I beg to move,
That this House has considered the matter of regulation of independent financial advisers.
I am delighted that my hon. Friend the Member for West Worcestershire (Harriett Baldwin) and I have secured this debate. As all hon. Members will know, this country finds itself in a dire financial situation, which extends deep into the private lives of many of our citizens. This country has the lowest personal savings ratio in the G20 and the highest level of personal debt, with half of all the personal debt in the EU borne by the inhabitants of these islands. We face a well-known problem of pensions underfunding, involving not just a deficit on pension liabilities but the fact that people are not putting enough aside for their retirement. Mortgages were taken out at the height of the boom, in some cases at levels higher than 100% of the value of the property to which they relate, and mortgage lenders worry about the next time bomb that may hit our economy—a trend towards interest-only mortgages. These are mortgages where the borrower hopes that inflation and an opportunity to downscale will pay off their mortgage. We also have a housing market in which many commentators still consider there is more readjustment to come.
It is against that background that we are debating the regulation of an important group of professionals, namely independent financial advisers. I am particularly keen to talk about that group because if we are even to begin to deal with the problems that I have outlined, we need a resource of professionals who will be able to spread the word and give sound financial advice to the wider population. The marketplace for retail investment advice in the UK is very diverse, involving banks, building societies, stockbrokers and some 33,000 independent financial advisers, as well some other players. It is fair to say that there have been problems in the past, and the Financial Services Authority suggested in its evidence to the Treasury Committee last week that there was and still is a significant amount of mis-selling every year; a figure of some £250 million a year was volunteered, but that is based largely on assumption and extrapolation from previous mis-selling scandals.
A number of constituents have come to me because they are very concerned about what the hon. Gentleman is talking about, as they are going to have to revalue themselves and go through another examination. Can he shed some light on why that should be?
I trust that the hon. Gentleman is referring to the independent financial advisers, who will have to do that. I will come to that a little later in my speech, if I may, but I will address it specifically.
The point I was making is important because it highlights the significant amount of money being drawn out of the net savings pool of the country. It is only right that the FSA and the regulators should address the problem. They looked into it and surmised that in this marketplace competition is hindered by opaqueness and incentive conflicts, resulting in the interests of firms versus those of customers not being fully aligned. The FSA set up the retail distribution review—RDR—in 2006 to address those problems, and the new rules are due to come into force in January 2013. Specifically, according to the FSA, the RDR aimed to bring about three principal changes. The first was an improvement in the clarity with which firms describe their services to consumers. Secondly, it sought to address the potential for advisers’ remuneration to distort consumer outcomes. Finally, it aimed for an improvement in advisers’ professional standards.
On that final point, I have also had a number of people writing to me. Would the hon. Gentleman agree that one of the overriding concerns—I have had letters from people with 29 or 30 years’ experience—is that experience does not seem to count for anything?
That is a recurring theme and I shall come on to that point, but the hon. Gentleman is right to raise it. It has been raised by huge numbers of IFAs who have got in touch with me, my hon. Friend the Member for West Worcestershire and with many other Members.
The three aims that the FSA has talked about are, I believe, laudable in principle, overall. It is not our intention tonight to derail the retail distribution review, which will improve standards for consumers. I suspect that not a single professional in the industry would disagree with the overall principles. Indeed, Which?, the consumer champion, strongly supports the measures contained in the RDR, and states that its members
“firmly believe that the IFA industry is best placed to offer this advice”.
However, the devil is, as always, in the detail.
In addressing the problems, the FSA has, through the RDR, introduced issues that disproportionately affect the IFA community. The IFA trade organisation, the Association of Independent Financial Advisers—AIFA—suggested in evidence to the Treasury Committee that although some 30% of IFAs strongly supported the RDR and 40% were rather ambivalent towards it, 30% would not put up with the RDR. The 30% who are against the RDR suggest that it would be better to leave the industry altogether, so the community of IFAs would shrink significantly.
Does my hon. Friend agree that that is particularly damaging in rural areas, where all the independent advisers are either one-man businesses or very small businesses, and that a huge proportion of the 30% who do not like the RDR are likely to come from such rural areas?
My hon. Friend makes an important point. Small businesses in rural areas are likely to be most affected because they have so few resources in their offices. As a direct result, poorer communities in rural areas will be denied access to independent financial advice. That is not a good thing.
Lord Turner, the chairman of the FSA, suggested that reducing the number of IFAs might well reduce the overall cost of investor advice. How can reducing competition possibly result in improved service to consumers? The key issues facing the worried community of IFAs can be reduced to just a handful of salient points. The first concerns qualifications, which are probably the cause of the biggest mailbags on this subject. It has been said, perhaps a little harshly, that IFAs hold a qualification no better than that of a McDonald’s burger bar employee—a qualification and credit framework level 3 pass, which is equivalent to an A-level.
The RDR requires all financial advisers to attain the QCF level 4 pass and, in the broadest sense, that is not unreasonable. However, it does not take into account the fact that a great many IFAs have a wealth of experience but, with an average age of 47, little enthusiasm to start taking exams. It is estimated that the exams will require 100 hours of study for each of four modules—that is 400 hours of study. We must bear in mind the fact that that is for a full-time professional who needs to earn a living and who may, as my hon. Friend the Member for Montgomeryshire (Glyn Davies) mentioned, be working by himself in a rural community with little support.
Can my hon. Friend come up with any explanation of why grandfathering rights could not be applied to those with long experience as IFAs, given that such experience is much needed in the marketplace by savers who are desperate to make good financial decisions?
I can see no reason at all for not introducing grandfathering rights. Indeed, when the FSA was set up it introduced grandfathering rights when IFAs came over from the personal finance authority.
I congratulate my hon. Friend on opening this important debate this evening. Jon Marris, a constituent of mine and an IFA, came to see me on Friday. He has already passed the exams that will be required—he has done the 400 hours of study—but, even from his position, he believes it is ridiculous that those who have been in the industry for many years should be forced to go through that. Although he has been able to do this, he thinks that the removal from the market of people who are perfectly capable of doing their job but who might not be able to get through the exams, even though they have shown for many years that they can look after customers, is completely wrong.
I think my hon. Friend’s constituent agrees with us all.
The IFA community is broadly in support of raising excellence in the profession, and many are opting to take qualification exams on their own initiative without the dead hand of the FSA pressing them to do so. Indeed, the website unbiased.co.uk lists IFAs by their qualifications, so the move towards improved excellence is already going ahead under its own steam. A significant number—possibly as many as a third—feel that their 20, 30 or 40 years of experience not only trumps any exams but covers a significant depth of knowledge in their chosen areas, which will surpass any exam requirements. In taking exams, they will also be tested on areas they choose not to specialise in. As I and many hon. Members have said, the FSA seems blind to their expertise. The FSA does not recognise that experience and is determined to put out of business any IFA who is reluctant to take their exams or to subject themselves to the FSA’s ill-thought-through in-house assessment.
Does my hon. Friend agree that if experienced independent financial advisers are driven from the market, those who will lose out most will be those with the smallest amount of assets, who will not get the advice that they receive at present?
Absolutely. The other group of people who will lose out because of the removal of these grey-haired sage IFAs will be the younger ones. Who will mentor the young, aspiring and highly qualified but short on experience new trainee? The FSA has no answer.
Let me turn now to fees and commissions. The FSA is further proposing that from January 2013 consumers will no longer be able to choose how their adviser is remunerated.
Does my hon. Friend know of any survey that has been conducted of whether consumers have any appetite to pay fees for their financial advice?
My hon. Friend will not be at all surprised to hear that there are a number of surveys. Which? Undertook a survey that showed that 85% of people would prefer to pay fees, yet a survey by Harris Interactive showed that only 6% of the public said they would be happy to pay fees as opposed to commissions. That is a big problem, I think.
In future, customers will need to agree a fee with their adviser. That means that no longer will a client pay for advice via a commission charged on a transaction.
I congratulate my hon. Friend on securing this excellent debate. Does he agree that if it is believed that commission makes advisers more inclined to promote products with higher commission, the same would surely apply to banks that offer their staff product sales incentives? Should changes not be consistent across the sector?
Yes, they should, and it is fair to say that the FSA is looking at the whole sector.
At the moment, every client is given the option of paying for their advice via a fee or commission. Since 1991, every client of every IFA has been given full details in writing of the adviser’s commission, and the overwhelming majority of clients elect to pay by commission. During that period, the market share of the IFA sector has increased from 29% to more than 65%—based on commission charging—with consumers demonstrating a clear understanding of and preference for independent financial advice. It should be noted that independent advice is not the preserve of the wealthy. Some 60% of IFA clients are ranked as C1 or below. If consumers are forced to pay a fee for advice, it is inevitable that many who would benefit from independent advice will not seek it, resulting in only the well-off accessing a significantly reduced IFA sector. The subject of commissions is extensive and I am sure that many hon. Members will want to expand on it in their speeches.
Does the hon. Gentleman not agree that this issue is not clear cut? Surely it is right that there is some concern about the idea of a commission. Is it not the case that the concern over not wanting to pay fees is about paying a fee up front? Could the fees not be back-ended in the way that commission effectively is, making it a flat rate?
The issue of commissions is complex and is surrounded by several other issues, one of the simplest of which is that the Office of Fair Trading has deemed it right that the providers of the products should be able to charge or incentivise IFAs and salespeople in a variety of ways. The difficulty with allowing different levels of remuneration to IFAs is that it creates some of the problems we have talked about, but the OFT will not allow a flat rate of commission, which is one solution that could have dealt with this issue.
The risk in being an IFA is a major issue. All professions carry an element of professional risk, which is covered by professional indemnity insurance. In pricing that risk, underwriters take into account the fact that there is a so-called long-stop of liability, which is usually about 15 years, but that is not the case for IFAs. It has been deemed fair for IFAs to have an unlimited period of liability, such that an 80-year-old retired sole trading IFA might be liable for a product sold half a century earlier. It might be that the claimant has a legitimate claim, but in our compensation culture it might be that he does not feel satisfied with what he has got and is just having a go.
In practical terms, for a limited liability company, as the business gets older it becomes less saleable as it accrues a large pool of risk on the products it has sold since it opened its door to trading. Is it fair that an IFA could be chased to the grave in a manner that no other profession allows? Will that indefinite level of risk be an incentive to newcomers coming into the profession? I think that the answer to both those questions is no.
The cost of implementing the RDR is high. Currently, a firm of IFAs with up to 25 advisers is required to put aside only £10,000 by way of regulatory capital. That minimum will double under the RDR, but there is a new element to come in. Under the new rules, firms may be required to put aside 90 days’ worth of operating costs. For the better-run firms with sophisticated systems and offices that could be a significant increase. It is not inconceivable that a firm employing 10 qualified IFAs supported by high-quality support staff could see its regulatory capital rise from £10,000 to £200,000, £300,000, £400,000 or even £500,000. That rule alone is an incentive for firms to go from providing a high-level service to a cut-price one.
