RDR: simplified adviceRDR: simplified adviceRDR: simplified adviceRDR: simplified advice

May 2010May 2010May 2010May 2010

RDR & simplified advice:RDR & simplified advice:RDR & simplified advice:RDR & simplified advice:

19 months and counting19 months and counting19 months and counting19 months and counting

No nearer a solution?

� Advisers and providers have complained that a lack of guidance from the FSA has held back attempts to develop simplified advice services.

� The lack of input from the FSA was a ‘dereliction of duty’, said Skandia chief executive Peter Mann.

� There is widespread industry complaint that the lack of clarity means it is near impossible to start developing a simplified advice process.

� The ABI has developed a proposal for a technology-based simplified advice service, which could serve the protection, ISA, annuity and group personal pension needs of the masses.

� Scottish Widows is one of four providers running an ABI simplified advice pilot but a big barrier to simplified advice is the level four qualifications requirement, which is making it an un-commercial venture.

So with 18 months and counting, how much closer to a solution are we to a 30m (potential un-advised) problem?

RDR

No turning back

After three and a half years of discussion and

consultation, we are finally nearing the end of the Retail

Distribution Review journey.

“ “� Following the publication of the advisers have until 31 December

2012 to implement these new rules in their businesses.

� The new RDR rules have been developed by the FSA to

increase consumer confidence in financial advice by removing the

potential for commission bias and increasing the professionalism

of financial advisers.

RDR

But not, yet, quite hitting the mark

� However, the new rules are widely

predicted to reduce the number of financial

advisers and increase the cost of advice.

� Evidence of advisers shifting their

business models further up market, where

advice is valued and affordable, can

already be seen.

� This will increase and prevent a large

number of consumers from accessing

advice.

Consumers prefer to access advice through a variety of channels rather

than relying solely on one source.

� Half of respondents who had sought

financial advice used the internet.

� Fifty-two percent used a financial

adviser, with an independent adviser

more popular than an adviser linked

to a product provider.

� Consumers who sought professional

financial advice often supplemented

this with their own research -

consumers prefer to access

information from sources which they

believe are independent and

impartial, like media and internet

‘best-buy’ tables, rather than using

public sources like the Citizen’s

Advice Bureau.

Accessing advice

Consumer preference

Source: Q3 2009 ABI savings and protection survey

© Teamspirit 2009

� Consumers generally prefer

financial advice to undertake a

comprehensive analysis of their

financial circumstances and to

recommend a product from a

wide range.

� These features are likely to

be associated with full advice

delivered by a financial adviser.

� Characteristics associated

with simplified advice were also

popular with consumers, as a

more economical and quicker

alternative to full advice.

Accessing advice

Important featuresProduct features

Consistent with full /

simple advice

General Population

(mean score)

Source: ABI & NOP , 2008

Cost of advice

By product� Given the comprehensive nature of full advice,

it is unsurprising that the time taken to deliver

this is typically nearly eight hours.

� This is therefore reflected in the cost.

� On average, full advice typically costs £670 in

total. Following the implementation of the RDR,

this cost is widely expected to increase.

The time taken to deliver advice does vary by

channel, with banks and building societies

typically taking less time to provide advice than

independent financial advisers, primarily due to

the nature of their service.

The time taken also varies

depending on whether the client

is a new or an existing customer

of the firm and by the type of

product recommended.

“

““

“

Source: CRA calculations May 2010

© Teamspirit 2009

Cost of advice

Calculated risk

Based on the cost of providing full advice, the research

has calculated the minimum case size which is

profitable. On average, consumers with less than £257

per month to save or £13,730 to invest as a lump sum

cannot be economically served by full advice.

� According to the research, over 30 million UK adults are beyond the target market of

full advice.

� While not all of these people need full financial advice, a significant proportion could

benefit from more economical financial advice which could help them protect their

family and better save for the future.

© Teamspirit 2009

Simplified advice

Guiding principles

Principle Stage of process Guiding principle The ABI has

developed guiding

principles for a

simplified advice

process. These are

based around the key

stages as shown in

Table opposite. As

part of this guidance,

we have identified the

Treating Customers

Fairly outcomes and

key requirements

firms should meet to

fulfil each principle.

Source: ABI’s guiding principles for simplified advice

© Teamspirit 2009

� To meet the advice needs of a

growing number of consumers

unable to access existing full advice,

the ABI have been developing

proposals for a new financial advice

process, known as simplified advice.

� This simplified advice process is

designed to meet straightforward

consumer needs through a limited

assessment of their financial

circumstances to deliver a suitable

recommendation.

� It is not designed to meet the full

range of consumers’ needs, but to

provide advice on specific

circumstances.

Any consumer who is beyond the scope of

simplified advice would be filtered out of the process

and recommended to seek a more appropriate form of

advice (full advice or a Money Made Clear service)

Simplified advice

The scope

“ “

� Consumers who are

currently served by

existing advice services,

but who will be unable to

afford or will be unwilling

to pay for this following

the introduction of the

RDR.

