FSA chairman Sir Callum McCarthy’s landmark Gleneagles speech brought to surface the regulator’s deep concerns about the current distribution model.
Following industry consultant Ned Cazalet’s report highlighting what he saw as the broken business model of UK financial services, McCarthy’s deliberately provocative words posed stark questions about product and provider bias, churn and future profitability.
The speech was followed by an autumn address from managing director Clive Briault detailing further the scope of the FSA’s retail distribution review, which will present an initial paper next summer.
The five themes are sustainability of the distribution sector, the impact of incentives, professionalism and reputation, consumer access and regulatory barriers. Each theme involves a committee of industry faces, including all the major trade bodies and some adviser names, such as Thinc Destini’s Roderic Rennison.
The move to principles was another big theme as the FSA set out what it expects from advisers and began consultation for the slashing of its rulebook and its interaction with Mifid. On the back of the Newcob consultation, the FSA sparked debate on the role of industry guidance in supplementing its high-level principles.
Some, like the Chartered Insurance Institute, see the proposals as a chance to cement its role as a professional body but others such as Aifa have no intention of being involved and worries have been expressed about potential confusion over the regime and its interaction with the Financial Ombudsman Service.
Aifa scored a victory in the summer when the Office of Fair Trading ruled that the market-average menu rates made advisers look unfairly expensive by including non-advised sales in the calculations. The FSA’s yearly recalculation of the averages took into account the OFT’s concerns but Aifa is still worried it is impossible to get accurate figures for collective investments due to the many ways in which commission is paid.
Concern about the effectiveness of the menu was another theme, with growing consensus from the trade bodies such as Aifa and Association of British Insurers – and, in fact, the FSA – that the menu is not working as required. There will be a post-implementation review in 2008 but, with growing acknowledgement that depolarisation has not been a success and dramatic suggestions expected from the retail distribution review, the regulatory environment could be looking at more major upheaval rather than simply tweaking.