But what does all this mean for the cost of the RDR to the consumer? The original estimates for the cost-benefit analysis of the RDR gave a net present value of £600 million for the first five years including one-off costs. That has now risen to a truly staggering £1.7 billion in order to address an unsubstantiated cost of mis-selling £250 million. Moreover, it is by no means the responsibility of the IFA community alone. In 2009, according to the financial ombudsman, just 2% of complaints in this area related to the activity of IFAs, while 61% related to banks, but 65% of the market share is held by IFAs.
I congratulate the hon. Gentleman and the hon. Member for West Worcestershire (Harriett Baldwin) on securing this debate. Does the hon. Gentleman agree that in putting together the RDR, the FSA has throughout consistently ignored all the comment from the industry, this place and elsewhere and that the time has come for it to listen and to review the whole set-up?
The hon. Gentleman is absolutely right. The overriding message coming back from the IFA community is of being ignored by the regulator. It has been suggested that Adair Turner, as someone who comes from McKinsey, looks at the issue from a box-ticking perspective as opposed to considering the fundamental needs of the consumer, which is the important issue.
IFAs are going to bear the brunt of the changes, and especially those with small operations in rural communities.
Is not the problem with the whole process the fact that it is angled disproportionately at hurting small traders, often in the poorer areas of the country? That needs to be reversed if the changes are to receive any credibility in or support from this place.
That is absolutely right.
I apologise for breaking up my hon. Friend’s excellent speech. Does he agree that a crucial point that we must get across to the FSA tonight is that the increase in these compliance burdens will be paid for by the consumer who will therefore lose out? The loss of perspective from the FSA and the inflexibility of its approach in implementing the changes are reflected in the large number of people here today.
Absolutely, and I am very grateful to my hon. Friend the Chairman of the Treasury Committee for bringing that up.
The £1.7 billion costs being pushed on to the consumer mean that £1.7 billion will be taken out of the savings pool. We simply cannot take that approach if we are trying to encourage people to save and to pay off their debts. That is why the changes are so fundamentally wrong. IFAs will have to bear the brunt of them, especially those with small operations where the requirement to sit exams, recapitalise and install new compliance systems, as well as all the other requirements of RDR, will often be handled by the same individual who is offering advice to the customer. Hector Sants estimated that implementation might mean a loss to the IFA community of 20% of the professionals who work in this arena today. Adair Turner has said that this is an acceptable cost, but I do not agree. It is unacceptable that up to 3,000 professionals according to the FSA’s figures, and more according to other research, will lose their livelihoods. Among those who stay, the cost will be passed on to the consumer, as my hon. Friend the Member for Chichester (Mr Tyrie) has said.
There are many questions to ask. Will the RDR deal with the cowboys? Will a reduction in the number of IFAs encourage a savings culture or detract from it? Is it right that when we are encouraging entrepreneurs to set up new businesses, the outgoing regulator should be bringing about such devastating change to this industry? My constituent Mike Jeacock is typical of the type of IFA who is threatened by the RDR. He runs a high street shop in Stourport-on-Severn and he networks for new business among his mates in the Stourport Workmen’s Club. These are not high-rolling wealth managers prowling family offices in Mayfair. We are talking about people who earn a living honestly servicing the financial interests of people who can afford little but who need financial advice.
The retail distribution review is a significant market intervention, and market interventions, particularly of such a fundamental and far-reaching nature, require overwhelming evidence of consumer detriment and the appropriateness of the solution. In addition, any solution needs to meet cost-benefit requirements. Does the RDR satisfy these tests? It appears to be based on a combination of unfounded assertions, limited and contradictory research and, as regards some of its solutions, little more than a hunch that the outcome will somehow be better than the present system.
It is estimated that up to 10,000 experienced IFAs of good standing will be forced to retire for no valid reason.
The FSA says that only less competent advisers will not be able to comply with the new qualifications and that the changes will therefore act as a sort of natural selection for the industry. Does the hon. Gentleman agree that the opposite might be true because it will be the more successful and long-experienced advisers with well-developed client lists who will not be able to comply or who will choose not to, and that we will therefore lose their experience from the industry?
Yes, I agree entirely. It is absolutely the case that the harder-working and more successful IFAs simply will not have time to take the exams and start dealing with the dead hand of regulation from the FSA.
With up 10,000 experienced IFAs of good standing potentially being forced to retire for no valid reason, it is estimated that as many as 3 million existing clients, many of whom will be elderly, will lose access to their trusted adviser as of 1 January 2013. I fear that without the FSA looking again at grandfathering the experienced through the process of implementation and without a rethink about commissions, independent financial advice will become the preserve of the wealthy only.
Will my hon. Friend give way?
I have just about finished actually.
I remind hon. Members that there is a six-minute time limit on contributions in the debate from now on so that we can try to ensure that everybody gets in.
I congratulate the hon. Member for Wyre Forest (Mark Garnier) on securing the debate and on putting the case so comprehensively, in such detail and so fairly. This matter is a great problem, but it had gone under my radar as a Member of Parliament until a constituent of mine who is an independent financial advisor came to my surgery and explained what is happening. He falls into the category of being someone in his 50s who for the first time in 30 years is required to study for an examination to keep his job, regardless of how long he has been in the industry with a complaint-free record. I find that amazing.
As a member of the Treasury Committee, I have tried to aid the hon. Member for Wyre Forest—although he does not need aid—or at least stand alongside him to press for an investigation. I find it worrying that decisions can be taken by a regulator without recourse to the House, and almost without recourse to anyone. Last week, as the hon. Gentleman mentioned, both the FSA and the Governor of the Bank of England came before the Committee, which was an opportunity—although we had a full agenda—to press the matter and question them.
The background against which the decision has to be judged is interesting. The FSA, rightly, admitted to many mistakes in the operation of its light-touch regulations. It was probably more open than the Bank of England, but that is another story. After Northern Rock, the FSA was very straightforward in meeting after meeting; it came clean and accepted criticism about light-touch regulation. However, Hector Sants decided in a policy speech to project a new image—from where, I do not know. He stated that in future financial firms would fear the FSA, but there is a pendulum effect. If something is released it tends to go too far in the other direction, and I rather fear that the FSA, in attempting to salvage its reputation—if it had one—has moved too far to demonstrate that it is not a soft touch as well as a light touch.
Members may think that I exaggerate. The FSA is undertaking two reviews; retail distribution is one and the hon. Member for Wyre Forest mentioned the other—the mortgage market review. If Members have not received many letters and e-mails about the RDR, there will certainly be anguished people contacting them when the full power of the MMR comes into effect and young first-time buyers who are self-employed find it difficult to get a mortgage.
It is not just that the FSA has not listened to the industry or its professionals, which will undoubtedly damage the profession. Does the hon. Gentleman agree that the really foolish thing, which is just as serious, is that it will profoundly damage the interests of the consumer? Yet the FSA seeks to protect the consumer.
I completely agree.
I forgot to congratulate the hon. Member for Wyre Forest on securing the debate and on introducing it. I also congratulate all Members in the Chamber. It appears that the only thing we can do is to come to the Chamber and voice our anger and concern. When the Committee discussed with the Bank of England the new powers of the new regulator, it was the British Bankers Association, of all people, who raised the democratic deficit. The point was made that we were handing so much power to the regulators and the banks that there was great danger that they would be pronouncing and taking action on matters that affect us as representatives of our constituents —matters relating to employment and standards of living. In our humility and generosity, we are passing great power to the regulators on matters for which we will be accountable—perhaps not in law, but in the view of the public. We will be accountable for the actions of the regulators, so a rethink is very necessary.
I thank the hon. Gentleman for giving way. I, too, pay tribute to my hon. Friends the Members for Wyre Forest (Mark Garnier) and for West Worcestershire (Harriett Baldwin) on initiating the debate. I congratulate them on that.
Does the hon. Member for Leeds East (Mr Mudie) accept that the FSA could be acting in the context of, on the one hand, lack of regulation in the banking industry in the past, leading to a complete knee-jerk reaction and, on the other, disproportionate regulation at the consumer end of the market, such as the debate is highlighting?
I do not completely agree. I think the banks could be the beneficiaries if 30,000 independent financial advisers are taken out of the market. The hon. Member for Wyre Forest referred to Lord Turner, whose attitude was that the number would not be 30,000, but between 10,000 and 20,000, which was acceptable, otherwise the FSA would not be doing it. There was no explanation why the number was acceptable, or of the unintended consequences of the decision. The authority had just decided that it would be acceptable.
Ordinary people who have worked in the industry for decades will be hurt by the decision. It is not a knee-jerk response to oppose the direction of a decision and the manner in which it is being imposed on individuals who have worked in the industry without blemish. It would not happen in other industries and other practices. In addition, there seems to be a lack of interest in the diminution of choice for the ordinary consumer of all ages if the decision is forced through.
The Treasury Committee has asked for responses. I plead with every Member, whether or not they are in the Chamber, to do some writing and complain. They should ask the very able Chairman of the Committee, who is standing by the Speaker’s Chair, to call a review meeting so that we can call individuals on this subject. We do not want to tie it up in a long agenda where it receives only 10 minutes’ scrutiny; we want a full meeting where witnesses are placed under real scrutiny and asked both to account for the decision and to reconsider it.
All I can say is “Wow!” when I see how many colleagues and Opposition Members have shown up this evening to take part in this historic debate. I believe this is the first time in this Chamber that the Financial Services Authority, which was set up by the former Prime Minister as the independent statutory regulator, has been subject to such parliamentary scrutiny. In fact, I believe that we are today showing that we can, and do, take a real interest in what the independent statutory regulator is doing.
The Chairman of the Treasury Committee pointed out how many Members are in the Chamber this evening for a Back-Bench business debate, when we are not obliged to be here by anyone other than the constituents who have contacted us with their concerns.
I support what my hon. Friend said about the number of Members present this evening, which is unusual, as she pointed out. The indication so far is that this is a cross-party issue and that party politics is not playing a part in it. The comments from the Opposition Benches support the comments made in the debate.
I entirely agree. We have learned in the past few years how important good financial regulation is.
Imagine the outrage there would be in the Chamber if a Minister said from the Dispatch Box, “I am going to put between 20 and 30% of an industry out of business at the stroke of my pen on 1 January 2013”? It is unbelievable that we have allowed an organisation to grow and, unscrutinised by this legislative body, have such a power over our constituents’ lives.
Does not my constituent, Mike Ward of Ward Financial Services, have a point when he says: “People need to understand that business has changed in recent years. People won’t trust banks as much as they did in the past, so they must be careful not to undermine the relationship between themselves and their clients. That would not be the right way forward”?
I thank my hon. Friend for that intervention. It is the banks that are likely to be advantaged by the change in regulations. I am afraid I have only six minutes in which to raise the many questions that I have about the regulation. I shall focus on a couple of areas that my hon. Friend the Member for Wyre Forest (Mark Garnier) did not touch on much in his remarks, which were extremely comprehensive.
