My Lords, Amendment 25A stands initially on its face. It proposes that the FCA should have regard to the desirability of not gold-plating EU directive regulations for the financial services industry. I have tabled it particularly in the context of the RDR reforms due to go live at the beginning of next year because the European Parliament has voted quite decisively not to ban commission as a form of remuneration. The German Government have elected to retain the commission structure for Germany’s IFA industry. It is my great concern that proceeding with RDR will ultimately cause grave damage to saving levels in this country but, more particularly, will rob the great majority of people of any access to financial advice. They will be left having to do it themselves or to buy the products of the large banks, which are not necessarily bad or good, but are, ironically, products on which commission will be paid.
I am certainly not attacking extremely professional financial advisers, many of whom have functioned on a fee basis for some considerable period. The reality is that their clients are upmarket clients. They are the elite. The great majority of people, to the extent that they save, do it occasionally. In my observation, they are extremely unwilling to pay fees, and it is uneconomic for them as well. Every time anybody phones their accountant or their lawyer, the clock ticks and they get a bill, so they do not do it any more than they can help. The existing sensible practice is that ordinary folk phone up their IFA from time to time to discuss the bit of money they have to invest and they have a sensible exchange. Only if some form of investment is made does remuneration by commission come into effect.
My first big criticism of RDR is that it is elitist. It is fine for the better off or for financial intermediaries who have those sorts of clients, but for the great majority it is not fine at all. I estimate that some 5 million people will be left without any form of advice as RDR works its way through. Although the FSA has sensibly committed to a review later on, by the time that happens it will be closing the stable door after the horse has bolted because there will be a very limited number of IFAs left.
On 7 September, the FSA announced that RDR would go ahead from the beginning of next year, but it gave individual IFAs the ability to apply for a waiver if they were not ready. It did not specify the conditions for the waiver being granted, nor is it clear whether the FSA has the staff to deal with what may be many applications. A money marketing survey as recently as September found that only 36% of financial advisers had their statement of professional standing. That means that 22,000 financial advisers are not going to be RDR compliant. The FSA stated that 91% were, but I do not know the basis for that figure. It is significantly in conflict with the latest information.
In the face of RDR, the financial advice industry is already contracting. There was a 6.2% reduction this year, and over the past two years there has been a 10.6% fall. That represents 4,300 financial advisers ceasing to be in business. If each of them had 600 clients, that is about 2.5 million people who no longer have access to financial advice. Under the new regime,
it will be uneconomic for those financial advisers who survive to have occasional clients because the fee level they would need to charge for the work they would have to do is considerably higher than people would be willing to pay.
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There is the separate problem that many financial advisers are not young—perhaps 50 to 70 years old. Many have been in practice for 20 or 30 years and many, despite the unfair criticisms that are often made, have a clean bill of health with their clients. However, unlike everyone else they are not being grandfathered and people of that vintage are extremely unwilling to take examinations in their modern form, having not taken any for ages. Many find the examination syllabuses not particularly relevant to their part of the industry, so older IFAs are not, in the main, willing to take the examinations, and are likely to close shop instead.
I asked the other day whether the Government were considering requiring regulators to have exam qualifications. The answer was no. This seems somewhat ironic when the SFA has refused to budge on grandfathering well performing, long-standing IFAs. The Financial Ombudsman’s findings show that in the main the sinners have been the large banking institutions, and that the record of IFAs—I am not saying they are all wonderful—has actually been fairly good; the ombudsman has mostly found in their favour.
The bottom line is that the Treasury Select Committee very powerfully advised a pause. In my experience, the investment management industry in the main is highly critical of RDR but has felt it not worthwhile raising its criticisms because RDR was going to happen anyway and it did not want to upset the FSA. Many advisers have now spent a lot of money on installing systems to deal with RDR. I believe that there will be a significant shambles in the savings industry next year. The life insurance companies I talk to tell me that their systems are nowhere near ready and that they are not at all clearly organised about how to conduct their business in a post-RDR world. There is a very powerful argument at least for pause or, if not, for some adaption.
Historically, those advising small and medium-sized companies on their pension arrangements were remunerated by life insurance companies discounting their series of charges over 25 years and paying the advisers up front to cover the cost of the work. That is no longer being permitted. The SMEs are simply unwilling and unable to pay the sort of fees that are economically required. I believe the buzzword is “factoring”, but unless factoring—a present-value calculation of future commissions—is one way or the other permitted there will be a particular problem with small and medium-sized companies, with all they need to do to reorganise their pension schemes, where they are generally not in position to pay the sort of fees that this will cost.
I greatly urge the Government to follow—for once—the EU and to accept the EU’s finding on RDR reforms that there is an ongoing role for commissions. I beg to move.