OUR PROFESSION

CONSULTATION RESPONSES

 

 

Our Profession

Consultation Responses

Response to the FSA consultation paper 06/19 Reforming conduct of business regulation

(Questions unrelated to the implementation of the Markets in Financial Instruments Directive)

AIFA is the trade association that represents UK regulated independent financial advisers (IFAs). Membership of AIFA is voluntary and on a corporate basis. AIFA currently represents over 70% of IFA firms in the UK.

IFA firms are the leading distribution channel for retail financial products in the UK. They generate over 60% of business by monetary value and are the major sector advising and arranging private pensions in the UK. As such, IFAs represent a dominant force in the maintenance of a competitive and dynamic retail financial services market.

We welcome this opportunity to comment on FSA's proposals and would like to state that we found FSA's pre-consultative work on this consultation paper immensely helpful.

The move to more principles based regulation (PBR)

AIFA supports FSA's move to more principles based regulation as we believe that an outcomes-focused approach will ultimately benefit both consumers and our members. However, it will mean significant changes to the way businesses are operated and for many of our members, more reliance on third-party support. The reduction in rules and guidance from FSA will create uncertainty and the likelihood of different practices and procedures emerging from firms conducting similar business. The success of PBR will depend both on firms having the ability and confidence to apply principles without reverting to internal prescriptive rules and FSA in ensuring its approach to supervision truly is outcomes-based.

Depolarisation review

AIFA lobbied FSA hard to undertake a post-implementation review of depolarisation as we believe that regulatory changes, particularly those as extensive as depolarisation, should be scrutinised post-event to assess whether the outcome has been successful and commensurate with the costs. We were pleased when, in November 2005, FSA announced the start of its review. The objective of depolarisation was to provide consumers with wider access to better value products and increase competition. In implementing the new regime, FSA introduced a new disclosure regime to help consumers understand the wider scope of advice available and the cost of the services on offer. Key components of the new disclosure regime were the IDD and Menu, the effectiveness of which is questionable. Whilst we do want to see some radical simplification of the documents we fully support FSA's proposal to retain them until we can be confident that any replacement of the current requirements will deliver improved understanding for consumers.

However, we do have wider concerns regarding the review of depolarisation. FSA focus appears to be on the disclosure requirements and we wish FSA to confirm that it will address the fundamental issue of whether depolarisation has benefited consumers. There is a danger that the review will become subsumed into the wider Retail Distribution Review and the fallout from implementing MiFID. We would like reassurance that there will be a proper assessment of the structure of the retail market and evidence sought to establish whether consumers have benefited as intended from the very costly changes brought about by depolarisation.

Chapter 2 General approach to reforming conduct of business regulation

Q 2: We have no additions to the list.

Q 3: We support the FSA's move to principles based regulation. However, we have raised our concerns regarding the implementation process previously. FSA has highlighted some of these in the CP but we would like to reiterate our concerns regarding the Financial Ombudsman Services and its interpretation of high-level rules. The reduction of FSA guidance and detailed rules will create a regulatory vacuum and will allow FOS wider discretion in the interpretation of the remaining rules. Whilst the gap is likely to be filled by guidance produced by industry and external compliance specialists, this will provide no safe-harbour for firms and no obligation for FOS to give the same regard as it does to FSA rules. This could be complicated further by the potential scope for differing or even conflicting guidance to coexist. It remains to be seen, how this is addressed by FSA and FOS which in turn will determine the success of PBR in the retail sector.

Chapter 3 The structure and contents of NEWCOB

Q 5: The structure is logical and easy to follow.

Chapter 5 Application

Q 6: Yes, we agree with the proposals.

Chapter 6 Conduct of business obligations

Q 11: Yes, we are supportive of FSA's approach. We believe that the proposed solution allows for a level playing field. Commission structures and payments to non-MiFID firms are different to the ones of MiFID firms and the way MiFID has been drafted does not take account of this. It would therefore cause extreme difficulties for non-MiFID firms to comply fully with the MiFID requirements. MiFID already states that the receipt of a commission.. where the advice or recommendations are not biased as a result… should not be considered as designed to enhance the quality of the investment advice to the client." There is therefore no need for an enhancement test for non-MiFID firms.

