RDR seeks to bring about a change in the financial services industry. From where I sit, change is needed.
A key issue that will affect Independent advisers, and is mentioned in the RDR consultation paper, is the definition of “Independence” so in this post, I want to explore the concept of Independence and check-in with you to see if there is any agreement on what it really means.
In the UK, when regulation was first introduced in 1988 we had “tied” advisers and “independent” advisers. Independent advisers were “whole of market” and could access products from across the industry of all providers. Everyone else was tied. I was tied to Sun Alliance at the time – which doesn’t exist any more!
In about 2005 the UK introduced the idea of “multi-tied” advisers, allowing tied advisers to sell the products of other providers. The idea was that this additional choice would offer better outcomes for consumers. I’m not convinced it had the desired effect. What it did do, was add confusion.
In the UK RDR, the regulator revised the definitions to “Independent” and “Restricted” – we are back to two options. Or are we? The UK has continued to follow the line of “whole of market” to define independence. Anyone not offering whole of market is therefore restricted and they must explain to clients the nature of the restriction. So we have situations where a firm specialising in say, retirement planning chooses not to get involved in providing mortgage advice, and does not hold mortgage qualifications and authorisation. Whilst they are unrestricted in terms of their advice about retirement planning and can go anywhere for retirement planning products, they cannot call themselves “Independent”, having to explain the nature of the restriction.
And so they call themselves “Restricted whole of market”…which is bonkers and achieves nothing but more confusion.
In South Africa, given the control that product providers exert on the distribution of accredited agencies, it is difficult to see that any firm could be described as Independent, if we follow the “whole of market” definition. That doesn’t make sense either.
The truth is that Independence has nothing to do with being “whole of market”. The dictionary definition of independence is “without control, influence or support by a third party.” I think this is very close to what clients interpret Independence to mean. In my financial planning firm, it represented exactly my sentiments to what being independent means.
That can be a double edged sword; You can’t reject the bits you don’t like and conveniently accept the bits you do like. As my former colleague, Phil Billingham, is fond of saying… “You can’t be a little bit Independent, just like you can’t be a little bit pregnant, or a little bit dead” – Either you are, or you are not.
The fact is, we know that tied and multi-tied advisers are controlled and influenced by product providers. Indeed, some so called Independent advisers are controlled or influenced by third party product providers. Consumers regard independence highly, in the context that the advice given is truly in their best interests, without being controlled or influenced (in whatever form that takes) by product providers. This explains why everyone wants the Independent tag.
I was interested to see the FSB propose a different definition (the one in the dictionary – not whole of market) of Independence in the consultation paper, and I had the good fortune to get to discuss this with Caroline Da Silva recently. She said, the FSB had looked at the UK and recognised the mess around Independence and Restricted. I’m encouraged by that.
I have some fairly provocative ideas about where Independence should go, which I’ll save for another day, but for now, can I offer the idea that, where product providers exert control or influence over a “distributor” they should be held accountable for the advice given? Perhaps the definition of Independence should involve a pre-determined list of criteria around disclosing any control and influence by any third party, or the that might include say:
- Ownership of the firm
- Any agreements reached in terms of business volumes
- Any assistance provided to the firm outside of training on products available to all
- Any conflicts of interest that impact on the firm’s ability to make its own decision
- Any influence in the amounts, methods and process for adviser remuneration
Independent firms should make their own decisions on these things based upon their business model, their worldview and the needs of their clients, with individual client suitability the ultimate test.
Further, can I offer an idea that product providers should allow Independent advisers unrestricted access to their products, both in terms of information delivery on existing plans in place, as well as future sales. Independent firms should, and already do, take responsibility for any advice given, and have an obligation to undertake proper due diligence.
I would also like to see products made available with, and without, distribution costs (i.e. commission) as standard. Independent advisers who are acting in an intermediary capacity should be able to get a wholesale price and then add their own advice costs separately, either as a direct fee or transparently through the product. I realise this happens already in many areas.
The relationship between the industry and the advice profession should be a partnership for the good of consumers, but the balance of that relationship is way out of line right now.
Does this offer a playing field that is level (or at least more level)? Does it allow Independents to demonstrate their Independence without compromising their business efficiency? Would it mean products have to stand on their own as valuable?
I know the industry won’t like it, because the industry doesn’t want to lose control of distribution, but the industry’s control and influence of distribution is what has got us into this position.
What do you think? What am I missing?