I want to hear more about the handing of a competitive advantage to the banks. It is my understanding from my discussion with the Financial Services Authority that banks that are trading overseas could come into this country and continue to offer advice. The European Union is about to consult on something called the directive for packaged retail investment products. It would be wise for the FSA to wait and see the results of the consultation before it takes permanent steps here to put out of business 20% of independent financial advisers.
I have also heard through the Westminster Hall debate that my hon. Friend the Minister has talked about the free annual financial health check that the Consumer Financial Education Body will be able to offer. I want to hear more tonight from the Minister about how that will be delivered and what the additional cost to the industry through the social responsibility levy will be. Has that additional cost to the industry been factored into the £1.7 billion that is the five-year cost of the retail distribution review?
For the remaining four minutes at my disposal, I shall focus on my main area of concern, which has been raised by colleagues—the question of the qualifications. Imagine if nurses who were qualified were suddenly told that from now on, nursing was to be a degree-level qualification, and that all existing nurses would have to pass that degree-level qualification or they would not be able to practise their profession. That is what is happening to our independent financial advisers.
If I thought that passing an exam would prevent mis-selling and we would never have another incidence of mis-selling in future, I would be more supportive of the idea, but I do not see that an ability to pass an exam, which someone in their 20s might be much better at—certainly, I was—than by the time they get into their 50s and 60s, when they have all that experience about financial advice, precludes mis-selling in the future.
I can offer a few examples. We have been inundated with correspondence on the issue, but a couple of important examples stand out. One adviser wrote to me who is already qualified to chartered financial planner status. He is an associate of the Chartered Insurance Institute, which maps across to a degree-level qualification, but with the FSA’s new standards, it appears that there will be gaps. If advisers with such a qualification do not fill those gaps in the two years available, they will no longer have a livelihood in the industry. That is blatantly retrospective regulation.
Another important example that was brought to my attention was a letter from the chief executive of a friendly society based in Cleveland on Teesside. The case may be raised in the debate; I hope so. The chief executive wrote to me explaining that his door-to-door sales force who sell funeral policies for £1 a week and life policies for up to £5 a week will now be required to take the degree-level qualification. As such, he felt that his friendly society with its 10,000 low-income customers would have to shut it doors. May I urge the Minister to try to influence the independent statutory regulator to be more respectful of experience as a qualification?
Does the hon. Lady agree with this statement: it is one thing to impose new rules on new entrants to the IFA profession; it is quite another thing to disqualify someone who is already qualified?
Indeed. I understand that there is to be an alternative-based assessment. The Minister mentioned it in the Westminster Hall debate, but I want to try to make sure that he works closely with the FSA to publicise that route more extensively, and that he works with the FSA perhaps to soften the cliff-edge of disqualification on 1 January 2013. We all want to see better qualified financial advisers, no question about it, but to close the door on financial advisers practising their profession on 1 January 2013 is not on.
In conclusion, financial advisers face a triple whammy. We have heard about some of the other issues, but the one that we would all see as being the most illogical is the one about qualifications. As the Government go through the process of changing the way the FSA operates, I urge my hon. Friend the Minister to change the way the FSA regulates the sector.
The debate might be in danger of becoming a love-in. [Interruption.] Thank you very much. The hon. Member for Devizes (Claire Perry) was making an open-arms gesture, but I do not know whether I want to go down that route. If détente breaks out, I for one will be delighted. I have been contacted by a number of individuals and groups who have significant concerns about the impact of the retail distribution review.
The review purports to set new parameters for this important sector of our economy, and regulation is at its heart. The chief executive of the Financial Services Authority characterised the review under three main headings, which the hon. Member for Wyre Forest (Mark Garnier) set out—the need for a transparent and fair charging system, greater clarity on the type of advice offered, and a better qualification framework for advisers. I have no quarrel with the first two points. We may differ a little about the content.
It is right that IFAs must disclose their charging structures to clients up front and in writing, so that the client has the information in good time, before the advice process starts. It is right that the IFA must also agree and disclose the total charges that the client will incur as soon as those are known. It is right that, from 1 January 2013, IFAs will be able to make an ongoing charge only where they provide an ongoing service. It is also right that from 1 January 2013, product providers will no longer be able to offer commission on their products, and advisers will no longer be able to receive commission set by product providers. That is just hiding the charges within the commission. The major concern on which I think all participants in the debate agree, however, is the concern of constituents who have contacted me regarding the so-called better qualifications for those who work in the market.
One should not automatically be afraid of higher qualifications for individuals who work in this important sector, but the quality of the debate has not been helped by the tactless, ill-informed and unwise comments of the Financial Secretary to the Treasury, who caused great anger among IFAs during a debate in Westminster Hall, when he compared the current level 3 minimum qualification for advisers to that of a McDonald’s shift worker.
Does the hon. Gentleman agree that, by focusing so narrowly on qualifications, we miss one of the most important things in any investment industry—experience and a track record? By narrowly defining what we think of as the appropriate qualifications, we completely ignore the experience that many IFAs bring to their positions. They will be forced out by such regulation.
I agree entirely, and I shall address that point a little later. It is why my constituents and I were so angered by the comparison of the current level 3 minimum qualification to that of a McDonald’s shift worker. It is, indeed, an insult to the many of thousands of people who work for that company—a company whose products, looking around the Chamber this evening, I am sure a few people have sampled.
The hon. Gentleman is concerned about the QCF—qualifications and credit framework—level 4 qualification, but is he not concerned also about the impact of the measure on the need for continuing professional development outlined in the RDR, and the fact that it is likely to disadvantage small operators who will not be able to rely on the critical mass of a large organisation when taking time off—probably about a week every year—to conduct CPD?
I agree entirely. The measure will impact on small businesses, not the big part of the sector, and that is why the Financial Secretary should have been mindful of the commitments people have to make to gain qualifications in the sector. One IFA, in particular, heard the Minister’s comments and blogged:
“I’ve just spent 70 hours revision to pass RO1. Nobody has paid me for my lost time. Nobody has asked me 1 of the 100 questions in the exam for the last 22 years. This guy”—
the Financial Secretary—
“needs to get in the real world.”
That leads me to my main contention: the proposals and timetable to increase the qualifications needed to participate in this sector of the economy are not sensible. Exams and qualifications in the sector are not new, but the proposal to introduce new rules that effectively force people to re-sit exams without taking account of their experience or, most importantly, clean regulatory record is patently unfair. Moreover, the sector will not be able to absorb the cost of revalidation; instead, as other contributors have said, it will be passed on to the customer in the shape of higher fees.
Others have also mentioned that many professional groups in the United Kingdom are not asked to revalidate, so I seriously wonder why we are trying to isolate this particular sector. Why, as other hon. Members have asked, do we want to take away that valuable experience from that important part of the economy?
Our time is limited, and there is a limit of six minutes on each contribution, but I too want to mention one individual who has contacted me in the lead-up to the debate. He is an old friend of mine, a next-door neighbour, and it is important that we bring our experiences to the House when we discuss such issues. Jim Hunter sells financial products, and he contacted me, but he did not complain about the need for transparency, fairness or greater clarity. In fact, having done business with Jim, I know that he had all those ingredients many years ago. Indeed, I am sure that many people who have contacted hon. Members are in exactly the same boat.
Jim was talking to a colleague recently at a meeting. The gentleman is 60 years old, with more than 30 years’ experience in the industry, and if he sat the proposed exams he would be 63 before he finished them. Jim explained that that person would be lost to the industry and have to retire before his time, because he would not study at that time of his life. There are many people like that, trying to make a living for themselves in difficult times, and that ability to earn a living in this important part of our economy will effectively be taken away from them without any real benefit to the economy itself.
Does the hon. Gentleman agree that, although the RDR was introduced with every good intention, further work should be suspended until there has been a full cost-benefit analysis of its impact on the IFA community and, indeed, on consumers?
I do not think that that point is unreasonable at all, and it could be taken on board.
One point has not been mentioned in the debate, but it is an important one to make in the last minute of my speech. The final thing that my constituent said to me is that many IFAs work on trust. That trust takes a long time to build up with individuals. If you take that experience out of the sector, the trust will go. People will be uncomfortable about going to new IFAs because they will have to rebuild the trust all over again. We should be mindful of that.
The RDR is an important piece of work and it is important that we get it right. For that reason, I urge the Minister and members of the Select Committee to take the comments away, recognise the need for common sense to prevail and work with the industry to come to a common-sense solution.
I declare my interest: I am an associate of the Chartered Insurance Institute, having studied for and passed my professional exams in 1985. Although I have not practised as an insurance broker since 1987, I wanted to speak tonight because I recall the debate when I was studying about how the importance of exams was a strong factor in professionalising the insurance sector. At the time, I felt that that was an over-egging of the situation, and here we are 25 years later and the Financial Services Authority is using a sledgehammer to crack a nut.
I am totally opposed to the new rules that the FSA is imposing on independent financial advisers. If I felt that it was imposing them because there had been bucket loads of horrendous examples of mis-selling, or because clients had been ripped off, or because there were statistics to show that IFAs had been responsible for the majority of the complaints in the industry, perhaps I could understand. But none of that is true. As we have heard, IFAs are responsible for only 2% of complaints from customers; the banks bear the brunt, at 61%.
I and congratulate my fellow Worcestershire Members on having this debate. Does my hon. Friend realise that the figures of 2% and 61% that she has just cited are further strengthened by the fact that the proportion of complaints against IFAs has gone down every year for the past five years and the proportion of complaints against the banks has risen every year over the same period?
My hon. Friend is correct. Is that not interesting? Many of us have been trying to get to the background of why this retail distribution review was brought in and where the FSA was coming from. The statistics really speak for themselves, and I am astonished that we find ourselves in this position.
Even if the statistics were much worse than they are, does my hon. Friend believe that the proposals in the RDR would lead to improved and safer advice for clients? I certainly do not believe that they would, even if the statistics were worse.
Absolutely. I thank my hon. Friend for bringing up that point. It is clear that the baby is being thrown out with the bathwater. Nobody at the FSA seems to want to explain why. IFAs that have offered solid advice for years, with unblemished records, should be granted grandfather rights. Like many other Members, I have been trying to find other areas of business where new rules are to be introduced without any grandfather rights. I cannot. Even licensed properties—pubs, to you and me—kept their grandfather rights when the new licensing laws came in a little while ago.
It has been estimated that the effect of the rules being introduced in 2013 will be that we will lose 30% of practising IFAs. Where will the business go? Yes, you guessed it: to the banks—to the people who have the record of providing 61% of the complaints from customers. What is the FSA saying about that? Absolutely nothing. We have to ask ourselves why the FSA is doing this. I cannot find a credible reason. As we have heard, on its own cost-benefit analysis, the cost of introducing these new rules has risen from £660 million to £1.4 billion to £1.7 billion.
