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IMA says RDR won’t cut charges

The Investment Management Association says it is “naive” to assume the FSA’s retail distribution review will drive down overall charges.

As part of the FSA’s recent platform consultation paper, the regulator said it would “be surprised” if annual management charges were maintained at current levels and suggested competition could lower overall costs.

But IMA director of authorised funds and tax Julie Patterson says: “There is a slight naivety to this assumption. What the FSA does not recognise is this does not mean the cost for investors will go down. Yes, it will look as though the returns are better but the overall costs will go up.

“There are tax effects – if the charge goes down, then the return on the fund is better, so there is more income to come on the fund. If there is more income, you will get a tax hit. Out of that taxed income, you will have to pay the adviser and those charges will be charged VAT at 20 per cent.”

She adds that “other parties down the chain”, including platforms, may increase charges to cope with the burden of the RDR.

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There are 7 comments at the moment, we would love to hear your opinion too.

  1. “What the FSA does not recognise is this does not mean the cost for investors will go down. Yes, it will look as though the returns are better but the overall costs will go up.”

    So who loses again – our clients.

  2. Less distribution = less sales = higher costs.

    Basic economics.

  3. And yet another voice is added! How much longer can the FSA 3 “not so” wise monkeys- remain deaf, blind and dumb?

    Otto Thoresen – CEO Aegon: “The RDR is only helping wealthy customers”

    AXA April 2009:”We will lobby the FSA to make sure the RDR does not mean less are able to access advice”

    David Cox – SuuqeaMarch 2009: “Two million clients could be left without an IFA after RDR – 40% could leave the industry”

    Shaun Crawford, head of insurance advisory at Ernst & Young, 26/06/09 The FSA’s Retail Distribution Review will have the following effect: Of a population of over 30,000 advisers, many industry commentators are expecting at least a third to leave by 2012.

    AVIVA Life marketing director David Barral has said the firm predicts by 2013 IFA numbers will fall to 10,000 in total as advisers fail to comply with RDR changes, leaving middle-market consumers unserviced. No surprise then that Aviva wants to grow its tied in-house channel to target 2.7 million ‘orphan’ clients whom were originally IFA clients. So much for consumer choice!

    Robin Stoakley, Head of Intermediary Business at Schroders said, “I do see up to 30 per cent of the IFA market leaving”.

    Figures provided by Matrix-Data Solutions (in June 2010) showed there were 32,000 advisers in 2008. However, this plunged to 30,198 in 2009 and currently stands at 28,714

    A study by Oxera during May 2010 showed that a quarter of advisory firms could leave the market.

    Stephen Gay – Aviva June 2009: “The regulator has failed to consider the danger of adviser charging limiting access to advice for those on lower incomes”

    FSCC January 2009: “Financial advice will be less widely available post RDR”

    Institute of Financial Services: “RDR will impair financial advice before improving it”

    Alasdair Buchanan Scottish Life November 2009: “Sales advice is a real cop out and extremely confusing to investors”

    Lord Lipsey: “Consumers in the middle (not high net worth or money guidance fodder) to be sold products by banks under the contradiction that is sales advice”

    Walter Merricks former Chief Ombudsman: “I think it would be unwise to count on the assumption that complaints from the retail investment world are suddenly going to go down as a result (of the RDR)”

    Deutsch Bank report August 2009: “Dwindling IFA numbers in the lead up to the implementation of the RDR will have a dramatic effect on the UK life industry. It will have a negative effect on new business volumes for insurers. There has been industry talk of 30% or even 50% of IFAs exiting the industry post 2012, which is not impossible.”

    Paul Selly HBOS: “Bancassurers set to benefit”

    Richard Howells Director Zurich LifeJune 2009: “The big question mark is still around what benefit it will have for the ultimate consumer. I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can really hang my hat on.”

    Martin Lewis Money Saving Expert June 2009: “There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash. What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment mis-selling, investment mis-selling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.”

    Janet Walford OBE, Editor Money Management Sept 2009: “I am not paranoid enough to believe that the FSA has a hidden agenda to do away with small IFAs, but the law of unitended consequences may well mean that this will be the result. This is especially the case when set alongside the myriad of other proposals that are costing some £430 million to set up, with ongoing fees of £40 million pa thereafter, a mind boggling amount of cash.

    Peter Hamilton barrister, Source: Money Management Oct 2009, Scrapping the FSA by Marie Jennings MBE: “The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be….It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified.”

    David Hazelton of Tax Incentivised Savings Association(TISA) 30/10/09: The RDR could be detrimental to consumers both in terms of higher product charges and an increase in the cost of advice, warns the Tax Incentivised Savings Association(TISA). Implementation costs for the RDR are being “seriously underestimated” and product charges will consequently have to be raised.

