Submissions have flooded in from the industry to the FSA on CP121. In compiling our response, Aegon UK studied a wealth of existing research, carried out 250 in-depth interviews among the IFA community and commissioned new consumer research.
Our response was among many to propose alternatives to the defined-payment system. The new test within CP121 of what constitutes an independent adviser is too restrictive. A true test of independence could be if the adviser is:
Acting as the agent of the consumer, not of any provider or providers.
Able to recommend products from any provider in the market.
Formally offering the consumer a choice of remuneration bases at the outset, including a fee option.
If this test were to be implemented, we believe that there would be no need for advisers to lose independent status.
Our research with consumers made it clear that there is considerable resistance to paying fees upfront, even among those already accustomed to using an adviser.
To further address these consumer concerns and lack of understanding, Aegon UK also proposed a new form of comparative disclosure, which we believe may further reduce the need for any change to how advisers are remunerated.
Advisers, whatever their status, would be required to tell consumers one or more of three things:
Whether the commission the adviser receives from the product type is high/medium/low compared with other product types that might suit their needs.
Whether the provider the adviser has selected will pay commission at a level that is high/medium/low compared with other providers offering the product type recommended.
The charges under the product recommended compared with others of this type in the marketplace are high/ medium/low.
We should all welcome the opportunities the FSA is giving us to move forward. But underpinning the whole process must be the aim to arrive at a position which better meets the financial services needs of consumers and encourages them to save adequately; facilitates effective, stable and appropriately rewarded distribution and enables a competitive environment – providing opportunities for efficient providers and advisers to generate profits at internationally comparable levels.
Only by arriving at an outcome which balances these three objectives in a sustainable way will over-riding Government objectives be met, in particular, encouraging greater private saving, rebalancing state versus private pension provision and generating investment in the economy.
It is essential that consumer purchasing behaviour is fully understood. The conclusion from our recent research is that, for most people across all socioeconomic classes, long-term savings and investment products are not bought but have to be sold – and this comes at a cost.
Measures such as combined benefit statements may begin to make consumers more proactive regarding such savings and require support from the industry.
However, any movement towards more proactive buying will be long term and limited. To deliver the sustainable virtuous circle, it is essential that margins within products are adequate to cover the costs (either current or as amended by the development of any two-tier advice structure) of efficient providers and distributors.
While not directly related to CP121, the imposition of a
1 per cent cap on stakeholder pensions and, by extension, to the rest of the pension market, is acting contrary to wider Government objectives and should be reexamined.
The biggest concern must be that the defined-payment system may not deliver the outcome the FSA hopes for. We support the FSA's objectives and believe the alternative we have outlined, among other ideas being put forward by many luminaries in the industry, is more likely to deliver these without collateral damage to the IFA sector.
Peter Dornan is director of group businesses at Aegon UK