Q 13: Yes, we agree

Q 14: N/A to our members.

Q15: This proposal does not relate directly to AIFA members. However, our comments are that although we agree that consumers are sufficiently protected by general law as well as the FSA's Principles for Business, the removal of the specific rule form the Handbook does increase the risk of consumer detriment.

Chapter 7 Client Categorisation

Q 16: We responded to the FSA's August paper on client classification in which we stated our concerns with regard to the costs incurred by non-MiFID firms. However, we expressed our support for FSA's proposal to disapply the quantitative tests for opting up to professional status for non-MiFID business as well as the proposal to make use of grandfathering.

Q 17: N/A to our members

Chapter 10 Distance Communications

Q 18: Yes, we agree with the proposal. We believe that this is a positive structural move. The growth in e-commerce and the ensuing increase in distance communications have made this necessary.

Q 19: Yes, we believe it should be carried forward.

Q 20: Yes, we agree that the ECD does not require a specialist source book. Firms should by now be well familiar with the requirements of the Directive.

Q 21: We are not opposed to the proposal. However, we have doubts regarding the implementation of the Directive by all member states and would like some assurance that the implementation process in all member states has been completed before the consumer contracts derogation is turned off.

We agree that the insurance derogation should not be turned off at this stage.

Chapter 11 Information about the firm, its services and remuneration

Q 22:We believe that it is imperative for consumer protection to keep the IDD and menu at this stage. We also agree with the FSA's proposal to conduct a proper review of the current IDD and menu before suggesting any changes. We believe that any ad-hoc changes to the disclosure regime to make it MiFID compliant would place an unnecessary financial burden on the industry. A new regime should only be implemented after the conclusion of in-depth consumer research.

Q 23: We believe that the MiFID requirements are very vague and not a substantive base for a review. The MiFID requirements state that a firm has to provide information on itself, its services and it remuneration. We agree that all these things need to be included and that the information required by consumers needs to be made available in a clearer and simpler way than currently. But its replacement must not weaken what we have in terms of consumer protection and consistency provided by the current disclosure regime. Any change in the disclosure regime must adapt to market dynamics.

We do not think that FSA should mix the objectives of the depolarisation review with MiFID requirements. Depolarisation has no direct connection with MiFID, especially as MiFID is not aimed at this sector of the financial advice market. As stated previously, a successful review needs to look at the cost to industry of depolarisation and if the benefits outweigh such costs. The effectiveness of the disclosure documents is only part of the review. We do not wish to see the focus of the review lost among the overarching compliance with MiFID requirements.

We believe that there is scope for simplification but it is essential to maintain clarity not only of individual firms' business propositions but also of other types of offering in the market. Remuneration must be clearly explained and a level playing field must be maintained.

Q 24: Yes, we support this proposal. The rules should provide customer clarity when choosing financial advice.

Q 25: Yes, we agree that it is a superfluous rule.

Q 27: Yes, we agree with removing this rule. The FSA's retail distribution review is looking at ways of paying for financial advice in a more efficient and transparent manner. One of the suggested solutions is factory-gate pricing. If retained, the excessive charges rule could create uncertainty and thus obstacles to innovation.

The current upfront disclosure rules which require transparency of the remuneration structure will ensure that consumers are protected against excessive charges.

Chapter 12 Insurance mediation

Q 29: We do not support the proposed removal of the prescribed format of the IDD for non-advised sales to retail clients. The same information still needs to be disclosed, clearly visible and prominent at the outset of the process and we believe that it is the interest of consumer protection to have a consistent format when disclosing the information.

Chapter 14 Identifying client needs and advising

Q 31: MiFID clearly requires advisers to obtain information regarding the level of education, and profession or relevant former profession of the client or potential client as part of assessing their ability to understand financial products.

