BBA responds to FSA's retail distribution review
Jan 10 2008 Susannah Hammond
The British Bankers' Association has published its response to the Financial Services Authority's discussion paper 07/1, entitled "A Review of Retail Distribution". The BBA is generally supportive of the need for change, however, it does not wholly agree with the FSA either on the root cause of the problems in the retail investment and savings market or with the solutions the FSA proposed. That said, the BBA's response opens up the debate and provides an alternative point of view which should help drive the industry towards a workable consensus.
The BBA agrees with the FSA on the need to ensure that retail customers and their needs are central to any reforms, but it also acknowledged that without economically viable and regulatory "safe" solutions, the diverse players in the retail market place will not invest and participate in any new approach that enables it to be successful.
DP07/1 covered five main areas of change to remedy the current issues in the retail market:
1. Customer access to financial products and services.
2. Professionalism and reputation.
3. Incentives and managing bias.
4. Sustainability of retail distribution business models.
5. Regulatory barriers and enablers.
The BBA has responded under each heading but overall has emphasised the need for a flexible approach with regard to the design of the new retail landscape and has proposed a marketplace which is differentiated by both service type and level of expertise.
Customer access to financial products and services
The BBA disagrees with the FSA's structural solution to the issue of customer access to financial products and services and believes that it is possible to provide better access for consumers to straightforward products which deliver cost-effective and appropriate solutions to basic consumer needs. "Primary advice" as the FSA suggested might work, however, the BBA and its members believe that an "assisted purchase model" has considerably more potential for increasing consumer access to retail products and meeting their needs in the most economically viable way.
Assisted purchase would be a non-advised sales service. Customer protections would be built into the sales process which would be underpinned by FSA-confirmed industry guidance. The FSA's and the Financial Ombudsman Service's stance on the new approach would be critical to ensure that firms who provide the service had absolute clarity as to regulatory safe harbour and the evidence and expectations around treating customers fairly. FSA-confirmed industry guidance, supported by an FOS commitment, would be a prerequisite to give firms the confidence to take the commercial risks involved in launching a new service.
The BBA has recommended that a high level cross-industry group is established to reach agreement on the definition for a "safe sale" under assisted purchase. The established high level Retail Financial Services Group, chaired by Ron Sandler, has a special focus on consumer confidence and could be involved. Important players in the retail marketplace should ensure that they have a voice on any such industry group that is created.
Impact of incentives
In DP07/1, the FSA reported that the following important issues do not act in the interests of consumers or, ultimately, the health and sustainability of the industry:
- Provider bias, based on the level of commission paid for similar products.
- Advice bias, based on commission being paid only when a product is sold.
- Decreasing persistency/increasing churn.
- Low customer awareness of what they have bought and how they have paid for it.
The FSA proposed customer agreed remuneration as a solution to at least some of the issues on incentives. The BBA supports the principles behind CAR, however, concern was expressed at how effective it would prove to be in practice. There are also concerns on potential systems and opportunity costs which would accompany CAR's implementation. The BBA has stated that it does not support the mandatory application of CAR in any channel but rather sees it as one method for firms to manage their conflicts of interest in relation to incentives.
Professionalism and reputation
Perhaps unsurprisingly, the BBA has expressed its support for the move towards greater professionalism and an enhanced role for the professional bodies in raising industry standards. There is broad agreement that the industry, professional bodies and the FSA all need to work together to deliver higher standards and bring about more effective action against unprofessional conduct which causes consumer detriment and damages the industry's reputation. The BBA has also stated that it feels that some of the proposed increases in minimum qualification thresholds go too far and it would instead support a requirement for all regulated advisers to be a member of a professional body.
Sustainability of retail distribution business models
Many of the smaller firms that are active in the retail intermediary sector are subject to a relatively high failure rate.
To help address the particular issues, the BBA supports:
- appropriate transitional arrangements which balance the need to address current issues while providing the opportunity for advisers to increase their capital bases; and
- the introduction of a long stop for financial services complaints as this could provide greater certainty for consumers and firms alike on the relevant timeframe for making a complaint.
Regulatory barriers and enablers
The BBA has articulated some widespread, fundamental industry concerns in its response to the questions raised about regulatory barriers and enablers in the retail savings and investment market. There are three main areas of concern:
FOS
The BBA suggests that the role of the FOS should be reassessed to address its retrospective approach which acts as a disincentive to advice provision, especially at the lower end of the market. The BBA validly states that the boundaries of retrospection have been pushed in a way that was never anticipated and this area must be re-thought. It is not impossible that an effective non-advised assisted purchase service could already be serving the mass market if the industry was less concerned about the risks attached to potential FOS action.
Consumer responsibilities
The BBA has expressed its support for the FSA's continuing pursuit of cross-industry agreement on consumer responsibilities. In the meantime, the BBA believes that consumers should, as a minimum, be encouraged to:
- Read promotional material carefully before applying for a product or service.
- Read and think about any advice received.
- Ask the bank questions if they feel uncertain about any aspect of the products or services supplied.
- Read and keep important paperwork about products and services, including regular statements and to notify the bank if they think there is something wrong.
- Give accurate and complete information to the bank when requested.
- Carefully destroy any unnecessary written material e.g., by using a shredder.
- Talk to their bank if they believe they have not been fairly treated.
Tax system
There is wide agreement that the complexity of the UK tax system distorts the retail savings and investment process and the focus on the impact of taxation can detract from a proper assessment of product charges, comparative performance and asset allocation.
The BBA proposes that the tax regime should be reformed to reduce the complexity for advisers and consumers and encourage a shift of focus onto asset allocation rather than tax wrappers.
The BBA also notes that despite the government's stated aims with regard to long-term savings, the means-tested benefits system acts as a clear deterrent to long-term saving at the lower end of the mass retail market.
Conclusion
The BBA has made a valuable contribution to the debate about the future of retail financial services distribution in the UK and it is to be hoped that the FSA will listen closely to the BBA's views and suggestions. The BBA's response to DP07/1 coupled with the forthcoming publication of the Thoresen Review (whose interim
report was published in October 2007) should help the FSA to achieve a workable solution to its customer-focused aims.
The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.