I urge the Minister to reopen talks with the FSA, not to allow it to put 30% of IFAs out on the scrap heap and not to reduce individuals’ choice of where to go for financial advice. Finally, he should use all his charms—he knows that I know he has charm—on the FSA, because the Government are new and “choice” and “fairness” are the catchwords that represent us, not “draconian, bureaucratic, Stalinist centrists”.
I congratulate the hon. Member for Wyre Forest (Mark Garnier) on securing this important debate. I am pleased that the hon. Member for West Worcestershire (Harriett Baldwin) referred to the Kensington Friendly Collecting Society, which is a very good organisation in my area.
As a Co-operative Member, I represent the interests of some people on low incomes who have been denied access to financial advice and products provided by friendly societies and mutuals as a result of the qualification requirements contained in the retail distribution review. The Kensington is a friendly society that has existed in Middlesbrough for 106 years. Mark Brooks, who is the chairman of its committee of management and a constituent of mine, and James Lancaster and Phil Carey wrote to me from the Kensington to raise their situation. The Kensington has 10,000 members throughout the Teesside postcode area. It provides savings and insurance products to those members for as little as £1 per week and a maximum of £5.70 per week. It provides opportunities for its members to obtain basic financial products. Without this provision, members of the society would largely be excluded from financial services and have to go to more expensive services, namely the banks, or to loan sharks.
The RDR is currently being finalised by the FSA. Its most likely outcome will be that the society will close down, which will mean that 10,000 members will lose their ability to save small sums of money for their funeral or for a rainy day. The reason is that the FSA is proposing a blanket qualification for any person offering financial advice—a qualification that is considerably higher than the current requirement. The FSA will not permit exemptions to this qualification structure, and it will not permit a gradual increase in qualifications vis-à-vis the risk and complexity of the product being advised on. The advisers at the Kensington and other societies will be required to obtain degree-level qualifications to sell a simple endowment or whole-of-life policy for a maximum premium of £5.70 per week. This is the only type of product that they sell, and the level of qualification required is disproportionate to the advice that they give.
The syllabuses of the proposed qualifications are irrelevant to the needs of those on low incomes. The exams focus on trusts, inheritance tax, capital gains tax and portfolio management. Those on low incomes may aspire to require this level of financial planning, but in the here and now they need advice on issues such as debt and benefits. The qualification requirements will mean that members of this society and others will be denied access to financial advice after 2012. The society will be unable to recruit new members because its advisers will be unable to offer advice to prospective members. A lack of new members will mean that this society and others will close. As a result, their members will lose access to financial products that they can afford and, in all likelihood, will be excluded from financial services thereafter.
That outcome seems to contradict the aims of the FSA and the Government in tackling financial exclusion. The RDR, while seeking to protect the interests of high net worth consumers, is by default taking away one of the few opportunities that those on low and insecure incomes have to obtain financial products. If the Government and the FSA are keen on promoting financial inclusion and financial literacy, then the existence of friendly societies like the Kensington is essential in delivering such benefits to those on low incomes. The concept of mutuality appears central to the idea of the big society, yet the consequences of the RDR would be to remove the remaining friendly societies that promote this notion.
Does the hon. Gentleman agree that the reduction in IFA numbers would also have an impact on the volume of new insurance policies and the work that would come from that?
Yes, I certainly agree. We would lose skills and experience, as well as putting people out of jobs for no good reason whatsoever.
The qualification requirements would deliver no discernable benefit to the vast majority of consumers beyond the wealthiest few. Let me assure hon. Members that by arguing against the proposed qualifications, I am not saying that such members deserve less than the better-off, but merely stating that they require different things.
The Kensington has increased its premium income by over 40% in the past seven years despite the fact that tax-exempt premium limits have not been increased during this period. That indicates that there is a demand for the service and the products. The Kensington delivers products that fulfil real needs for those on low incomes. For example, in the Teesside area, owing to bad debt difficulties, undertakers will not proceed with a funeral unless the deceased’s relatives can provide a deposit of £750. The Kensington, among others, can fulfil that need because its minimum premium is £1 per week, which is enough to generate £1,000 of death cover. It has a local presence, which means that the agent can deliver a death claim cheque to the family directly within two working days of the member dying, and the whole process is conducted by someone whom the family knows.
The majority of members of the Kensington and other friendly societies in Teesside live in the poorest and most socially deprived council wards in the UK. Our people require honest and appropriately qualified agents who understand the benefits system, can provide advice on debt issues, and can generally assist in all forms of financial planning for those with limited disposable incomes. It is difficult to imagine that any such member would ever require advice on IHT planning, trusts, corporate financial planning, portfolio management or CGT.
The QCF level 4 is a disproportionate qualification for the home service market operating within tax exempt limits. It will not add value to consumers, nor improve the service that they receive. It will make home service sales forces even more expensive to run and will generate further financial exclusion. A more considered qualification that focused on the real, everyday financial issues that affect those on low incomes would be welcome. Current academic thinking reinforces my view, which I assume is shared by other hon. Members, that the only effective method of accessing and engaging those on low incomes in savings and protection products is a direct sales force. Indeed, the Department for Work and Pensions website states that tenant engagement teams are being piloted to increase take-up of home contents insurance,
“particularly as all other traditional methods of promotion (leaflets, flyers, competitions, prizes etc) have not resulted in large scale increases in the number of policy holders.”
In conclusion, the RDR qualification requirements for advisers selling tax-exempt, small premium assurance products are disproportionate and irrelevant to the needs of those on low incomes. The RDR will reduce the access of those on low incomes to basic assurance products at a time when significant amounts of energy and money are being invested in promoting financial inclusion in that area.
I congratulate my hon. Friends the Members for West Worcestershire (Harriett Baldwin) and for Wyre Forest (Mark Garnier) on instigating this debate. I was unable to attend the Westminster Hall debate on 20 October, but the transcript indicates the quality of debate that we have in this House on occasion.
Many issues have been discussed at length, so I will attempt not to repeat what has been stated by other hon. Members. However, I will highlight some areas of concern. I concur with hon. Members who believe that the FSA is taking a sledgehammer to deal with problems that are not great enough to warrant it. The FSA’s proposals will damage choice and result in small businesses being forced out of trading. It will affect the choice available to people who live in rural communities in particular. As has been stated, the proposals discriminate against older members of the financial advice community. There will be an effect on the availability of advice and support for those who are less wealthy in our society. All those problems must be addressed.
On damage to choice, Ernst and Young estimates that as a direct result of the proposals, there might be a reduction of about 50% in the number of financial advisers who are willing to carry on trading and that there might be as few as 10,000 fully accredited financial advisers with about another 10,000 providing restricted services. Such a reduction is unacceptable. Even the FSA states that there might be a loss of as much as 25% in smaller firms who are willing to provide this service. It is difficult not to conclude from those figures that the proposals will affect choice. I find it hard to accept the FSA’s argument that it is bringing forward the proposals to serve consumers and give them more protection and choice.
Does my hon. Friend agree that as well as removing choice, the proposals might lead to people not bothering to save—at a time when people need to save—because they cannot get advice on how to do so or on where to put their money?
I accept that point. In particular, I believe that those who are less wealthy in our society will be discriminated against, even though there should be greater encouragement for them to save than other people. That issue relates directly to the damage to choice.
Although I share the Treasury’s view that there is a need to ensure that advice is of a high quality and accept that there has been mis-selling and bad advice—I do not argue against the need for a degree of regulation—it is difficult to accept proposals that even the FSA accepts will result in a reduction in the services that are available to the public. In particular, I remain unconvinced of the merits of the examination process being the be-all and end-all. Are structured learning and examinations really a substitute for experience, integrity and honesty? If I were looking for a financial adviser, those qualities, rather than an exam, would be the first on my list.
Does my hon. Friend agree that one way of taking the matter forward is to allow consumers to decide? We all believe in consumer choice. If the proposed laws were passed and financial advisers had to have letters after their names, we could have a grandfathering clause so that the consumer had a choice. They could go with experience or with somebody who had sat the exams under the new regulations.
There is a lot of merit in that argument, and I would be encouraged if the FSA were to consider such an approach.
As a Member who represents a rural community, I am well aware that the change will have a much greater impact on smaller financial advisers. After all, the cost of regulation is estimated at about £6,000 per adviser. That could be taken as being reasonable in the context of a large, city-based financial advice firm, but for small firms in my constituency such a regulatory burden could be the difference between remaining in business and leaving business.
At a time when the coalition Government are stating clearly that they want the private sector to create jobs, and that they want to get rid of the red tape and bureaucracy that have stifled a generation of jobs in small businesses, I find it odd that the financial advice sector is being earmarked for different treatment. The financial advisers to whom I have been talking support the coalition fully in trying to reduce the red tape and bureaucracy that small businesses face, but they would like to be included in the discussion.
On rural services, we in Aberconwy have suffered in many ways, such as the closure of small post offices. We have also seen the legal aid franchise service stopped for the time being, creating a real threat of no legal aid services being available in any of the small towns in my constituency. I therefore believe that we should be very concerned about the further attack on small businesses in rural communities that we are discussing this evening.
In many small market towns, financial advice is part and parcel of what people have come to expect. When they go into town on market day, they can do their banking and go to the post office, the local shop and the solicitor, but they can also go to the financial adviser. It is not acceptable that people who live in a rural community will have to drive to the nearest large town, or even perhaps use the banks instead. Banks in rural communities, and certainly in my constituency, are now nothing more than counter services. It is a real problem that services in rural areas are under threat.
My hon. Friend the Member for Ipswich (Ben Gummer) made the point about rural services very strongly in the Westminster Hall debate, and I agree with him, but I would go further. In Aberconwy, many professional firms work through the medium of Welsh. If rural financial advice services are taken away from parts of my constituency, people will lose the ability to go to a local financial adviser and deal with their problems in the language of their choice. People in my community switch between Welsh and English in the same way that people go into a café and choose coffee or tea—it is quite natural for people to use their own language when dealing with their own affairs. I wonder whether larger concerns in more anglicised towns on the coast, or further away in Cheshire, will take into account the need to provide a Welsh-speaking service.
On discrimination against older financial advisers, I question why no grandfather rule is proposed. Why are we not willing to consider experience as being of importance? I shudder at the thought of leaving people in my constituency dependent on the banks rather than having an IFA. If having an independent adviser is good enough for some people in our society, it should be good enough for people in my constituency. The proposals should be reconsidered, and I endorse the call for the FSA to think again about the damage that it is doing to a very important service in my communities.
I congratulate the hon. Members for West Worcestershire (Harriett Baldwin) and for Wyre Forest (Mark Garnier) on introducing this apt motion. It has certainly galvanised a lot of interest in my constituency. Like all hon. Members, I have received e-mails, letters and phone calls, and I have held personal interviews, so I have had lots of information. My constituents have made it clear to me from the outset that this is not just about advisers who provide help to wealthy people who can stay at home and watch their money work and grow. I am speaking tonight on behalf of people who have a small sum of disposable income and who wish to enhance their small pensions at retirement age and seek help and advice from financial advisers. They have asked me to speak on their behalf, and I happen to know that some of them are watching the Parliament channel to see that I say what I said I would say.