MiFID draws a clear correlation between the level of education and employment and the ability to understand the risk associated with financial products. We agree with the spirit and idea of calibrating information and collecting an appropriate level of detail according to the product. However, in most cases personal information is collected upfront when the adviser does not know what products people will be investing into. It is therefore unlikely that advisers will differentiate between the likely outcome of products purchased and will collect the additional information in every case. This will be going beyond current COB requirements and increase administration to the fact-finding process. It could also result in a perception that it is necessary to have a specific level of qualification for specific products. This could impact adversely on the advice market.

Our concern is based on the fact that we do not believe that a client's professional qualifications are a reliable indication of their ability to understand a specific financial product and that it is not an adviser's role to decide what qualifications are adequate when deciding to invest in certain types of products. We are particularly concerned about the attitude the Ombudsman might take. Potentially this could become a catch-all for every investment that does not meet a client's expectations because there will inevitably be discrepancies between views on the level of qualification required. We do not believe that professional qualifications correlate with understanding financial products or an individual's appetite for risk. It will be important that undue emphasis is not placed on this one aspect when assessing suitability.

We would feel it necessary to issue guidance to members on this matter which raises concerns about our own potential liability. We have set out our concerns regarding the issuance of industry guidance in our response to the FSA consultation paper.

There could also be an impact on advice which is currently given under disclaimer e.g. where a consumer does not want to divulge information or restrict the scope of advice to specific investments.

Q 32: Yes, we agree with the proposal to keep the modified requirement for a suitability report. However, we are fully aware that many firms currently produce very detailed suitability letters as a means of protection, rather than focusing on providing important information to the customer. Reduced prescription is unlikely to change this behaviour and we therefore do not see any real benefit arising from the change.

We have serious concerns about the deletion of the requirement to recommend the "most suitable" product. We believe that the requirement should be retained and that the UK should apply for an exemption under article 4 of the implementing Directive.

Compliance with a requirement to recommend the most suitable product should pose no problem for firms who are committed to acting in the best interest of the client. We believe that there is a distinct difference between the "most suitable" product and a suitable product and we do not agree with FSA's view that this gap will be sufficiently filled by the TCF principle. It is important to prevent product bias and we would like to see the requirement explicitly retained in the rule book.

Q 33: Yes, we agree with the proposal.

Q 34: Yes, we agree with this proposal. However, we would like clarification on whether this also applies to clients of non-MiFID firms who have been grandfathered into the professional clients category or do not have to comply with the quantitative qualifications.

Q 35: Yes, we agree.

Q 36: Yes, we believe that a wider review is a necessity. In our opinion, the basic advice regime has failed. During the original consultation process we highlighted weaknesses of the proposed structure and set out the reasons why we preferred focused advice.

We are very keen to discuss changes with FSA, either as part of the retail distribution review or through the normal consultation process. We believe there is a need for a standardised advice process to enable simple products to be marketed and sold in a more cost-effective manner. The process needs to be practicable for firms and beneficial for consumers.

Chapter 15 Non-advised services

Q 37: N/A

Q 38: Yes, we agree with this decision. We have serious doubts about the practicability and benefits of the appropriateness regime and believe that rolling it out to non-MiFID firms would cause a significant increase in administrative costs with very little benefits for consumers.

Q 39: We are supportive of the proposal as we believe that it is important to increase consumer protection for such high-risk products.

Q 40: Yes, we support the proposal to extend the test to such products as they are high-risk. This will contribute to consumer protection and stop disputes about who initiated the sale. It will be easier to administer and at the same time offer better protection to consumers.

Chapter 16 & 17 are not applicable to our members

Chapter 18 Preparing product information

Q 55: We contributed to FSA's work on Quick Guides and although we liked them, we had a problem with the proposal to hand them out in addition to the KFD as they were not considered to be adequate on their own. We support consumers being fully informed about what they invest in but see a danger of information overload. We therefore believe that FSA should focus on finding a solution where consumers are given less but more valuable and easier to understand information. We are supportive of the proposal to slim down the KFD but to keep more material than was contained in the QGs.

