beginning with the move away from a rules bound regulatory system.
2. More Principles Based Regulation
We are moving into a new era of “more principles based regulation”. This holds the prize of a regulatory system focused on “outcomes”: on what actually happened rather than on technical infringements which are of more concern to technocrats rather than consumers. Where consumer protection is still paramount but where firms can have the operational freedom to build on good practice.
AIFA supports the moves towards a more principles based regime if it delivers these “regulatory dividends”. We are keen to work with the FSA to ensure that the bridge from rules to principles is built well, on firm foundations, and is strong enough to carry all of our members. Whether the bridge ends in a “safe harbour” or “sturdy breakwater”, is less of a concern than the surety which comes from knowing all firms will be treated equally and a level playing-field will result.
I know that AIFA’s Director General, Chris Cummings, has recently been making some headlines by repeatedly pressing FSA to undertake a cost / benefit analysis of the move to a more principles based regime. He is not doing so to be difficult or unhelpful. Indeed, I hope my comments today will reassure any sceptics that AIFA is supportive of this direction of travel. He is simply asking FSA to undertake the same level of internal scrutiny it would expect of any of its regulated firms who were about to undergo a strategic shift.
Further, it is my view, that by undergoing a cost / benefit analysis the FSA will be helping itself. It is not difficult to imagine others in the sector, in the media, or in other positions asking those who lead the regulator if the changes they have introduced have been successful. We imagine they will be and will be easily identifiable. However, a case supported by clear, robust, and detailed financial analysis would be even more compelling.
With the FSA pushing a more robust regulatory agenda in Europe and pressing the case for the introduction of clear analytical tools (such as the establishment of cost / benefit analyses), for them not to undertake one for this move could undermine their authority.
The industry is going through another period of great change: the RDR, MPBR and MIFID implementation to mention just a few of the acronyms that dominate our life! During times such as these, it is crucial that the regulator demonstrates its accountability.
Finally on this topic, let me say, we know that consumers are interested in “outcomes” – they do not want endless streams of papers and procedures. They want suitable advice, professional advice, trusted advice. The professional advice community enjoys high levels of consumer confidence and we do sometimes worry that the classification of all types of people from bank staff to the most highly qualified chartered financial planner under the heading of “financial adviser” does nothing to help the consumer and everything to lower the trust in the industry.
I call upon the FSA to work with us to introduce a better framework for the sector. A framework which makes it clear to the consumer who is advising them and who is hiding behind misinformation, who is a salesperson and who is offering no-advice at all. Only by bringing clarity in the service that firms offer can we rebuild trust and bring consumer confidence.
That brings me on to the next major theme of member concern: the Retail Distribution Review.
3. Retail Distribution Review
As you know, we are active participants in the Retail Distribution
Review. We are represented on every working group and our own working party is developing solutions to some of the issues raised. We see this as an opportunity to inject new thinking into old problems. We see it as a positive challenge. It is vital that the advice profession contributes to advance a clear agenda for improving its reputation, professionalism, and of course, explores new ways to ensure fair and appropriate remuneration.
We are pleased that the FSA has made it clear from the outset that this is not a review focusing solely on IFAs and the issue of commission; but that it is a review across all sectors. It goes without saying that any solutions which are proposed must also be applied across all sectors. Transparency on charges must apply to IFAs, product providers, banks and building societies. Customers must be treated fairly across the board.
I have always been suspicious of simple solutions to complex problems. The short term benefit can disguise longer term problems – or simply cause them to re-appear in other parts of the value-chain. That is why we call on FSA to ensure any proposals that emerge in the Discussion Paper due in June are well thought-through and balanced. That they are not used to cure the problems of one part of the value-chain by blaming another group: that proposals are not advanced for adviser remuneration that will simply make it harder for consumers to access professional advice and instead lead them into non-advised purchasers or let them fall into the arms of those who cannot offer access to a wide range of products and services.
The Retail Distribution Review has the potential to bring about the largest shake-up in the sector since the passing of the Financial Services & Markets Act. Let no-one be under any illusion of the scope of the Review.
