Having heard several comments about the concern of the FOS about the RDR ‘Guided Sales’ [Simplified Advice] approach being proposed by the FSA, I wanted to check out what appeared to be a contradictory message in the FOS ‘RDR Implications’ statement that they issued in December 2008. I felt that in most regards, the statement was helpful and supportive, though clearly intended to identify potential risks that an increase in complaints could result from ill considered or poorly implemented practices and processes. Ultimately, one must presume that all parties in the industry have a mutual objective of not wanting to see complaint volumes increase.

The area that concerned me was the section below, with the two clauses highlighted:

5. guidance for financial businesses – where the boundaries lie
5.1
Key issues include:
• how far uncertainty can be reduced by FSA guidance;
• how far reduced uncertainty means reduced scope for innovation; and
• what “focused advice” might mean in practice.
5.2
The November 2008 feedback statement indicates that the FSA is not currently minded to create a new rules regime. But the feedback statement includes some helpful material on what existing rules do (and do not) require. Potentially, there may be scope for further clarification by guidance – in one form or another. Options include:
• general guidance published by the FSA;
• individual guidance issued by the FSA to individual financial businesses; or
• published industry guidance that has been “confirmed” by the FSA.
5.3
Our strong preference is for general (published) FSA guidance. This is likely to be highly influential with ombudsmen when they are deciding individual cases, and so it holds out the prospect of reducing uncertainty for financial businesses and consumers in relation to potential claims.
5.4
It is likely to be impracticable for ombudsmen to take into account a host of (unpublished) individual FSA guidance to different financial businesses. Rather, it would be better for any general guidance to be updated regularly in the light of individual developments.
5.5
The FSA has stated publicly that it will not confirm industry guidance which purports to affect the rights of third parties (which includes consumers taking cases to the courts or to the ombudsman service). This means that FSA-confirmed industry guidance is unlikely to reduce uncertainty in relation to consumer claims.
5.6
It might perhaps be helpful if the FSA built on the material in the November 2008 feedback statement, and explored further explanation of what is (and is not) possible in the context of “focused advice” – with particular reference to the ways in which the financial business’s obligations can (and cannot) be limited. For example the FSA’s May 2007 insurance sector briefing [opens in PDF format] indicated where advice could (and could not) be limited in the context of with-profits. Something similar in the wider context of the RDR might well be helpful.

Source: FOS “retail distribution review”: ombudsman implications – December 2008
http://www.financial-ombudsman.org.uk/publications/policy-statements/retail-distribution-review-08.html

Having spoken with the FOS, they have clarified that where clause 5.5 is referring to ‘industry guidance’, the context is that this would be from bodies other than the FSA. This means that the FOS would be willing to refer to and give weight to FSA guidance – as stated in clause 5.3, but neither the FSA, nor the FOS would be likely to give weight to, or rely upon other ‘guidance’ that was provided by the industry. From this, I believe this would include output from organisations such as AIFA, ABI and BBA. However, it has to be said that these organisations my help to reinforce FSA guidance and it is expected that the ‘Moneymadeclear’ pathfinder will be helping to clarify what the public should understand and expect from different advice channels and how they are to be remunerated.

As you would expect from the FOS, they are primarily focused on the risks of ‘mis-selling’ or ‘misunderstanding’ rather than the benefits that a ‘Simplified Advice’ channel could provide.

However, the FSA has stated that one of the key objectives for RDR is of having:
‘a market which allows more consumers to have their needs and wants addressed’
Source: FSA

I agree with the FOS that it is important to manage the risk, but this also had to be balanced with the desire to increase access to advice. Some distributors may be reluctant to support such a route to market for fear of a potential mis-selling scandal along with associated costs (£2.7 and £11.8 billion in compensation for Endowment and Pensions mis-selling) along with damage to ‘brand’ and ‘industry reputation’. The FOS acknowledges this fear, but they would also say that they are an ‘independent’ organisation tasked to deal with complaints rather than advise on routes to market. Whilst they have expressed that they are willing to help the FSA, to share their experience and review proposals for processes to identify where there could be risk (and have already done so), it was for the FSA and industry businesses to mitigate these themselves.

Distributors should not be put off from investigating how a ‘Simplified Advice’ route to market could be made to work for the benefit of the consumer and to do so profitably. We have used the analogy of some consumers only be able to afford a cheap car to get them from A to B, whereas there will be others who can afford a luxury car or even have a chauffeur! We should not necessarily judge the cheap car as a poor product choice. In Financial Services, it is surely better for someone to have some form of provision to get them from the A to B of their personal needs rather than excluding them on the basis that they cannot afford the better and more expensive product and/or advice service. Encouraging consumers to engage with the industry, even via the ‘Simplified’ route, has long-term up-selling and cross-selling benefits for Providers, ‘Restricted Advisers and IFAs, as well as society as a whole.

We have an obligation to apply TCF to all that we do in the industry and if a Simplified Advice process is to be implemented by distributors (and providers), then it is incumbent upon them to regularly review, assess and manage the risk of implementing and running with inappropriate processes or advice standards. Technology is a great enabler throughout the advisory engagement value chain. It can ensure greater application and adherence to ‘Guidance Standards’, it can better identify and trigger warnings of risk and it can improve the user experience as well as better manage the customer relationship and communication. There has been some ongoing criticism of the RDR and whilst ‘creative conflict’ can be good, the industry should embrace the change to make it work, rather than let it be a missed opportunity.

With the series of Discussion Papers, Interim Updates, Feedback Statement and now CP09/18 published last week, the RDR (RDIP) story rolls on towards the milestone deadline of 2012 – Olympic year. The CP has much to talk about and no doubt we, and much of the industry, will be debating the implications over the coming weeks.

We were talking with one of the major technology suppliers last week and the debate turned to the role and future of Product & Fund Research tools. There was a feeling that these have lost their attraction and perceived value over recent years and a question of their survival was posed. Our own view was that there could be resurgence in the appeal of these tools in a post RDR world; especially driven by the need for IFAs to have assessed the whole market for product suitability and fund choice. Whilst I am sure there are many IFAs that would say they already do look ‘holistically’ using their own knowledge or tools such as Synaptic, or Defaqto. That having been said, I still believe that there will be a good number that rely on a smaller ‘chosen’ group of ‘tried and trusted’ providers. The obligations of RDR will put more focus on the evidence to support the IFA’s claim that they looked at the whole market and made the most appropriate choice. Indeed, as with so much in UK regulation, the ability to ‘prove’ that this process has been fully applied is likely to be a driver in advisers turning to Research Tools, to both do the exercise and to have a demonstrable audit trail to prove it too.

These tools will have to be all-inclusive (breadth) in covering the market and contain comprehensive details on Providers, Products, funds and maybe even some product options that don’t often feature – such as National Savings. The information will most likely go beyond factual quantitative analysis and comparison, to include more qualitative information, including service and financial strength. Indeed, we have seen one such tool incorporate advisers’ feedback and we could see a similar situation to many Web2.0 applications where the ‘community’ of users provide and rely on their own reviews and these could be augmented with ‘independent experts’ and consultancy practices views.

The product and fund choices in the market are currently large and, notwithstanding provider consolidation possibilities, it is clear that more of what are currently non-commission paying alternative products will have to be considered when giving advice. Having so many options and a need to show justification in choice will be an added pressure. Some advisers may choose to do this work themselves, but this could be an expensive use of their time and if Research Tools are competitively priced, they could become one of a number of the necessary technology solutions that advisers use as a matter of routine.

We will shortly be doing a more detailed analysis of these tools and looking at if and how RDR may influence their development in the future.