One constituent sent me some background information, which sets out the situation very clearly. The retail distribution review appears to offer solutions—at least on paper—to matters which the FSA has identified as problematic within the industry. I am not aware of those problems, which concerns me. The FSA believes that the measures set out in the RDR proposals will provide for greater consumer confidence and engagement within the industry. It is planned that all advisers attain the qualifications and credit framework level 4 qualification by 31 December 2012.
A constituent of mine wrote:
“I have attended seminars at which RDR and the future of Independent Financial Advisers are discussed. They all have the same line…segment your client base…they give guidelines how to do this so that we have an income stream from a fee base structure. If I were to follow this suggestion I would have 3 clients left. When I question this approach, on every occasion the reply is…I need to change my market.”
Did anyone ever hear such advice in all their life? Goodness me!
Building society closures and the exodus of the large phone service companies have reduced almost to nil the supply of premium products for those on low incomes, particular the 4 million who still feel disengaged. What do the hon. Gentleman’s constituents think about that?
I thank the hon. Gentleman for his comments. I have the same concerns.
It is estimated that it takes 400 hours to do the exams. That is approximately 10 weeks when people do not have the opportunity to earn money or do what they normally do. Advisers in Strangford have painted a different picture to that painted by the retail distribution review. Most of the customers of advisers in my constituency are working class. I have been informed by many financial advisers that they have spent time with people without receiving any financial reward—we have heard that from hon. Members on both sides of the House tonight.
One adviser offered advice to a female client who was about to go through a separation. She was stressed out about her finances, but the adviser spent a lot of his time on the phone to her. For all his work, he earned not a penny. The road that the regulator is pushing advisers down will mean that they will be unable to afford time if they do not get paid. Will we therefore end up with people being unable to afford sound financial advice, exactly as the hon. Gentleman said?
I represent a rural area, as do many hon. Members, including the hon. Member for Aberconwy (Guto Bebb). We are aware how the proposals will affect and impact on people in rural areas. Consumers will suffer substantial and unprecedented detriment owing to the unintended consequences of the proposals. Would it not be wiser or better to protect grandparent rights, as at least two or three hon. Members have intimated? Doing so would give the protection that many need. A substantial portion of the adviser population will leave the industry. Various surveys have been conducted and although there is no consensus on the figures, it is obvious that adviser numbers will fall drastically.
One of my constituents in Strangford wrote:
“I am 54 years of age…the heavy regulation is taking its toll. I am ¾ of the way through the new exam structure. Many advisers are finding it impossible to pass these exams as many are over 55 and are finding the stress unbearable.”
Another hon. Member referred to a 63-year-old adviser for whom contemplating exams will put him away in the head. The result will be anxiety, depression and stress. My constituent predicted a drastic fall over the next three years in the number of independent financial advisers. He continued:
“Advisers are finding the regulations unbearable, and many are having problems due to”
what is taking place. He made a statement that I found moving and honest:
“We are all starting to swallow the negativity thrown at us by the regulator over the past numbers of years, which is trying to kill us off”.
Now IFAs are facing another obstacle and barrier. We cannot afford for any businesses to be lost, especially ones that will take the financial burden off the state by enabling people to supplement their pensions and not need state aid and benefit. They are the people in my constituency and across Northern Ireland on whose behalf I wish to speak.
Robin Stoakley, head of intermediary business at Schroders, said:
“I do see up to 30 per cent of the IFA market leaving”.
How on earth could we support something that would take away 30% of the IFA market? Furthermore, Aviva UK Life marketing director, David Barral, said the firm predicts that by 2013, IFA numbers will fall to 10,000, leaving middle market consumers unserviced.
Does the hon. Gentleman agree that at a time when we desperately need small and medium-sized enterprises to be increasing their activity, not reducing it dramatically, this is a disastrous thing to be happening?
I agree wholeheartedly with the hon. Lady. The one great thing about tonight’s debate is that we have, I think, a united front—if that is the way to put it. All the parties are in agreement, which is good news.
Time does not permit me to go through the long list of people in the industry agreeing with the prediction of a sharp decline in the number of advisers owing to these proposals. However, it is clear that there is a definite problem with these regulations and their impact on IFAs. If the adviser population falls by about a third, as predicted, it will leave millions of consumers without an adviser. Some will migrate to other advisers—we understand that—but a great many will be left without a trusted source of advice. The UK currently suffers from the largest saving retirement and protection gaps in its history, and it is essential that these gaps and the current over-reliance on the state are reduced. I think that many in the House are prepared to accept that.
The UK can ill afford to lose 10,000 advisers. Such a catastrophe would intensify the existing problems. The UK’s leading consumer champion, Martin Lewis, of Money Saving Expert, remarked:
“There’s a worrying possibility that the FSA is about to kill off”—
“independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash.”
That is an expert’s opinion.
I speak not only for the financial advisers in my area who have been forced out of their jobs, but for the wee man and the wee woman who have asked me to come here and fight their case for them. I also stand for the thousands of people in my constituency who benefit from the current system. People who are forced to pay for all advice offered will be unable to invest much, and therefore will not invest or, worse, will invest somewhere they should not, with dire consequences. I am aware that it is the FSA that is making these recommendations, and I ask the Minister to do the honourable thing and support the alternative proposals put forward. They would benefit the larger advisers, as the FSA is trying to do. However, we also have to look after those disadvantaged consumers, so I urge the House to support them.
Order. May I remind hon. Members that I want to begin the winding-up speeches at about 20 minutes to 10? There are 16 Members who still wish to speak in this important debate, although there might be more—I have not seen them all. Hon. Members do not have to use the six minutes, but I am not going to reduce the time limit, because I appreciate that it is difficult to make the strong arguments hon. Members want to make in less time than that.
I have taken feedback from my local independent financial advisers in rural Somerset. The general approach to the retail distribution review has fundamental flaws and will inevitably fail in one area—which is surely to encourage people to buy more financial products and to take responsibility for their financial futures. The RDR will fail because the regulator is trying to impose on the industry an advice process and a particular bids model without recognising or understanding the realities of what the public want.
Surely it would be better to find a way of developing an environment in which product providers and advisers have the freedom to develop their own business models, providing that they were honest and straightforward with clients and treated them fairly. That would allow innovation and would have some chance of success. The whole situation is similar to what happens when central Government try rigidly to control everything, instead of delegating responsibility to local authorities. Central Government do not always understand the issues at the grass roots and may get it all wrong. This Government should move us away from a prescriptive approach to one that allows an element of freedom.
Will my hon. Friend give way?
I want to be brief.
We should consider what an IFA’s clients are seeking to buy when they look at financial products, look at what they do not like about the present procedures and consider whether the RDR will change anything. A constituent of mine has stated that when his clients buy their financial service products, they are seeking a similar experience to that when they buy other goods. First, they want the buying process to be a simple and pleasant experience. If the Government wish the public to buy more financial products and take responsibility for their future, they should not forget that fundamental point. That is not easy to achieve in the current environment. For a start, most clients do not like to be issued with mountains of complex paperwork. They find it quite intimidating.
Secondly, a lot of people visit an IFA with a specific purpose in mind—to invest some spare funds, to discuss their pension, and so on. They wish to restrict the conversation to those points that they believe are relevant and, having listened to what the IFA has to say about the matter, will wish to make up their own minds about whether the product under discussion is suitable for their needs. However, once in discussions, people often have to go through the IFA’s “advice process”, and are no longer responsible for their own decisions. The IFA has to be sure that the product is right for them, so these people find themselves undergoing a time-consuming and irritating process, having to answer personal questions that they often consider an invasion of their privacy.
Thirdly, clients quite rightly seek value for money. Unfortunately, the whole regulatory procedure is so cumbersome that it is no longer cost-effective for those with limited funds to seek an IFA’s advice. The cost of many financial products has risen dramatically. For example, 30 years ago the annual management charge on a unit trust was usually 0.25% or sometimes 0.375% per annum, but now it is usually 1.5% per annum. Much of the increase has arisen purely as a result of regulatory costs. A significant part of the cost increase is driven by regulation, so everyone suffers.
Will the RDR change any of the above? Not in my opinion: there is little evidence that any of those fundamental issues will change as a result of the RDR. We are all in favour of raising standards, but further examination passes will not address any of those issues.
Does my hon. Friend agree that it is quite surprising that even where IFAs are well on their way to getting the new qualifications, they are still against the system and see the exams as pointless? The new qualifications will not weed anybody out, which might have been their objective, because everybody sees them as inappropriate for the job that these people do.
Absolutely, and I thank my hon. Friend for her intervention.
The cost of paying for the IFA’s time will not change. We are all in favour of raising standards, but further examination passes will not address any of the issues that I have set out, and clients will not mind whether they pay commission or fees. To improve matters, the regulator must lessen the threat of litigation by giving clients the freedom, if they so wish, to take an element of personal responsibility in their decisions and to buy from an IFA after those discussions. The regulator must also stop telling IFAs how to structure their business models and must allow them be innovative. Without the mountains of regulation, most experienced IFAs could significantly improve the service that they offer their clients while dramatically reducing their charges. Also, they could probably employ more people and could significantly improve the customer’s experience.
I would like to quote from two small independent financial advisers in rural Somerset. One says:
“If the RDR goes through in the current format I am likely to lose the adviser…I employ. He is highly intelligent (a university graduate) and has over 20 years relevant experience. He is very competent to undertake the work that he does. However, he is in his…fifties and is busy with two children still at home and another at university. At this stage of his life he simply does not wish to use all of his spare time studying for further examinations. So this will be another person in your constituency without a job—so unnecessary.”
The second person said:
“I am lucky, I have all the necessary exams. I just hope they do not raise the bar again. I really could not face the pressure of having to pass more exams at my age. If it happened, I would have to close and more people would lose their jobs.”
The FSA in this case is judge, jury and executioner. I ask the Ministers to reconsider the rules for 2013, and to reopen talks with the FSA, to make it possible for independent financial advisers to offer the high-quality service that they want to give to their customers.
I recently met a group of independent financial advisers who serve Llanelli and the surrounding area. They fully understand the need to have a properly regulated industry, and the need to improve consumer confidence. They want high standards, and I can assure hon. Members that they simply would not get away with it if they did not have high standards, particularly in a close-knit community, where everyone knows whether they have done well or badly in their last transaction. Their next custom really does depend on that. They also made the point that they already have certification. In addition, many of them have a great many years’ experience. They also accept that new entrants to the profession need proper qualifications and training.
A number of difficulties have already arisen with the new scheme. The first relates to the availability of slots to take the exams at the examination centres. One independent financial adviser in my constituency is waiting for a slot to take an exam in January in Bristol. Now, Madam Deputy Speaker, there is nothing wrong with Bristol, except for the fact that it is some considerable distance from my constituency. There is also the inconvenience of having to travel there in the winter, to fill a particular slot for a particular examination. If that slot were not available, they would have to go somewhere else.
