With the results of the FSA's Retail Distribution Review looming, Stephanie Spicer analyses the potential outcomes of the report and how vastly divergent the two main scenarios could prove to be.
There are two potential scenarios for the future of the financial services market. One is that there will be more advice for consumers and better access to products, and the other one will be that there will be fewer financial advisers to give advice and less consumers actually seeking any advice.
Which scenario becomes a reality largely depends on the results of the Financial Services Authority's (FSA) Retail Distribution Review (RDR), which is proposing a re-structure of the financial advice market.
Protection advisers could be forgiven for thinking that, as the RDR was looking at the savings and investment market, they were largely immune from its implications. Alas, many fear this is not so.
"The FSA says RDR does not cover protection and it has no intention of covering protection," says Kevin Carr, head of protection strategy at LifeSearch. "But it almost impacts on protection by default," he adds. "If you have a piece of overriding legislation that covers all forms of retail distribution of financial services then it is naive to think it won't spread out into protection."
The main proposals of RDR as they impact on IFAs are the ones that propose segregation of financial advisers. The top tier of professional advisers will be called professional financial planners (PFP). PFPs will have to be holders of chartered status as awarded by the Chartered Insurance Institute (CII) or be certified financial planners as awarded by the Institute of Financial Planning (IFP). Immediately that poses a problem.
"There is quite a gap in standard between being a certified financial planner and a chartered financial planner," says Chris Cummings, deputy director general of the Association of IFAs. "The education equivalent just doesn't match up between the two. But, nevertheless, the FSA is saying that, to get into that top tier of adviser, individuals have to have more than the baseline qualifications that many IFAs hold today."
PFPs would have to be entirely fee-based or operate a consumer-agreed remuneration model (CAR).
The tier below PFP is the general standard of adviser. This adviser would still have to be more qualified than today's baseline qualifications but not as well qualified as the PFP. This adviser could continue to take commission or operate a fees and commission offset model.
"So if you take commission you cannot be called independent; that is one of the key messages running through the RDR," says Cummings.
The third level of adviser is called a primary adviser. These will be about as qualified as today's baseline qualifications and they can take commission or they can operate a CAR system. They can be single tied, multi-tied or offer whole of market solutions.
Notwithstanding the obvious impact of these proposals on how IFAs are categorised and how they can advise and be remunerated for that advice, the FSA is still focused on savings and investment. Why worry if you advise on and sell products for protection purposes?
Carr believes the FSA has to acknowledge the peculiar impact of RDR on the protection market now by ring-fencing protection.
"When Insurance Conduct of Business (ICOB) legislation came into force in January 2005, all forms of insurance were to come under the same regime, so car, travel, buildings and contents insurance would be in the same category as critical illness (CI), income protection (IP) and private medical insurance. What the FSA is now proposing is two-tier legislation; so there is light-touch regulation for general insurance products like buildings and contents, car and travel insurance and then a more complex level for CI and IP.
"We very much believe life insurance has to be kept with CI and IP because people don't ring up and ask for them, they ring up and ask for life insurance. So what are sellers to do? Are they going to bother being regulated and paying more money to sell something customers don't ask for? They will sell life insurance and that's it. It will restrict consumer access to things like CI and IP."
Carr believes that if all the protection products are labelled as complex under ICOB then it would be contradictory for them to fall under the primary simple level set by RDR.
"You will have one piece of legislation saying this is complex and another bit that overrides all of this," says Carr. "So does that mean protection has to sit in the professional category, which is a higher level of regulation?
"Let's be sensible and say pure stand-alone protection is ring-fenced from RDR and let ICOB do the job. Protection sold as part of holistic financial planning advice, alongside pensions and savings advice is a different kettle of fish because the protection then would be more of an investment-related sale because there would have been investment advice being given."
Then there is the issue of commission. Carr says it seems one of the desired outcomes of RDR may be to bring about the end of commission. The problem with that, he says, is that without commission there will probably be no protection industry.
"Consumers won't pay fees for protection insurance in the same way they won't pay fees for car insurance or buildings and contents insurance."
He says the concerns the FSA has with commission are not applicable to protection. The concern over consumer detriment in terms of the investment growth is that, if a commission is being taken out of an investment, it restricts the investment and there is detriment in growth of the fund, but this does not apply to protection because there is no investment element.
Then the concern over product bias: if a bond pays 15% commission and an Individual Savings Account (ISA) does not, what if an IFA puts a lot of money in bonds when it should have been in ISAs?
Product bias
"You do arguably have areas in the investment market where there is product bias with commission," Carr concedes, "but you don't get it with protection because CI, IP and life insurance all pay the same. What it is driven by is premium. So £30 for life cover pays the same commission as £30 of CI or IP."
Carr acknowledges that the FSA is very aware that in protection the commission model is not broken, but is not so sure it has considered whether it can have commission in some parts of the market and not others.
"How do you achieve that?" he asks.
Cummings also points out that, in its RDR, the FSA says that as a result of its reforms it would become more expensive to give advice and it does see the number of advice firms falling as a result if they cannot make the transition to a fees or a CAR model.
"It is a very clear and present danger whether you are a protection IFA or an investment IFA," he says.
The point to bear in mind about the RDR is that this is not a done deal. The FSA may have very keen reasons to see its proposals implemented and certainly address what it sees as problems in the current structure of advice and how consumers are serviced within that.
But this is a consultation period with a deadline for responses of December this year. The FSA has then said it will not be commenting again until June 2008, at which point it could well be another consultation paper that will be issued. The implication of the RDR is targeted for 2010.
Cummings says there is much that could happen in that time.
"Sometime between now and 2010 we will see a general election," he says. "We could end up with a Conservative government that has a wholly different view about what it wants the FSA to achieve. Wider political implications will absolutely have to be borne in mind."
Cummings also points out that the recent Green Paper from the European Commission has some similar thoughts to the RDR in it but some remarkably different thinking. "The scale for the implementation of that paper is also 2010," says Cummings.
"We could find the FSA wanted to do something in the UK that cuts across the wider context of Europe and the Commission won't let it implement it. Although we are starting from different directions will we end up in a similar place? Or is Europe's agenda for change completely different to the FSA in which case the FSA will have to get in line? It is the Commission that takes the final decision on financial services regulation in the UK not the FSA anymore. So it is not a done deal by any means," he adds. n
Stephanie Spicer is a freelance journalist
