Financial services is in for yet another shake-up and it seems clear that IFAs are firmly in the spotlight. The shake-up will come from the Treasury select committee's investigation into restoring confidence in long-term saving.
Although the select committee is renowned more for elaborate performances than making any real headway into issues, its latest inquiry seems set to have almost as much bite as it has so far had bite.
The inquiry has had all the signs of a typical select committee circus, with ringleader Labour MP John McFall particularly cutting towards his witnesses whenever the mood takes him but, beneath the harsh allegations directed at life company bosses and castigation levelled at the regulator, action plans and recommendations for fixing the “travesty that is savings in the UK” seem to be formulating in the minds of committee members.
The committee said last November it would look into how to restore confidence in long-term saving after misselling scandals and mistrust stemming from split-caps, structured products and the Equitable Life debacle.
The aim has been to address the extent and nature of the savings gap as well as looking at the reason for shortfalls in take-up of savings products.
Since then, the industry's great and good – from the heads of the major life offices to FSA chiefs Callum McCar-thy and John Tiner, chief financial ombudsman Walter Merricks, Institute of Actuaries president Jeremy Goford and Aifa director general Paul Smee — have all been marched into Portcullis House to be grilled on the shortcomings of the industry.
The results of the hearings will be a report tabled in Parliament by the committee recommending further investigation and changes to industry systems in a bid to restore confidence in an industry which the committee sees as less and less trustworthy in the eyes of the consumer.
Cicero Consulting director Iain Anderson says the committee has traditionally been quick in turning round reports and recommendations once it finishes a review and most lobbyists are expecting its report to be published in July.
Anderson believes that for the first time the report focuses heavily on IFAs. He says: “Until now, the select committee's focus has always been on product providers but it looks like they will be targeting IFAs during this review.”
It is believed the committee has already recommended that the Office of Fair Trading should investigate IFA support of suppliers' products and provider cross-subsidy funding for Aifa and more scrutiny seems destined to come.
Committee member Labour MP James Plaskitt says, contrary to popular belief, the committee is not “out to get the industry”. He believes it is in everyone's best interest for the review to be forthright and positive but says he has been unimpressed by the “careful treading and defensive posture” that many witnesses have taken.
He says: “Confident customers means good business. The last thing we want is to generate more criticism of an industry that has done enough to create it for itself.”
Last month, Aifa director general Paul Smee was in the firing line, facing harsh criticism over Aifa's funding. The committee took issues with the fact that most of Aifa's funding comes from providers, insinuating that this lead to bias.
Smee questions the committee's criticism of witnesses. He says: “The committee should consider that there are ways it can act to make witnesses less defensive.”
Liberal Democrat MP Norman Lamb believes Smee was overly defensive but agrees there is a danger in too much antagonism.
Lamb says: “This needs to be justified because there is always a danger that confidence could be decreased more from raising these issues. Despite the tough questioning, our intention is to come up with constructive suggestions which will help the industry restore confidence.”
Plaskitt says the committee is not bent on “bashing IFAs over the head” and reiterates Lamb's assertion that suggestions will be constructive.
Lobbyists see the potential for massive changes to the industry. Anderson says:”This is one review that something will come out of. This is not a lame duck, like many reviews are. The repercussions for IFAs will be particularly significant.”
Scottish Widows head of industry relations George Andrew believes the committee looks to be focusing on trying to create solutions and says it is a good turn-round from its preoccupation with price capping.
He says: “The notion of product price capping has been a diversion that has not worked and has meant that the Government has not been paying attention to how to boost confidence in the savings market. Hopefully, this committee will look at more relevant issues and help develop a strong investment advice culture in the marketplace.”
Plaskitt and Lamb both warn that the role of IFAs needs to be investigated further. Lamb says: “Part of this review is to ensure that IFAs act responsibly. They have made mistakes in the past.To some extent, these were a result of the climate they have operated in. We need to ensure a system that makes these mistakes less likely in the future.”
Plaskitt admits that commission is under intense scru-tiny by the committee. He says: “The impact of trail commission is very obscure. It has obviously been a big contributor to the problems in the industry.”
However, he believes the payment menu, which is supposed to increase transparency, is complex and needs refinement.
Lamb sees the menu as a sensible approach to “bringing more clarity to remuneration”.
Committee chairman Lab-our MP John McFall will not be drawn into conversations over the menu but it is believed that more questioning is to come on its usefulness.
One lobbyist says: “We believe the committee sees the menu as a muddle and will be looking to improve it.”
LIA public affairs director John Ellis has written to the committee, expressing his concerns over the menu and bel-ieves he is not alone. He says: “Slowly, the committee is understanding that the menu does not really solve the problem of transparency. They seem to be suspicious of commission. Sales incentive are definitely on their agenda.”
Smee is still confident in the worth of the menu. He says: “We need to get to a point where commission is seen as a means of paying for advice, not a method for concealing what a product costs the consumer. The menu is a workable way of getting this message across.”
Plaskitt believes the key facts document is overly complex. He says: “The talk going around is that it is not fit for its purpose.” Both Lamb and Plaskitt have indicated that the committee will be recommending an overhaul of the document.
Some members of the committee are also concerned with formulating a risk coding model for all financial services products. Labour MP Angela Eagle is looking at developing a red, amber, green system for signalling the risk level of a product.
But this idea has been attacked by the industry. Andrew says: “The idea seems quite blunt to me. There is a whole spectrum of risk that a simplistic system like this would not incorporate. It does not seem like the select committee at present adequately understands the levels of risk involved in investment and savings products.
“There is a lot of volatility that cannot be taken into account by a simple three-level risk-coding put on products in the first instance.”
Plaskitt says a three-code model is too simplistic but says the basic idea is workable. He says: “I am determined to get some sort of risk coding accep-ted. I am convinced we can develop a sensible, universal risk system to help consumers better understand products.”
As the round of questioning for this review draws to a close, all eyes in the industry are looking towards what the committee's recommendations will be. What is clear is that this review will have a real impact on IFAs.