There are three key proposals that AIFA would like to see adopted:
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There have been calls for IFA firms to be better capitalised. While this may help, a better way to bring stability to professional advice firms is to ensure we have a fairer interpretation of the “Statute of Limitations”. Just as consumer rights are placed at the heart of any discussion, so there must be an acceptance of consumer responsibilities. Eventually, any business must have the surety that they will not carry risk into perpetuity. Neither the Ombudsman nor the Compensation Scheme should be able to
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set aside legislation which provides an end-point within which consumers are free to complain. The time scales are not unfair and at, six years after the event, three years after becoming aware of the need to complain, or within 15 years of the event occurring, are hardly swift.
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That it will be consumers, not regulators, who decide how they pay for financial advice and products. Firms should be free to decide how they will offer their services and consumers should be free to decide how they will access them. Transparency of offer, not regulation of method, should be our guiding star.
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Firms who invest more in running better businesses should be the first to receive any regulatory dividend from the Review. Those with better Training & Competence schemes, who recruit and develop their staff and advisers should be recognised. Those who can justify lower levels of capital should be able to negotiate for it. Simply, there needs to be a better recognition of firms who are better able to meet their clients’ needs and can also meet the demands of regulation. These firms should be rewarded for their bar-raising behaviour – by way of shifting the regulatory discussion from focusing on poor performance.
AIFA wishes to create a more positive approach across the sector. This means the regulator commenting on good behaviour as well as criticising bad. Firms who are recognised as market-leaders receiving regulatory dividends. A clearer labelling of firms and those who work within them, so that consumers know what type of service they are being offered. And, finally, a renewed focus on building trust and confidence within the UK population. This means new work for the professional bodies, the trade body and the regulator.
We must sow the seeds of professionalism and professional behaviour if we are ever to reap the harvest of a first rate reputation and consumer respect.
I wish now to turn to one of the ways in which we may deliver this new and improving reputation: the Generic Financial Advice Service.
4. Generic Advice
People need to save and invest more to protect their futures. That is not in doubt. And there is much evidence available which confirms what we are at AIFA have known all along - consumers who receive financial advice are significantly more likely to be placed in a better financial position and are better protected than those who do not.
We may have some concerns about the way in which generic advice might be delivered, but we support the concept of the proposed generic advice centres.
And we will offer our assistance to aid the creation of these. We recognise that this initiative will increase the public's perception of just how valuable a commodity professional advice can be.
And we were also pleased about the inclusion of a working party examining consumer access in the Retail Distribution Review.
However, at the sake of repeating ourselves, we must make it clear that there is a major difference between generic information and generic advice: the two mustnot be confused. Information, by its nature is generic but advice implies a personal understanding of someone's individual needs.
5. MIFID
No speech would be complete these days without a mention of MIFID but I promise to keep it short. The smooth implementation of this Directive represents a huge challenge for both us and the regulator. We have appreciated the FSA’s support on the continuance of the menu. It is important that a level playing field be maintained on both the disclosure of charges and status. AIFA and the FSA have worked well together so far on MIFID to make the requirements more proportionate.
AIFA’s representation of members
My final comments are about the changing business and regulatory environment and AIFA’s representation of its members.
Depolarisation introduced a new landscape and AIFA’s members have been fast to respond to the opportunities it created. Technology has also opened up and changed the landscape – and we have seen the arrival of open-architecture IT systems which have better enabled the development of wrap based businesses.
The outcome of the Retail Distribution Review may reshape the intermediary market once again. AIFA will be closely reviewing the proposals to ensure the voice of the professional advice community stays strong, unified and grows in stature under any new regulatory regime.
Throughout these changes, one thing remains constant. The importance of professional advice. As always, AIFA will work to support that principle and to represent members in the best possible way. And over the coming months we will be considering how we can continue to represent our members in this evolving business and regulatory environment.
I have spoken for long enough and I’m sure you are looking forward to lunch. So I would just like to say that this has been an invaluable opportunity for AIFA and its members and I hope, Deirdre, that you have found it equally beneficial.
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