    Bankhall managing director David Golder 03/11/09: “We say write to the regulator, write to your MP. Do not let the FSA get away with some of the things that will lead to the widespread decimation of our industry.”

    Robert Kerr, head of retail distribution development at Scottish Widows says: The RDR could have the unintended consequence of “disenfranchising” the majority of consumers from financial advice. “Our key concern is the RDR proposals will act to drive advice upmarket, with financial advice becoming the preserve of the wealthy leaving mass-market consumers un-served,”

    Nigel Waterson when Shadow pensions minister : “While no-one can object to raising the standards of training and competence, should an emphasis on exams take precedence over on-the-job training and experience? Is the 2012 implementation date practicable given the extra qualifications and changes in systems that will be required to be in place?

    Richard Hobbs Director Lansons Regulatory Consulting 16/07/10: “I have to say, it (RDR) only just survived an executive committee meeting in March 2010 at the FSA. The FSA are not particularly proud of the RDR but it is a question of losing face, so I think they will carry on.”

    Nick Cann chief executive of IFP 30/09/10 said: “The FSA must develop a “catastrophe strategy” in case it reaches June 2012 and half of advisers are not yet meeting the RDR requirements.”

    Martin Lewis Moneysavingexpert.com founder 21/10/10 has echoed warnings the RDR will reduce access to advice. Giving evidence to the Treasury select committee Lewis said: “By the nature of what I do, I deal with a wide spread of the public. I worry that if you ask people to pay for financial advice, they will not pay.”

    AIFA warned 16/11/10 that net fund sales would drop by £1.8 billion if the RDR caused a 10% drop in the IFA population. There is a danger that FSA’s RDR qualification requirements, and in particular the 2012 deadline imposed for achieving them, may result in a significant number of IFAs leaving the industry, thus decreasing consumer access to advice,’ said Aifa in a paper on regulatory reform: http://www.aifa.net/publications/aifa_manifesto_for_regulation.pdf

    Sarah Thwaites, Director of Products and Services at the Financial Services Skills Council, November 2010 issued a statement saying: “The danger is that if too few existing advisers meet the new qualifications level, or the industry does not find it cost-effective to offer advice to the mass market, the very important aim of achieving good consumer outcomes may be lost.”

    On 02/12/10 Julie Patterson IMA director of authorised funds and tax says: IMA says RDR won’t cut charges. The Investment Management Association says it is “naive” to assume the FSA’s retail distribution review will drive down overall charges. As part of the FSA’s recent platform consultation paper, the regulator said it would “be surprised” if annual management charges were maintained at current levels and suggested competition could lower overall costs. But IMA director of authorised funds and tax Julie Patterson says: “There is a slight naivety to this assumption. What the FSA does not recognise is this does not mean the cost for investors will go down. Yes, it will look as though the returns are better but the overall costs will go up. “There are tax effects – if the charge goes down, then the return on the fund is better, so there is more income to come on the fund. If there is more income, you will get a tax hit. Out of that taxed income, you will have to pay the adviser and those charges will be charged VAT at 20 per cent.” She adds that “other parties down the chain”, including platforms, may increase charges to cope with the burden of the RDR.

    CONCLUSION – AS A RESULT OF RDR CONSUMERS WILL SUFFER

    Consumers will suffer substantial and unprecedented detriment due to the unintended consequences. A substantial portion of the adviser population will leave the industry. Various surveys have been conducted and whilst there is no consensus on the figures it is obvious that adviser numbers will fall drastically.
    If the adviser population falls by around 1/3 this will leave millions of consumers without an adviser. Some will migrate to other advisers but many will be left without a trusted source of advice. Please note that the advisers who deal with the smaller investments of the typical everyday client are the ones who are most impacted by the proposed changes.
    The UK currently suffers from the largest savings, retirement and protection gaps in its history. It is essential that these gaps, and the current over-reliance on the state, are reduced. The UK can ill afford to lose 10,000 advisers, a catastrophe that will intensify the existing problems.

  4. I hope the IMA have put this in writing to the Treasury Select Committee as part of their submission request on RDR.

  5. Female IFA – please write to your MP and inform her/him of the RDR and you should also write to TSC – Andy Love MP
    andylovemp@aol.com

  6. John Whipple – Don’t you worry I’ve done all of that already and they’ve ALL replied.

    Mark Garnier, Harriet Baldwin, My MP & the TSC

    Last night’s was a real gem!!

    I hadn’t copied in Andy Love though just sent it to the TSC who replied that all the members would have a copy before Monday’s nights response.

    Should I send it to him as well?

  7. Basic economics – same demand from consumers and lower supply of advice = higher charges. You learn this in the first few weeks of an economics A level, so it isn’t rocket science.

    The FSA, as ever, knows best and ignores even the simple rules of economics.

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