Q 58: We are supportive of this proposal. Use of the keyfacts logo delivers the familiarity of a consistent approach and sends a message that the information is important. We also believe that a reference to keyfacts is more appropriate and fitting terminology than keyfeatures.

Q 59: We do not think that it is the role of industry bodies to set regulatory standards. We have set out our views on industry guidance in our response to the relevant consultation paper and refer you to this for further information on our position.

We are therefore very cautious about best practice guides although we have issued them to members in exceptional circumstances. We have collaborated with other trade bodies on the production of a number of such guides and will continue to do so where we feel this is necessary. Guidance issued by bodies representing product providers like ABI and IMA can be helpful for intermediaries through the creation of a consistent approach by product providers.

Q 60: The proposed approach highlights the importance of clarity and the clear allocation of responsibilities between providers and distributors. Under the proposed approach, providers will have to take responsibility in choosing the information they are going to disclose. By taking on this responsibility they are also taking on any liability resulting from insufficient disclosure. We have set out our views on provider/adviser responsibilities in our response to the relevant FSA consultation paper. We would also hope that the FSA takes due regard to the work undertaken by ABI and AIFA setting out clear lines of responsibility through the product life cycle in its monitoring and supervision.

Q 61: Yes, we believe that this will be the case.

Chapter 19 Providing product information to clients

Q 62: We are supportive of the proposals and FSA's decision to keep a level playing field. However, NEWCOB 15.2.9 (1) again raises the issue of provider/distributor responsibility and we would like FSA to clarify its position.

Chapter 20 Cancellation

Q 64: Yes, we agree with the proposal

Q 65: Yes, we agree and we also support the proposal to extend the same cancellation rights to SIPPS post April 2007.

Q 66: Yes, we support this proposal in the interest of consumer protection. It will give consumers more notification of their rights.

Q 67: Yes, we believe that pre-sales disclosure and cancellation notices provide sufficient information to the customers to ensure that they can exercise their cancellation rights.

Post sale variations: We also support the removal of the cancellation rights for post-sale variations. We agree with the view that where people are just adding to an existing investment, the risk is significantly reduced which justifies a reduction in the paper trail. Where there is a significant increase we believe that the application of the TCF principle will protect consumers. Providers may also consider where it may be appropriate to issue the documentation.

Chapter 21 Reporting information to clients

Q 68: N/A

Chapter 22 Claims handling for long-term care insurance

Q 69: Yes, we do agree. We see it as unnecessary to retain detailed rules for what is basically run-off business. The market is already under considerable scrutiny by FSA and we cannot see any risk from a move to high-level rules.

Chapter 23 Specialist regimes

Q 71: N/A

Q: 73: N/A

Q74: N/A

Chapter 24 With-profits

Q 75: We welcome the proposal and believe that it will prove to be beneficial. Reordering information into three sections is a positive move as it will lead to de-duplication. We welcome the improved clarity regarding reattribution of assets and the role of the policyholder advocate. We particularly like the proposal in section 24.8 regarding the presentational changes. Research carried out as part of AIFA's "Stake in the Ground" project has shown that the current disclosure documents (PPFMs) do not fulfil their purpose. Any changes to structure and content that makes them easier to compare will be welcomed. Life offices should follow the tabular format to make comparison easier.

The consumer friendly PPFMs still have to prove their value to policyholders. The continued communication on changes will generally be ignored. We support the concept but have to accept that in practice they fail to deliver the objectives, due to the complex and dynamic nature of with-profit investment.

The changes in the with-profit market have left it in a state of flux. We therefore agree that it would be pointless making fundamental changes at this time. However, we do see an urgent need for a review of all information regarding with-profits which should be considered outside the COB review.