Does the hon. Lady agree that, if grandfather rights were to be introduced, as many of us wish, it would not only be fair to existing IFAs but release more slots so that new ones could come into the market, thereby increasing competition and choice for consumers?
Indeed, there are certainly issues about the way in which the whole system has been set up and run, and about whether it can be worked properly. As the hon. Gentleman points out, to have so many people trying to take the exams in just two years is not particularly practical. The time scales are extremely tight, and the independent financial advisers have to book into the slots. Another problem, of course, is that they do not always pass the exams.
That brings me to the nature of the exams. As I have said, independent financial advisers already have certification, and I have seen some of the questions that they have to answer in order to gain that certification. Many of them seemed to require a very different kind of knowledge from the knowledge that the IFAs in my area usually need. Furthermore, IFAs are fully aware of their own shortcomings. They know that they have limitations, and that they will sometimes need to pass a client on to someone else for specialist advice.
One very experienced financial adviser in my area is a well respected member of the community who is very much involved in local town centre activities and in keeping the community alive. He recently failed one of these exams, however, which has knocked back his morale and that of a number of other financial advisers who know him. He failed the exam not because he was not perfectly capable of doing his job or because he lacked intelligence or experience. That seems only to confirm that the nature of the exams needs to be reconsidered. We also need to take into account the enormous amount of time that has to be put into them —400 hours has been mentioned, and that is probably the minimum—as well as the costs involved.
I know from experience of developing new examination schemes what happens in such circumstances. Everyone wants to put in their 5p worth and everyone wants extra questions on their area, and the whole thing develops until it becomes so big and unmanageable that no one could possibly want it as a syllabus. Another problem is that people are often terribly worried about being thought of as soft. They are worried that someone is going to tell them that standards are falling, so they decide to put in harder and harder questions to try to counteract that.
Have any of the hon. Lady’s constituents been able to observe how the qualifications might help to identify those independent financial advisers who might have a tendency to mis-sell, compared with those who might not?
My constituents have made clear to me that many of the questions do not bear much relation to what they do in their everyday work, and are certainly not a test of their integrity. That does not mean that they do not want regulation or do not like the idea of having proper qualifications and a respected profession, and it does not mean that we should abandon the RDR altogether. What those people are saying is that we should look at the detail again and create a workable system that can be respected and is a useful tool, rather than one rejected by the profession that will not help anyone in the long run because it will simply lead to an exodus that will have the impact on local communities that many Members have described.
I probably know some of the constituents to whom the hon. Lady has referred. Some of them have been in touch with me, as well as with my local independent financial advisers. In other professions, when it comes to continuing professional development and examinations, those who specialise concentrate on their specialities, and therefore undergo tests that relate to their experience. The problem with the RDR regime is that it is far too general. That puts people in a really difficult position, which is unfair.
My friend and compatriot is right. That is why those responsible refer such people to others. They know that they do not know everything; they know what they do know, and they know what they do not know. This is not about throwing the baby out with the bathwater. It is not about abandoning the system altogether. It is about getting it right: it is about having another look, and establishing whether there are ways of implementing the system that will make sense. We need an arrangement that will not create a time scale that is difficult to adhere to, will not depend on slots that are impossible to secure, and will not involve questions the answers to which people will not need to know in their professional lives. We need modifications to make the system much more manageable.
I will speak very briefly. I will chuck away my notes, and see if I can do better than six minutes. I am delighted to be able to speak in the debate. I was urged to do so by two constituents in particular—Roger Clark, who is listening to the debate not far away, and Mr William Dixon—but others have written to me as well.
The number of IFAs has fallen from 32,000 to 29,000 in the last two years. When Hector Sants, the excellent and much revered and admired chairman of the FSA, appeared before the Treasury Committee last week, he estimated that between 10 and 20% of IFAs would go out of business as a result of the RDR provisions. I ask Mr Sants this: who are we—who is he—to put 5,800 companies out of business with a stroke of the pen, and what is the problem that needs fixing?
Many Members have quoted the figures this evening. complaints about IFAs to the financial ombudsman’s office: 2%, of which 39% are upheld. Complaints about the banks: 61%, of which 50% are upheld. No doubt my hon. Friend the Minister will say that that is because the banks offer a wider range of services. Of course they do, but I do not think that that explains such a large disparity.
I want to make three points. The first relates to the qualifications and credit framework level 4 qualifications. I am a qualified chartered surveyor, but I cannot think of a single professional body whose members would have to obtain a retraining qualification halfway through their careers. My hon. Friend and neighbour the Member for West Worcestershire (Harriett Baldwin) mentioned nurses, and other hon. Friends have mentioned publicans. None of those have to retrain.
Let me say one or two things about these exams. I agree with others that there should be grandfather rights, and I think that the implementation should be put off for five years. As we all know from the home information pack debacle, it takes time to implement exam regimes of this kind. I think that 31 December 2012 is too soon. I also think that it would be perfectly reasonable to ask new entrants to the IFA profession to undergo the exams, but to give grandfather rights to existing practitioners, many of whom have had many years’ experience.
I understand that two kinds of qualification will be granted under the new regime: a restricted qualification and an independent qualification. Someone will go to an IFA who will say, “I can advise on mortgages but I cannot advise on pensions, because I have only a restricted qualification.” I think that that is thoroughly unsatisfactory.
The second issue I want to talk about briefly is commission-based product withdrawal and the accusations that it can lead to practitioner bias or product bias. The Financial Services Authority asked Charles River Associates to undertake a survey into the matter, and he concluded that
“there was no evidence that moving to”
a fee-based model
“to the exclusion of a commission would lead to benefits since consumers choosing to pay on a fee basis do not receive better advice than those opting for a commission basis.”
I also agree with those who said it will favour the wealthy in society and put the poor at a disadvantage, because the poor cannot afford to pay this fee up front, while the idea of phasing it in over a number of weeks or months would be unfair to IFAs. That proposal is therefore not very sensible either.
The third issue I want to raise is the cost of compliance. Two years ago the cost was estimated to be £680 million; last year it was estimated to be £1.4 billion; today it is estimated to be a staggering £1.7 billion. That is £6,000 for every practitioner. For a sole trader or a small business, that is a huge amount of money, while for large IFAs with a number of partners it does not matter quite so much. I therefore urge my hon. Friend the Financial Secretary to consider very carefully what has been said today. I cannot remember a debate during my entire 18 years in Parliament where there has been such consensus of interest and so many Members have attended when they do not have to be in the Chamber as there is not a three-line Whip.
I urge my hon. Friend to listen to what has been said tonight, and I urge the FSA to think again, and to ask itself what the problem is that needs fixing. These are all small businessmen and small traders; they are precisely the people we were saying throughout the election campaign that we wanted to help, yet these proposals of ours are likely to put large numbers of them out of business.
Finally, I want to refer to the point made by my hon. Friend the Member for Aberconwy (Guto Bebb). I represent a rural area, and I know that banks have closed many of their branches in the high streets of my small market towns. If the IFAs are driven out as well, a lot of my poorer constituents will be left without any form of independent financial advice at all, at a time when the banks, if they are there at all, are offering a reduced service.
My hon. Friend the Financial Secretary is a reasonable man, and I ask him, please, to listen carefully to what has been said tonight. We need to have a rethink on this matter.
I, too, will abandon my notes this evening, and restrict my remarks to one or two brief points.
Most of the topics have been more than adequately covered. There have been a great many well-made speeches in which many powerful points were made. There has been a lot of discussion about grandfathering, and I think it is worth pointing out that there are other ways in which IFAs could be grandfathered into the industry other than just a blanket allowance so they can all carry on practising. For example, would it not be possible for IFAs with more than X years of experience to continue advising clients who had been on their books for more than Y years, with their clients’ written consent? I can see no particularly good reason why people should not be able to elect to do that.
Also, if an IFA has X years of experience with no established complaint against their name, might they be able to pay to have an independent examination of their records to establish whether they had been responsible for some of this alleged mis-selling which the FSA is so clear has been going on behind the scenes, but which has not been recognised by many clients? It seems to me that there are ways forward that the FSA could follow to make sure we get the benefit of the experience that exists in the IFA community, and which otherwise looks as though it is going to be lost.
I am very worried that in the short term newly qualified advisers may lose out on the chance to be mentored by experienced colleagues, particularly if large numbers leave the industry. We may well also find that a number of clients suddenly lose the person from whom they have received advice very happily for a number of years, and they might not be at all confident or happy to change that adviser. At a time when clearly so many people have neglected to provide for their later years, it seems to me perverse that we should be reducing the number of suppliers in the market.
Does my hon. Friend agree that at a time when the Government are making such welcome reforms to our pensions system, people will need independent advice more than ever, and if we press on regardless with these changes there will be increased costs and less access to such independent advice?
My hon. Friend’s point is, of course, very well made. With auto-enrolment schemes more advice, rather than less, is going to be needed, and there is no doubt in my mind that we need more advice right now. In short, the FSA still has not answered a large number of questions adequately, and I will certainly not be convinced that the retail distribution review is adequate or worth while until we receive some of those answers.
I congratulate my hon. Friends the Members for Wyre Forest (Mark Garnier) and for West Worcestershire (Harriett Baldwin) on securing this debate and on the passion with which they made their points. Indeed, I congratulate all hon. Members in the Chamber on their passion and strength of feeling about this review.
I have been contacted by a large number of constituents who work in this sector and are worried that the retail distribution review will have many unforeseen negative impacts on their employment. I hope that the review is not a knee-jerk reaction to the recent financial crisis.
A recurring theme of this debate has been the heavy-handed nature of the Financial Services Authority: people have said that a sledgehammer is being used and so on. Is it not time for us to recognise that it ought to be held properly accountable, just as other quangos are and just as we intend them to be? This persistent theme is at the heart of this discussion and we need to address it.
I am sure that the Minister will take my hon. Friend’s views forward, and I thank him for the intervention.
I believe it is right that the customer is always put first when it comes to their money. We cannot go back to the financial irresponsibility that led us into the crisis in 2007, which we are, thankfully, just getting out of. Therefore, splitting the financial advice sector into two is probably a good thing, but we must make sure that the advice given by advisers in the primary sector will not stop people moving into a financial position where they will require the full range of services offered by the higher financial advice sector in the future.
My constituents have also suggested that the proposed regulation will force between 30 and 40% of financial advisers to leave the sector, and many hon. Members have mentioned figures of 20, 30 or 40%. It is vital that that does not happen. As my hon. Friend the Member for The Cotswolds (Geoffrey Clifton-Brown) said, we are in the business of keeping small businesses and promoting them. We need to do that in this instance, because we do not want all these people to be out of work at a time when life is difficult.
