A poorly thought out aspect of the retail Distribution Review as it stands is its effect on Holloway products. Paul Hudson explains
By the time you read this, we may be living our lives under a Conservative government, or perhaps Labour hung in there. Who knows, maybe the Liberal Democrats pulled a Government out of the bag at the last minute? But whichever route the voting public took, we would still have an uncertain future ahead of us which includes an evolving review of regulation in financial services, albeit by a regulator operating under a new name.
For a Holloway Income Protection (IP) provider, the future is challenging, whatever colour sits in Downing Street. Niche providers will continue to bang the drum because the need for IP exists and Holloway IP can lay claim to being ‘financially inclusive’ because it is both affordable and permits contract holders to build a capital sum. Furthermore, mutually or customer owned businesses currently fit the ethos of all the political parties so if they are good to their word then good mutual firms should be supported. The current RDR proposals if unchanged present a serious challenge to Holloway IP.
Any IFA who recognises the usefulness of IP and even more so the diversity that Holloway brings should be concerned. There are the obvious RDR concerns we all have about over-regulation, additional costs, additional training leading to a reduction in IFA numbers, but for income protection, unless resolved, consumers will have less choice and thus suffer detriment.
Falling short of the mark
CP 10/8 seeks to address the pure protection issue, but sadly for those IP contracts that offer that little bit more like Holloway, in terms of the ability to accumulate a capital sum; they still fall short of what is needed.
Under the current RDR proposals, pure income protection contracts (not Holloway where there is an option to accumulate capital) will not be subject to fee charging and level 4 adviser qualification. So while this is good news in that we may actually see an increase in the sale of income protection insurance, for Holloway IP there may be unintentional adverse consequences. This is because the product is targeted at those on lower earnings who are unable to pay for the advice of an IFA, and who look for affordable premiums and something back at the end of their contract.
So, the negative impact of this is that the sale of ‘Holloway style’ income protection declines. No great loss we hear, but not from those consumers who recognise a good product when they see one and the IFAs who strive to serve them. Furthermore how are consumers best interests served if regulations conspire to deny them access to a product because IFAs won’t associate fee charging and level 4 qualifications with IP?
The real value of Income Protection
Sales figures alone belie the real value IP can play in a person’s financial armoury. Diversity in the market is important and the continued presence of Holloway providers like Cirencester friendly who operate a financially inclusive product, catering for those who are often overlooked in financial services is important. 2010 is likely to be a year of striving to ensure this valid and low risk product type is not allowed to disappear by effective engagement and education of the regulator.
Industry observers and participants alike are describing a mass exodus of IFAs from financial services, or of IFAs struggling to secure business should the RDR be implemented in its current guise. But is this really the case? We know that the Tory’s planned to scrap the FSA if they achieved power, but will they retain the RDR, or a variation of it? Therefore the issues of qualifications, further professional development, and fee charging are likely to remain major areas of potential misgiving and indeed may become more prevalent if IFAs challenge the infringement of their human rights.
There aren’t many who would argue about being suitably qualified and running a professional business. That said, the fact that to be deemed competent from late 2012 calls for higher level qualifications for selling products of an investment nature suggests that until now advisers haven’t been. This is a pretty wide statement and somewhat unfair. Furthermore by categorising Holloway IP as an investment product and thus limiting its sale through only the new higher qualified IFAs, there is an obvious consequence that the distribution channel for providers of Holloway style products will shrink dramatically.
The uncertainty around RDR is having an immediate impact on IFA productivity at a time when the recession is also taking its toll. Qualifications take time and effort to achieve and this is likely to mean there will be less time for the IFAs to do their actual job – advising their customers.
Not the be all and end all
But qualifications aren’t the be all and end all; experience, knowledge, enthusiasm and an ability to deal with people can often count for more than a paper based qualification. Many IFAs came into the market from the now defunct direct sales force where ‘selling’ and understanding the customer was a skill that was learnt over time. Having a qualification can quite easily create a barrier if applied inappropriately.
The RDR proposes that products of an investment nature are sold on a fee basis only, whereas those without an investment element remain commission based. While the sentiment behind this recommendation is valid – that is ensuring customers are given unbiased and fair service – the practicalities of it need to be thought through.
The profile of customers is very different the length and breadth of the country and many IFAs who provide a vital service to those on lower incomes could struggle to get business by charging their customers a fee. This would be a huge shift in the way they operate, particularly IFA firms outside of London where a typical self employed blue collar worker would not accept being charged a fee. Particularly in the market of protection with investment (Holloway products), as the very market these products are aimed at are blue collar workers. Another thought: try recovering the fee from a very low cost product like Holloway – answers on a postcard please.
A major concern is that potential customers could simply walk away from financial advice all together, being unwilling or unable to pay for such a service. An analogy could be made to the privatisation of dentists. With fees being introduced for customers, many simply stopped going to the dentist. The result was a lot of less well off people have bad teeth. If the regulator is really serious about financial capability then it needs to ensure the development of every distribution channel and make it as easy as possible to help the public purchase a diverse range of financial services. IFAs and consumers must be central to that objective.
Those that read the trade publications, blogs, websites, and hear the views at industry forums and functions, soon get the sense that a considerable amount of providers and IFAs are still very uncertain about RDR. That’s not merely a lack of ‘awareness’ or ‘clarity’, but a lack of belief in the proposal both in terms of it happening and leading to real consumer benefits. With so much to finalise there might be something in the case for it not happening or maybe not by 2012.
Are businesses sticking their heads in the sand? Is it an inability to change, or is it all the uncertainty around RDR? My advice would be just because the RDR is not yet agreed and an election has added another dimension, don’t delay in addressing the issues. I suspect there are providers and IFAs out there who have been waiting to see the outcome to a great many things; the conclusion of the consultation process, election, recession and human rights issues. Whatever the stripe of the Government it was always the case that, we may not see the RDR under the FSA, but it is likely to be something close.
Whatever the outcome, some big issues have been brought into the open which now cannot be ignored, and even if they are considered and rejected, still need to be debated. Therefore until we know whether the RDR has a future in the current format or not, we should continue to debate the issues, consider the issues, challenge the proposals and ensure a position to compete for the future.
Paul Hudson is chief executive of Cirencester Friendly Society