Chapter 25 Pensions: supplementary provisions

Q 76: We believe that there is no need for detailed rules covering the content of pensions transfer analysis. This work is now undertaken with highly sophisticated computer based analysis programmes which ensure that advisers perform all necessary calculations and comply with all information requirements. We acknowledge that there is increased activity in the sector fuelled by the changes to the tax regime and the move to wrap platforms. We agree that there is more potential risk for consumer detriment but this needs to be addressed through compliance functions. Retaining prescriptive rules on transfer analysis will not alter behaviour.

In the interest of consumer protection and reputation of the advice community we agree with the proposal to retain the existing requirements for pensions transfers and the specialist activities of specialist advisers.

However, we do question whether the current regulatory definition of pension transfer, which encompasses transfers from money purchase occupational pension schemes, is still relevant. Transfers from defined benefit schemes pose the highest risk and the greatest degree of complexity where the expertise of a specialist is essential. But we feel FSA could re-evaluate the need to include money purchase OPS transfers within the definition of pension transfers where the potential risk to consumers is considerably lower.

Q 77: Yes, we agree with FSA's proposals.

Q 78: We agree with the statement that there has been a significant reduction of "vanilla" pension customers. However, we believe that this is due to the increased take-up of group stakeholder pensions via worksite marketing with limited and not full advice. We therefore question FSA's assumption regarding the split between advised and non-advised sales.

However, the market for SHP and group SHP is considerably smaller than that for IPP and GPP due to the alignment of competitive charging structures and wider choice of investment. Consumers are often able to receive a better contract for the same money. This has been the case especially since the increase in the price-cap on SHPs for new business. The higher price-cap and the likely introduction of personal accounts mean that the market for SHPs could ultimately be subsumed into the PP market.

We therefore support the proposed removal of the stakeholder decision trees.

Q 79: We believe that it is of vital importance that FSA retains this rule. Everything needs to be done to make people more aware of their rights to shop around. It is important that people maximise their funds. We also believe that the process of using an OMO needs to be simplified. AIFA would be pleased to participate in any project that will deliver a more effective and efficient process.

Chapter 26 Transitional provisions and waivers

Q 80: The proposed transitionals and waivers seem to be sensible.

Q 81: We have no suggestions for any other areas.

Q 82: N/A

Chapter 28 Unfair Commercial Practices Directive

Q 83: UK consumers are already better protected under FSMA and we therefore agree with FSA's approach. We do not expect to see any changes arising from the implementation of UCPD.

Chapter 31 DISP (dispute resolution)

Q 94: We agree with the proposal to remove the requirement for FOS membership displays in branches. Our members are already required to disclose the ultimate availability of FOS from the outset through the IDD.

Q 95: a) we are not generally in favour of removing this requirement. We believe that 5 working days is a sufficiently long period of time for a firm to respond and that the rule helps to focus attention. We believe that having a defined period gives consumers the reassurance that the complaint has been received and is being dealt with promptly.

b) We agree with this proposal. The 4 week written holding reply creates an artificial deadline and we are therefore supportive of its deletion. The rule has posed difficulties for intermediaries who often have to rely on third party information to progress a complaint and which is frequently not made available in time. Removing the 4 week 'holding letter' will reduce administration costs for IFAs. We believe that the 8 week backstop is important and provides sufficient consumer protection.

c) We are not clear about the difference in other sectors but our members have to comply with it already.

Q 97: We agree with the proposal for practical reasons. We do not expect it to make a significant difference to our members as the vast majority of them treat all of their clients as private clients

Q 99: The transition proposals are clear and reasonable.

Chapter 32 Transaction reporting requirements for non-MiFID firms

Q 100: N/A

Annex 1 Chapter 3 Client categorisation

Q 101: We agree that the costs will be fairly minimal as evidenced by an FSA survey of our members last year. The vast majority of our member firms already categorise all their clients as private. We are very pleased that there is no requirement for pro-active notification as this would have been costly.

Annex 1 Chapter 7 Identifying client needs and advising

Q 102: N/A

Q 104: N/A

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