Training and recognised qualifications are important, as they demonstrate to the customer that the financial adviser they are employing to deal with their future can be trusted. If we all agree that there should be a better qualification, surely it should be for those new to the sector and not for those who have had the years and years of experience that we have heard about in various examples. If this proposed qualification is to be in place by 2013, surely we will be rushing it and too many people will be trying to do it, so there will not be enough providers to allow this to happen.
What will happen to all these people who leave the sector in the rural areas and small towns? Very often there are not many of these people in such places. It might be fine if this occurs in cities, where more choice is available, but there is not a lot of choice in rural areas. There is a worry that a lot of the people who will need to take this qualification if it is imposed will not be able to do so in the short time available to them before 2013. Nick Cann, chief executive of the Institute of Financial Planning, has said that the FSA must develop a “catastrophe strategy” in case it reaches June 2012 and half the advisers are not meeting the RDR requirements.
The other concern that the financial advisers in my constituency have mentioned is that the proposed changes to the sale of financial advice will lead to customers being worse off, as they will not be given the range of options currently on offer. Surely, if anything, we should be looking at providing choice for people. Leading critics suggest that the more lucrative financial advice roles will be moved to the banking sector, which will mean that customers will be offered only options that benefit the bank.
Interestingly, the mystery shopping exercise carried out by Which? across the industry concluded that its
“surveys tend to show that IFAs perform better than banks.”
Based on all the evidence that we have heard tonight, I believe that, irrespective of whether it is the desired outcome or it happens by mistake, the increase in the role of the banks in the financial advice sector is wrong and worrying, and that we should be looking at providing choice.
Richard Howells, the director of Zurich Life, said in June 2009:
“The big question…is still around what benefit it will have for the ultimate consumer. I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can…hang my hat on.”
I believe that the aim of the RDR is vital in ensuring that the consumer is defended and our financial sector is strengthened in the light of the recent crisis, but I do not believe that the changes need to be made as the FSA says at the moment. I simply ask the Minister to ask the FSA to reconsider the outcomes of the review and to ensure that its original aims, set out when it began back in 2006, have outcomes that will be advantageous for the whole sector and, more particularly, for the customer, whom we should be protecting. I am sure that the Minister will ensure that the passionate arguments made in the Chamber tonight are taken forward and that they will colour his views.
The FSA has been held by some observers to be weak and inactive in allowing irresponsible banking to precipitate the credit crunch in 2007, which, as many Members will know, involved the shrinking of the UK housing market, increased unemployment, the public acquisition of Northern Rock, and the takeover of HBOS by Lloyds TSB. I remain fundamentally concerned that we have allowed the same organisation to undertake a review of independent financial advisers in this country.
As you are no doubt aware, Mr Speaker, the FSA has devoted massive resources to the RDR over the last three years, during which time it had taken its eye off the ball so far as the banks were concerned. Ironically, the FSA’s light-touch regulation of the banks, which are, as many Members have said, responsible for the vast bulk of consumer complaints, went on simultaneously with the massive intensification in regulation of financial advisers, who cause hardly any complaints to the Financial Ombudsman Service.
That all came at a time when the mortgage market virtually ceased to exist for financial adviser firms through a combination of tighter lending criteria and positively anti-competitive practices such as dual pricing by lenders. As a result, many financial advisers and mortgage advisers have gone out of business and many more will face the same fate in the next few years.
The sector employs thousands of people, such as my constituent David Barnett who is listening not so far away, and advises millions of others, such as me. Many people will struggle in the years of austerity to come, and those people—our electors—need us to help them to balance their budgets and avert financial disaster when the worst happens. They are looking to us to do that tonight. We must also look towards the financial advisers, many of whom are part of the creation of small and medium-sized economies in rural areas and in some suburban areas, such as my constituency.
The RDR is a long and complex affair, and I shall not repeat the details now. My understanding from my constituents is that it boils down to two main themes—remuneration and qualifications. As it stands, it looks as though the entire remuneration system will be changed to one that will cause confusion, confrontation and a loss of service to the mass market. Qualification requirements are being ramped up and thousands of advisers are under pressure to gain their diplomas before 31 December next year. At the very time when business conditions have never been more difficult, advisers are being forced to spend hundreds of hours earning diploma points when they could be earning a living for their families.
The latest directive from the FSA is a requirement that whenever a life assurance policy is sold financial advisers must illustrate to the client the total premium cost over the entire policy term. The total cost of a life assurance policy is irrelevant—the only costs relevant in the purchase of life cover are that the premiums for the contract recommended are demonstrably fair and competitive for the type and extent of cover being bought when it is bought in a free market and that they consider the potential cost to the client and the client’s family of not having the cover if he or she suffers disabling ill health or death. Requiring an illustration of the total cost over a period of 20 to 25 years simply creates an off-putting and distorted impression to the consumer. Financial advisers are being asked to spell out the total theoretical cost of life cover and thereby to accentuate its negative aspects. A simile for this would be vehicle manufacturers giving prospective purchasers the likely finance, running and maintenance costs of the vehicle they are selling over its projected life. The FSA has gone too far. In fact, it went too far a long time ago, although it should certainly ensure that advisers are competent and honest.
Does my hon. Friend agree with the former chief ombudsman that the idea that complaints will go down after the RDR is wishful thinking? Does he agree with the head of HBOS that the main beneficiaries of RDR will be the bank assurers? We are looking at the law of unintended consequences.
I certainly do agree with my hon. Friend and many others who have made the same point. The main beneficiaries will be the big banks, including many of those that got us into the difficult situation that the coalition Government are having to address.
I should like the FSA to keep its nose out of normal commercial transactions and to leave business to businessmen such as the many constituents who have been mentioned tonight. If the FSA should be giving the public any message, it should be, “Protection is valuable and essential, so you should see an IFA and get some.” Instead it gives out the message, “Look how much you’ll spend over the life of a policy,” without addressing the benefits of that policy.
Independent financial advisers would like to be left to get on with their jobs, employ people, pay their taxes and look after their clients. They create wealth, look after our voters and, unlike the massive, over-complicated, expensive and unnecessary changes proposed by the FSA in the RDR, their requests are very small, simple, cost-free and necessary. They are just asking the Government to direct the FSA to revise the outcome of the RDR so that there is no change whatever to the current rules on remuneration and disclosure and to move the deadline for diploma qualification to 1 January 2016. I ask the Minister to ensure the same.
I will make my comments brief because I am conscious that we are short of time. In my constituency, I have more than 50 very small independent financial advisers, a number of whom have come to speak to me about this issue because they are very concerned about the future of advice in our very needy constituency, which has four towns and 30 tiny villages. Those people serve the financial needs of the community.
We need to consider the increasing overall need. Students are increasingly going to need help to sort out how to finance their education. People in or out of work are increasingly going to have deal with redundancy and will want to know what to do when they suddenly get that lump of money to keep them in health. People will want to know what to do with a small inheritance should they be so lucky to get one. For the elderly, the change in pension provision is extraordinary and we will have to help people to deal with pension auto-enrolment—should they fall out of it or stay with it? There is much to consider and much help is needed.
Of course there are IFAs who have a bad reputation. Some sold products when it was inappropriate to do so just to maximise commission, some sold badly performing products and others mis-sold precipice bonds, which was unforgivable. With a cost of £45 million a year to the consumer, we need to address this issue, but what can we do? The retail distribution review is absolutely welcome, but we must strike a balance. We must get something affordable and the FSA must enable IFAs to remain in business while protecting consumers. How can we do that? The Government have said that 50% of IFAs in the profession would already comply, so what of the other 50%? Clearly, there is an issue and we need to make sure that more of those people stay in rather than fewer; otherwise, the predicted savings to consumers of £1.8 billion will not be made. That is not what this Government are all about, so we need to consider a different way of proceeding.
I spent 30 years in a profession that has parallels with this one and I should like to draw the House’s attention to some parallels that might help the Minister. In my time as a lawyer, I looked at the changes that the Law Society wanted to bring about when it considered introducing continuous professional development for older members of the profession. Instead of putting 35 hours in place immediately, the number of hours was slowly ramped up over a five-year period. The scheme did not just enable people to have out-of-office time; study time in the office and in the evening counted as well, which was helpful. I suggest the Minister looks at that system. We need to look at a modular approach for exams and at distance learning. As one of my hon. Friends pointed out earlier, we need to look at qualifications that are relevant to the business the individual is practising.
I wholeheartedly support the comments that have been made about experience and the idea of grandfathering. I was formerly a professional mentor, and with the European Mentoring and Coaching Council I looked at how we might develop qualifications and accredit people already in a profession. We looked at a framework model that enabled people to qualify when rules changed. I certainly commend that to the Minister.
The point about the big bang in 2013 when everything will change is absolutely right. That is not an appropriate way forward. I hope the Minister recognises that the businesses we are talking about are microbusinesses. Costs are crucial. Fees for IFAs have gone up by 4.8% this year, and I hope he is not thinking about the national financial advice service, at a cost of £50 million to the industry, replacing in any way the financial advisers who will undoubtedly fall out of the system.
I congratulate the hon. Member for Wyre Forest (Mark Garnier) on initiating this well-subscribed and, so far, very moderate and well-tempered debate on behalf of the 33,000 independent financial advisers in the industry. Clearly, the matter is of concern. I suspect the Minister is thanking his lucky stars that we do not have a votable motion at the end of tonight’s portion of the debate, as we did in the earlier section on banking reform.
The Financial Services Authority started the retail distribution review many years ago. A consultation paper came out in 2009. Earlier this year, we had the proposals, although they will not come into force until 2012, so this is a useful period when the House should debate and consider them. It is a matter of regret that too few of these crucial regulatory issues are subject to parliamentary scrutiny, as Government Members have observed.
Some extremely legitimate points have been made about the need for sensible transition—if we are to have change—to new arrangements, which, in the words of the hon. Member for South Derbyshire (Heather Wheeler), do not throw the baby out with the bathwater. That is one of the phrases in the debate that particularly comes to mind, but a number of points were very well made, especially when we think about the comments of the chief executive of the FSA. Is it really acceptable that between 10 and 20% of the profession could leave as a result of the retraining requirements, shrinking the availability of independent advice? The hon. Member for West Worcestershire (Harriett Baldwin) rightly questioned what would happen if a Minister were to stand at the Dispatch Box and announce the demise of a similar proportion of an industry.
It is important that we take a pro-consumer approach to regulatory change—as the Opposition certainly do. Undoubtedly, it is necessary from time to time to look at the framework within which consumers get that advice, and I do not begrudge the FSA’s moving in that direction. However, there are some serious questions. On balance, it is right that we move away from fee structures that are, to a certain extent, hidden in the margins, where sometimes commission may not be transparent for customers and products are recommended even though it does not necessarily say on the tin how much of the fee will be returned to the adviser, but—
Will the hon. Gentleman give way?
