One of the Financial Services Authority’s (FSA) four priorities for its retail work in the current year is its review of retail distribution. The issue of reforming retail distribution is not new.
In May 2006, KPMG reported on the study it had undertaken for the FSA on the future of advice in the IFA, mortgage and general insurance (GI) sectors, and setting out possible scenarios for the future. In the report on mortgage advice there were some broad suppositions that product choice and complexity would help increase market share for brokers, and that over-supply of lenders in the higher margin non-conforming sectors would boost adviser bargaining power, causing procuration fees and profits to rise.
The KPMG reports were followed by the FSA deciding to look at the subject in more depth and the current retail distribution review, primarily focused on the advice sector, was announced by chief executive, John Tiner, in June 2006. The FSA has since set out five key priorities for the review. These are: the sustainability of the sector; the impact of incentives; professionalism and reputation; consumer access to products and services; and regulatory barriers and enablers.
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Doubts exist about the ability of the existing business model to serve the interests of providers, brokers, and most importantly the consumer. These doubts were clearly expressed by Sir Callum McCarthy, chairman of the FSA, in a speech he made in September at the Gleneagles Savings and Pensions Industry Leaders’ Summit.
He said that, within the distribution system for financial services to retail customers, ‘we have a system which serves neither the producer of the services nor the customer of the services. It is doubtful whether it serves the broker either’. He went on to say: ‘We have a model based on incentives which produce results which are unattractive to providers, unattractive to consumers, and whose benefits to brokers are questionable.’
It is no surprise then, that some of the areas of concern for the review include commission structures; the resulting focus on volumes over quality; and the likelihood of provider bias and churn. Although the focus is on the investment sector, mortgages and GI are not excluded, and the stated areas of concern certainly will apply to our own sector.
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If the clearly stated concerns of the FSA about the desirability of a sustained commission-based remuneration structure result in pressure to scrap commissions paid by providers in favour of fees paid by the customers – how far will this affect mortgage and GI brokers? Having just undergone the major step of becoming a regulated industry, do we now have to anticipate a fundamental change in the way that the advice and sales process is paid for – in other words, how we earn our livings? A discussion paper is due in mid-2007 and we will need our voices heard.
Talking about T&C
Q1: The FSA has announced it is making changes to the Training and Competence (T&C) rules. The way I understood it, there were no changes really, as MiFID covered the same rules. I’m confused, can you help?.
Bill answers: The T&C part of the FSA handbook is split into two sections, with TC1 being a ‘catch all’ to confirm an authorised firm’s commitment to ensuring employees were competent for the jobs they were doing. An extract from the FSA handbook follows: ‘The firm’s commitments to T&C should be that:
- its employees are competent;
- its employees remain competent for the work they do;
- its employees are appropriately supervised;
- its employees’ competence is regularly reviewed; and
- the level of competence is appropriate to the nature of the business.
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Put simply, the wording shown above now as TC1 disappears but the MiFID requirements being added say the same thing so there is no duplication. Your responsibilities for maintaining your employees competence remains the same.
Yellow Pages clarification
Q2: Much was written some time ago about Financial Promotions being placed in the Yellow Pages. My understanding was that the FSA did not expect product adverts to be placed as the rate/APR would be out-of-date quickly. What is the current position?
Bill answers: The FSA did state that it would not expect to see rates quoted. I have not personally studied the Yellow Pages too much in recent times although I think it is that time of year when adverts are being canvassed. I believe the FSA is of the same opinion and, given ‘Treating Customers Fairly’, this makes an even stronger argument for not wanting rates quoted.
Retail distribution review
Q3: I have read about a project being driven by the FSA, which could have a massive impact on the industry now and for years to come. What is it and where can I find some information?
Bill answers: You are referring to the Retail Distribution Review and it could have a huge impact on the financial services industry. See my opening notes for its key priorities.
- the sustainability of the distribution sector;
• professionalism and reputation;
• consumer access to financial products and services; and
• regulatory barriers and enablers.
If you go to the FSA’s website and search under ‘retail distribution review’, you find an article by director, Clive Briault, which sets out what the project is and why it’s taking place.
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