At the Gleneagles conference last September, chairman Sir Callum McCarthy set the industry a challenge. He asked it – in concert with us at the FSA – to tackle the shortcomings he identified in the long-term savings and pension market.
Sir Callum’s list of issues included current commission structures, unsustainable business models, a focus on volume over quality of advice, the potential for product and provider bias, the lack of persistency and the poor reputation of the industry.
He gave evidence for this collection of issues so I will not go over the arguments here but it is heartening to know that most people I have spoken to in the industry are in general agreement. The consensus view is that things are not working as well as they should and if they carry on will get worse.
So there is quite a lot for the industry to get to grips with. Sir Callum’s speech and our further announcements have created a good debate.
It is fair to say that a lot of this debate, at least outside FSA circles, has so far focused on commission. This is perhaps inevitable as the issue affects so many people’s livelihoods. But for us, commission is just one of the many things we are looking at and we are not saying that commission is necessarily bad.
What we have recognised is that present business models frequently fail to prevent the high risk of poor quality sales advice. But is this always the case? No. What is different in firms where this is not the case? That is the sort of thing the review aims to find out.
Given the central importance of a financial sector that is able to provide the right kind of products in the right way and at the right time to those that need them, we believe now is the time to take a step back and consider the wider context of the distribution of retail financial products.
So far, the response to the challenge has been very encouraging. Two weeks ago, we announced an excellent collection of people to chair and take part in our industry groups. We have people from the providers – asset managers, life companies and banks – as well as from their main distribution partners – financial advisers. We have large and small firms, advisers that are fee-based and those paid through commission. The last thing we want is a lot of talking with no endproduct so we expect and are looking forward to good suggestions and initiatives from the groups. On the evidence so far, we are on the way to doing that.
The groups focus on five themes that we and the people in the industry we have spoken to so far have identified as key. These are sustainability, professionalism, incentives, consumer access and regulation. All are interlinked. If you change something in one area, it invariably has a knock-on effect in another area.
We have been busy meeting with the market and trade bodies to hear their views on the issues. We need better understanding of the costs and the profitability of the business and sustainability of the structure and assess how far those costs are associated with regulation. We need to identify requirements of regulation whose costs outweigh their benefits, in which case, we will seek to change them.
The industry groups will help us with these issues. By spring, each group should be in a position to propose ways to improve things. We want market solutions and, more important, a strong intent from the industry to implement these solutions. But for this to happen, whatever is suggested has to be workable and practical for firms to put into place. What we do not want is FSA action or threats of more regulatory intervention to trigger a response from the industry.
The ideas that come out of the groups and our discussions with trade bodies and others will form the basis of an FSA discussion paper, beginning a new stage of discussion with the industry. Although this sounds like a drawn-out process, it is worth us taking the time to get things right and we encourage those of you working in the industry to get involved.
One way to get involved is through your trade association. We have the likes of Aifa and the BBA as associate members of our industry groups. You can also get in contact with us directly by writing to me at the FSA’s usual address.
Amanda Bowe is head of the retail distribution review at the FSA.