� Consumers who

recognise the need to

save and invest after

using Money Made Clear,

but require further

advice to determine

which product meets their

needs.

The ABI has identified three groups of consumers who could

benefit from a simplified advice process:

� Consumers who are

already unable to access

existing advice services.

Simplified advice

Consumer targets

1 2 3

Tenets of simplified advice

� Central to offering simplified advice at a price which

more consumers can afford, is the process driven

nature of the service.

� A simplified advice process is automated and IT

driven which the consumer can access via the

internet unaided, over the phone or face-to-face

where a facilitator guides the consumer through the

pre-determined questions.

� The whole interaction should take no longer than

30-45 minutes, significantly less than 7 hours 40

minutes typically needed for full advice.

Charging-based remuneration for

simplified advice model

QCF 4 adviser qualification requirement

FOS Judgment uncertainty

FSA Judgment uncertainty

DetailBarrier

FSA Judgment

uncertainty

Simplified advice

Four barriersFOS Judgment

uncertaintyQCF 4

RequirementCharging-based

remuneration

Uncertainty around how this will be judged, especially by FSA

supervisors – the industry requires FSA general guidance to provide

clarity.

Uncertainty around how the Financial Ombudsman Service will judge

any complaints – industry requires clarity that any complaints would be

judged based on the limitations as explained to the consumer.

Current FSA proposals to require an individual facilitating the process to

hold a QCF 4 qualification. May be an inappropriately high qualification

level, as an individual facilitating a simplified advice process will be

restricted to guiding the consumer through the pre-determined process.

Current FSA proposals require simplified advice to operate an Adviser

Charging model. This may discourage many consumers in the target

audience and create consumer confusion.

Last year, in CP09/18, we suggested that

[QCF level four] standards should apply

equally to those giving simplified advice.

The responses to this were divided, and we

can see that there might be an argument in

terms of proportionality. There is also a

question of how the qualification

requirements might apply in a simplified

advice process that is fully automated.

� FSA director of conduct policy Sheila Nicoll said that where

simplified advice is delivered via an automated service, QCF level

four may not be required:

Simplified advice

Overcoming barriers

I have a lot of sympathy with that view, but

we have to decide what is meant by ’good’

– I have no particular objections to that

statement, however

When asked whether the FSA accepts that a

simplified advice process will deliver good, but not

necessarily the best outcomes, Nicoll saidH

© Teamspirit 2009

The simplified process

Consumer response

� The results of this research are

positive, with 83% of respondents

rating their experience as either very

good or quite good.

The research also found a significant proportion of consumers

are willing to put their trust in a simplified advice process and

believe it can help them identify and meet their financial needs.“ “

Source: ORC International

� As it stands, the FSA is in danger of

failing to fulfill one of their objectives for

the RDR – enabling more consumers to

have their needs and wants addressed.

Danger of falling short Working closer & harder

Although the advice landscape will undoubtedly

change in the run up to the introduction of the FSA’s new

RDR rules in 2012, consumer access to suitable types of

advice is an issue that is predicted to grow as commission

“

“

Source: UK Structured Products Association

� It is therefore vital that the industry works

closely with the regulator and the

Ombudsman Service to ensure

consumers can access suitable,

affordable financial advice.

So what next?

is replaced by transparent advice charges.

The better off will pay for advice but the rest

will need a value proposition. Cost reductions and

tax incentives (unlikely!) will help. Key is

consistency and greater integration across the

industry and public sector

There’s no doubt that the

economic wake-up call has opened

a window5 but how closer are we

today to stepping through with

workable solutions?.

“

““

“

The simplified market is

more likely to provide the right

solutions. But not necessarily

the best5 for which you will

always need Face-to-face.

“

“5-% are not willing to pay for advice. The 50%

that are most are only prepared to pay £50 or

less! Ongoing f2f is going to be seriously

challenges. How can we expect to deliver

anything more than remote / Ltd advice?.

“

“

There is certainly a market.

We’ve got the name of that

solution – ‘Simplified Advice’ –

but we really need to get on with

what it looks like.

“

“So what next?

Views from the market

Adam Phillips, Financial Services

Consumer Panel

Adam Phillips, Financial Services

Consumer Panel

Peter Jolly, Assistant

Director ABI

Fiona Fry, KPMG

Robert Kerr, Scottish

widows

So what next?

This is make or break

� So we seem to be gravitating to an acceptance that consumers

may not get the exact advice they need from simplified advice but

would not suffer from being told to save more through an ISA.

� ‘We focus on perfect outcomes too much when it is not always

possible’ was one of the central themes of last Tuesday’s

conference, which has some interesting TCF implicationsH

reconciling the two could be a challenge if not managed carefully!

� Simplified advice, it seems, is a process, not a person. The role is

really just a facilitator.

� So whether providers and advisers adopt the ABI’s decision tree

model en masse or go their own route remains to be seen.

� All will be key in determining whether this helps achieve RDR aims

of increasing access to advice or just further taints the industry!