I just want to make a point about the ending of the commission system and the placing of the fee, perhaps straightaway, in an up-front form for the consumer. There may be risks that are similar to those related to the argument about up-front tuition fees, because people may be deterred from taking the advice in the first place. They may feel that the system is too difficult. As my hon. Friend the Member for Barrow and Furness (John Woodcock) said, we have to ensure that any fees are disbursed throughout the period of the product.
There will always be some form of bias in the system, at least conceptually, regardless of how we reward IFAs. Whether or not there is a fee-based system, they will still be more likely to receive a fee if they propose the sale of a product. Does the hon. Gentleman believe that getting rid of commission is the right way to go? Why not regulate from the product end? Why not get rid of 10% commission, if that is felt to be a gross abuse? Why not limit the size but allow commission, which the public understand and quite like if it does not force them to pay up front, which it seems from surveys they do not wish to do?
As I say, this is a good time to debate those matters. There are options that must be explored. We have not bottomed out the debate. Perhaps the Financial Services Authority can consider not necessarily the hon. Gentleman’s suggestion in particular, but why commission changes are not being made across the wider financial services sector. There have been historic problems with mis-selling of products, not solely from an IFA perspective, and I can see why many people feel that these changes are necessary.
I would not counsel hon. Members to take issue with every section of the RDR—many of those who spoke in the debate did not. It is right, for example, that there should be proper clarity between independent and restricted market advisers, and that rather than waiting for the customer to inquire, there should be full disclosure on that up front.
I have only a couple more minutes.
The crux of the matter must be the issue of qualifications—the A-level equivalent threshold for financial advice. Although I understand the move to a QCF level 4 standard, which seems entirely fair, it is sensible that there should be a mechanism to allow some sort of conversion of existing qualifications or existing experience to that new level 4 qualification. I cannot believe it is beyond the wit of the FSA, Ministers and others to find some way of doing that. Hon. Members such as the hon. Member for Meon Valley (George Hollingbery) spoke about how we should look at the grandfathering issue and what options there might be. It is important to move that forward.
I should like to conclude because I want the Minister to be able to explain in a way that he did not necessarily do in the first flush of debate on the topic in Westminster Hall, and possibly reflect the views of the vast number of Conservative Members. I am still perplexed that the Financial Secretary to the Treasury chose that McDonalds diploma analogy. Perhaps he will reflect on that and recognise that some IFAs were slightly astounded by that reflection on their professional integrity. He might want to choose his words more carefully.
It is important that parliamentary accountability should be voiced. The more I reflect on these financial services policy issues, the more it strikes me that there is a democratic deficit. No, we do not want to be embroiled in the day-to-day operational issues of regulation, but policy is policy and we are accountable for that. Perhaps, as my hon. Friend the Member for Leeds East (Mr Mudie) suggested, we can return to the issue when we come to the FSA reform Bill and discuss amendments to that. Hon. Members will log and remember today’s debate and we can come to that later on in the day.
It is a shame that there is no motion tonight on the issue. It would have been useful for Members to express the formal position of the House of Commons on the matter. This is a time for the Minister to listen to the debate and perhaps reflect carefully on the measured and worthwhile comments that have been made by hon. Members across the Chamber.
I congratulate my hon. Friend the Member for Wyre Forest (Mark Garnier) on the way in which he opened the debate this evening. He gave a balanced perspective on the changes that we are trying to make to improve standards for consumers, how that sits with the IFA sector and some of the challenges that a change in standards will create.
It is worth reflecting for a moment on the responsibilities of Parliament and of the FSA. Parliament set out the framework by which the FSA operates. The Financial Services and Markets Act 2000 sets out its objective, powers and how it goes about exercising its responsibilities. For example, there is a requirement to consult. As we know, there has been a long process of consultation on the RDR since the previous chairman of the FSA raised the matter in 2006. There have been a number of iterations and debates about consultation documents and discussion papers. Consumer groups, product providers, IFAs and their trade bodies have participated in a very lively debate, but the FSA is rightly responsible for implementing day-to-day regulations, and I know that it takes very seriously parliamentary scrutiny of its role. I spoke to the chief executive this morning about the Treasury Committee’s scrutiny last week and the debate this evening, so the authority is well aware of parliamentarians’ concerns. It is right that the FSA gets on with its job but listens to the issues being raised.
I counsel caution, however. It is all very well to think that we should engage in the regulatory regime when we think we are going to help one group or another, but there are times when regulators make difficult decisions on behalf of Parliament and our constituents, so we need to think very carefully about where the balance is struck. It might be very attractive in the context of this debate for Parliament to take more responsibility, but hon. Members might feel it less appropriate at other times.
Will my hon. Friend give way on that point?
On that point?
No, I will not give way to my hon. Friend, because I have—[Interruption.]
I have about nine minutes to respond to quite a long debate in which a number of points have been made, and I want to take the opportunity to address some of those issues.
Let me put on the record the importance that I place on independent financial advisers. They play a key role in helping people make financial product purchases and financial choices. High-quality, independent financial advice is vital in ensuring that people are encouraged to save and plan for the future and make the most out of their money. I have used independent financial advisers and been happy with the service I have received, because they have provided me with good-quality advice.
I cannot overstate the detriment to consumers from poor and biased advice. Indeed, the FSA estimates the detriment to consumers from inappropriate advice to be £200 million per annum, and it thinks that the figure could be significantly higher. Consumer detriment has led organisations such as Which? and the consumer panel that advises the FSA to support the measures in the retail distribution review. We need to get that balance right and to address some of the issues that undermine consumer trust in the IFA sector, and the FSA has sought to do so through the RDR.
I have become very conscious—in particular, over the past six or seven months as a Minister—of the financial services sector’s increasing complexity, and consumers must be confident that IFAs are fully up to date and that their advice is underpinned by good technical knowledge. There can be few hon. Members who do not support that stance or recognise the benefits that increased professionalism can bring. Indeed, the FSA finds a clear link between increased qualifications for financial advisers and improved consumer outcomes. Under its reforms, consumers will be confident that their adviser has a minimum level of understanding and expertise that is maintained each year through continuing professional development.
We should also recognise that a number of IFAs already comply with those standards. Just under half of IFAs already hold the required qualification and, indeed, many go beyond QCF level 4. Some 89% of advisers already meet the required hours each year for CPD, and we need to recognise the progress that has been made since examinations were introduced in 2008.
I recognise the strength of the debate about grandfathering, and it is an important debate to have, but we need to think about how much experience is sufficient for people to be grandfathers, and about how we can ensure that that experience covers the range of products necessary to provide whole-of-market, independent advice. We ask people to advise on a range of products, such as pensions, insurance bonds and ISAs, and they need such technical knowledge to do so. Consumers are entitled to know that their adviser has a high standard of technical knowledge, and a minimum qualification standard should deliver that.
The increase in standards will not discriminate against those who have kept up to date with market developments, and they should not have to commit a significant amount of time to study. As I have said, 90% of advisers already undertake the required number of hours for continuing professional development, and I think that over the next two years the measure can be used to fill any gaps between existing and revised standards. As a consequence of lobbying by the IFA community, the FSA has relaxed the regulations, so there will be non-exam-based alternative assessments, rather than formal written exams. That is an important move forward that the FSA has already made, but high standards of technical knowledge will be crucial to help IFAs navigate their clients through the increasingly complex choices that they have to make.
I want to touch on the issue of adviser charging. I am strongly committed to increased transparency in financial services; it is important that consumers—whatever they are buying, be it advice or a product—understand the charges and the returns that they are likely to get. That underpins a whole range of work that we are doing at the moment in the Treasury.
Currently, financial advisers can earn different amounts as commission payments, depending on which product they recommend and from which provider. How much they earn is not always transparent; indeed, Which? found that 82% of advisers failed either to explain the “key facts of cost” document or have a meaningful discussion with their clients about how their advice would be paid for. It is important that remuneration arrangements for advisers work in the best interests of consumers and promote independence of advice.
A number of IFAs have already moved away from commission to a fee-based approach. I know that AIFA, the trade association for IFAs, is helping IFAs change their business model. I do not doubt the integrity of the vast majority of advisers, but no one can doubt the financial detriment caused to consumers as a consequence of mis-selling scandals of the past. Following the FSA’s pensions review in 2002, 1.7 million consumers received compensation totalling £11.8 billion due to pension mis-selling alone.
Advisers should welcome changes in remuneration as a clear way of building consumer trust in the sector. Consumers already pay for advice, as commission is deducted from their premiums or initial investments. Advice is not free; that money comes out of the contribution that consumers make to their pensions, their investment bonds or their savings for the future. However, it is important that both the cost and the value of advice is clear to consumers. These reforms will provide clarity on price and service and that will promote competition. Just as we want transparency on interest rates paid on ISAs to promote competition among ISA providers, I believe that transparency on IFAs’ remuneration will also promote competition and provide a better understanding of the value of advice. It will increase consumers’ confidence in that area.
We want to broaden the range of advice available. A number of hon. Members have raised the annual financial health check that CFEB is going to organise. Let me be clear. The cost of that will be borne by a social responsibility levy that will be paid by institutions from Goldman Sachs through to the high street insurance broker. The cost will not be borne by independent financial advisers alone. The biggest firms, such as Goldman Sachs or Barclays, will make the biggest contributions, and they will make a far bigger contribution than IFAs. Furthermore, consumer credit organisations have also been brought into the scope of this; they will also have to pay their share towards the annual financial health check. It is important that the burden should be shared.
Will the Minister give way on that point?
I wish to conclude my remarks so that my hon. Friend the Member for Wyre Forest, who opened the debate, can conclude.
We want a more responsible savings culture in Britain, in which people can plan confidently for their futures and are better able to realise their plans. Financial advice has a key part to play in that, and I want to see improved levels of expertise and knowledge and much greater clarity over transparency. It is important that the FSA should work closely with IFAs to get to that point. This evening’s debate has helped the FSA understand the concerns of Members of Parliament. I am grateful to my hon. Friends for securing this debate.
I am conscious that I have just over one minute to sum up this incredibly useful debate. There has been an extraordinary amount of unanimity on both sides of the Chamber; the debate has been completely unpolitical. We have talked about financial inclusion for those who need help and about protecting smaller businesses. We have questioned why the RDR was necessary and talked about grandfathering. IFAs are singular in the sense that they are not allowed to be grandfathered; long-stopping is something else that they are singularly affected by. We have talked about pushing savers into the hands of the banks, even though the banks have a worse track record than IFAs.
Importantly, we have also talked about the fact that we need more time to address this issue. I completely appreciate that we have already had six years, but we are entering a period when European legislation will be affecting these matters as well. We are also seeing the FSA moving into areas covered by the Consumer Protection and Markets Authority and the Prudential Regulation Authority. There are ongoing changes that give us an opportunity to extend the period.
I hope that three things have come out of the debate. First, Parliament has not had a chance to do this before because it is the first time that we have had such a Back-Bench debate, so will the FSA please listen following this new development? We have the feeling—
Motion lapsed (Standing Order No.9(3)).