Consultation paper 121 sets out a number of proposals, which on the face of it could significantly change the shape of our industry. Notwithstanding the highly competitive and efficient standards of the UK retail financial services market change is undoubtedly needed. The UK savings gap is currently estimated to be in the region of £27bn – the thrust of the review in seeking to address this is to be applauded. We now need to ensure that the outcomes support this aim through the creation of an open and expanded market providing wider access to advice for consumers.
Reforming polarisation and maintaining a flourishing IFA sector are not mutually exclusive. Recent research from Aifa clearly shows that consumers find the proposition that IFAs offer as attractive. It is difficult to imagine a positive outcome that does not include efficient IFAs offering good quality advice. Indeed, the ability of providers to invest in IFAs with appropriate disclosure will provide access to capital to enable e commerce and other initiatives to improve efficiency.
The proposals introduce the scope for a wide range of multi-tie business models. These will undoubtedly have the propensity to increase the choice available to consumers and as such could well be attractive to some firms currently offering either independent or tied advice.
Multi-tied businesses will operate with the same economic drivers and pressures as existing business models. Underlying business practices will continue to drive efficiencies and in turn the margins available to fund the costs of distribution, which includes commission. As is currently the case, successful firms will focus on building a model that allows them to present a proposition which, their customers find attractive.
A level playing field is required across all distribution to enable market forces and consumer choice to prevail in determining the best and most effective business models. In particular the suggested “defined payment” system for IFAs needs careful consideration. The propensity of consumers to pay fees is not great and it is essential that this does not preclude consumers from seeking independent advice. Nonetheless the idea seeks to build clarity around the cost of advice and address the vexed issue of potential bias. As such the proposal put forward should prove a useful basis to build on.
Effective disclosure covering status, ownership, breadth of choice available and how the cost of advice is funded, is a central requirement. This should ensure consumers are able to make an informed choice and support effective and healthy competition within the market.
As you would expect with a proposal of this nature, the adage of the “devil lying in the detail” holds true. We will make a detailed and thorough response to the FSA that seeks to build on the points they put forward. At the same time however we will be seeking to ensure that change is not brought about that, through unforeseen consequences, has an undesirable impact on the IFA sector.
There is likely to be a move in the short term to distribution firms away from full independent advice, allowing advi-sers to continue offering choice from across the market but receiving income from commission. This could be followed by large distribution groups renegotiating their commission arrangements with product providers. It is those product providers with strong brand, great propositions, good relationship management skills and the ability to e-enable this process who will succeed not those who rush to pay the highest commission.
Regardless of what the future may hold, access to advice, competitive products, strong brands, efficient business practices and fair competition in an open market are the essential elements for the UK retail financial services market. A well-considered and timely response to the review will best serve industry and consumer interests alike so that we can all focus back on the task in hand – closing the savings gap.
Peter Hales is sales and marketing director at Norwich Union