The Changing Face of Retail Financial Services in the UK
Clive Barwell TEP FSI CFPCM , Director of Paramount Group Limited
This article was provided by Clive Barwell for Fellows and Associates and published by his request. We will always consider publishing articles provided by website viewers please send an email to: [email protected] with your suggestions.
Regulation of the Retail Financial Services Industry has been with us now for a little over 20 years, with the original Financial Services Act 1986 coming into force on 29 April 1989. Although this was repealed and replaced with the Financial Services & Markets Act 2000, which came into effect on 01 December 2001, the lot of the Financial Adviser has remained broadly unaltered for those two decades. That is about to change radically.
In June 2006 the Financial Services Authority (FSA), the single regulatory body created by the 2000 Act, published a consultative document entitled the Retail Distribution Review, in their words, “to address the many persistent problems we had observed in the retail investment market”. After an extensive consultation process, we are now in the implementation phase and the new face of retail financial services will be with us on 01 January 2013.
What were the key “persistent problems” and how are they being addressed? The FSA focussed on the many, so-called, miss-selling scandals that have hit the industry in recent years – pension transfers, endowment mortgages, split capital investment trusts – to name but three and sought common factors. Unsurprisingly, it emerged that there were two common factors to all of these; too low an entry qualification standard for advisers and too high commission incentives for certain products sales.
So, what are the solutions? With effect from the implementation date, all financial advisers, whether they work on a restricted (tied to one or more product providers) or on a whole of market basis, will need to have achieved a higher minimum qualification standard to continue to advise. At the same time, all regulated investment product providers will be barred from paying commission to intermediaries. At present, this only encompasses investment and pension business, as the jury is still out on mortgages and protection.
It will still be possible for an adviser to take a fee from the product recommended, but the level of that remuneration is to be agreed between the adviser and the client, not dictated by the provider. This facility is essential as, for example, with tax-privileged pensions there are tax advantages to the client if the adviser’s fee is taken from the product rather than from his bank account, the contents of which have been taxed.
On the basis that the FSA considered the problem bad enough to go to all this effort, there are clearly a lot of under-qualified advisers in the marketplace, who are heavily reliant on initial commission from product sales. There is a new bred of adviser already available, with at least the requisite qualifications and an ethical approach to remuneration. Which of these are you dealing with?
I am advocating that everyone should review their current arrangements and the questionnaire in the Institute of Financial Planning (IFP) brochure “10 Questions to ask when choosing a Financial Planner”, is a good starting point – available to download via this link http://tiny.cc/10Questions. One question this doesn’t ask, which I recommend is added, is “How long do you intend to remain in your current role?”, as we are aware that a lot of advisers will leave the industry over the course of the next 3 years or so. Many Independent Financial Advisers (IFAs) are in their 50s and 60s and are disinclined to acquire additional qualifications at this relatively late stage in their career. Whilst I may be accused of being cynical, I wonder whether some of those are planning on maximising their commission income over the remaining years!
If you are one of Fellows and Associates’ Clients in the legal profession and you and/or Colleagues are in the habit of referring Clients to an IFA, I advocate that you review those arrangements as well. In fact, I recommend that you complete a questionnaire along the lines of that in the IFP brochure and place that on your client file by way of “due diligence” prior to any referral. In that way you can more easily fulfil your duty of care to your client in terms of the quality of the referral you are making.
Clive Barwell TEP FSI CFPCM has been in financial services since 1971 and spent the first 23 years of his career with the Lloyds Bank Group, culminating as Manager of Lloyds Private Banking, Leeds. Since leaving the Bank, Clive has been an Independent Financial Adviser and is currently a Director of Yorkshire-based Paramount Group Limited www.paramountifa.co.uk.
Clive is Chairman of the Yorkshire Branch of the Society of Trust & Estate Practitioners, a Fellow of the Securities & Investment Institute and a Certified Financial PlannerCM, so brings a wealth of expertise to add to his vast experience in financial planning.
Clive is happy to give advice to anyone needing help with a financial planning issue. Contact Clive on [email protected].
Twitter: http://twitter.com/Barwellclive
Personal Profile: www.linkedin.com/in/barwellclive