The race is on to get it right

Banks have their work cut out to meet the 2012 deadline for implementing the controversial Retail Distribution Review. And, as they wrestle with the strategic implications, reports ALISON BIRD, there’s still uncertainty about the final regulations.

Don’t wait! There’s too much to be getting on with – now.” If there’s a consensus among those advising the banking sector about the profound implications of the looming Retail Distribution Review (RDR), this is surely it.
 
Controversy rages fiercely and vital bits of the jigsaw still have to be put in place. But few disagree with the scale of the challenge if everyone’s going to meet the end-2012 deadline. And there are few arguments about its purpose, either.

The big objective of the RDR is to rebuild people’s trust and confidence in the retail investment market by raising standards of professionalism, and changing commission on products to fees based on service. A key element is that by the end of 2012, advisers, whether independent or restricted, have to demonstrate greater knowledge and skills and meet enhanced standards in dealing with clients.

Technically, that means investment advisers need a minimum QCF Level 4 qualification. However, as banks wrestle with the strategic implications, there’s still uncertainty about the final structure of the regulations – and therefore the costs of implementation. The crucial missing element is the FSA’s steer on Simplified Advice, which is expected later this year.

Peter Tyler, Policy Director Retail, British Bankers’ Association (BBA) says they. support what the RDR is trying to achieve, and stand foursquare behind the raising of professional standards. “We’re still uncertain about exactly how the regulatory landscape will look, but we have a good view of its direction and believe this is a good opportunity for banks to make changes to the way they currently deliver investment advice services.”

But the operational dilemma is plain, he warns. “Many banks are already putting in transitional arrangements for up-skilling their advisers, and finding appropriate continuing professional development (CPD) routes to ensure they meet the 2012 deadline. But others are waiting to see how the dust settles before they make their move. And that dust I settling around Simplified Advice.

“We believe the RDR presents an opportunity to bring in some new services. Given the not insubstantial costs associated with implementing the Review, I think we’ll see some refinement in company targets with investment advice provision being focused up to those with more capital to invest. We’re concerned that consumer access to investment advice could be reduced and believe that this gap could be filled by a new Simplified Advice service.”

The policy cliff-hanger is whether the FSA insists it’s necessary to upgrade all advisers to the current QCF Level 4 minimum, or will approve a simplified, highly automated service which could require a separate, lower level professional qualification. While awaiting that steer on flexibility, says Tyler, simplified advice models are just emerging. “We believe qualifications need to be fit for purpose and a reasonably highly automated advice service with protection within it probably doesn’t need the same content that you’re likely to see emerging from full advisory syllabuses.”

Even where there is clarity, though, the banks have a challenge on their hands. “Among bancassurers, most advisers are qualified to QCF Level 3 so banks need to uplift this subset – and here we’re talking about many thousands of individuals. It will be a significant challenge to raise the level of that many advisers by the end of 2012.

“Think about logistics – the numbers having the time to study, sitting the required number of exams at the right time – even with professional bodies like CIOBS who’ve been working hard to ensure provision and access to the necessary qualification for some time.”

Lillian Hosea, Head of Consulting at London-based training consultancy, Momenta, agrees: “It’s a challenge for any bank at any time, but it’s a major challenge given the pressure the industry is currently under. And those involved in mergers also have significant operational hurdles to negotiate their way through, as well as thinking about the consequences of RDR.

“But the bottom line is that increased professional qualifications should mean a higher quality of service for customers.”

And here she confirms that some banks are waiting for the FSA’s steer on Simplified Advice because that is their primary market. While others gear up their staff in preparation – taking advantage of the ‘no regrets’ policy – some banks “risk being left with staff that are no longer able to practice”.

She adds: “Our role is to stop that happening and to help get the right people through the right exams at the right time.” But she’s acutely aware of the further challenge to those working towards QCF Level 4: “Many haven’t studied for a long time. No-one working in investment advice, for example, has an unchallenging job. They have full-time jobs, targets, families, social lives, so the commitment to a routine of studying will be difficult to fit in.”

Hopefully, the new professional qualifications will equip bank advisers with the broader investment discussions needed to keep them compliant, says Philippa Grocot, Director, Retail Sector, Corporate Training Partnerships, specialists in compliance, risk training and management development for the financial services sector.

But she identifies a practical challenge. “Although advice models won’t really change, people need to feel confident and comfortable with the new information, whether it’s about pensions, savings, insurance or protection. So while it’s theoretically straightforward to gain the information, the key question is: ‘How do I talk to my customers with confidence?’ I believe applying the knowledge gained by studying and taking the qualification to the everyday conversations with clients needs support. And I don’t think many banks have thought about that yet.”

Gillian Tait, Managing Director of Competent Adviser, which provides structured on-line RDR study support programmes, agrees: “We believe there are many gaps in people’s knowledge at QCF Level 3.

“As an integral part of our student support, we undertake a gap analysis of students’ existing knowledge and then provide them with the tools to bridge these gaps so that, when they begin their QCF Level 4 training, they do so from a position of strength. We provide students with the tools to bridge knowledge gaps so that when they begin their level 4 training they do so from a position of strength.

“In one recent case, an organisation identified trusts as their staff’s most likely area of knowledge weakness. But our gap analysis showed their real knowledge gap was pensions. Had we not identified this and put in place the remedial action required, these students would have struggled with any pension questions they encountered.”

Next – the Mortgage Review

And RDR isn’t the end of it. The next big change will affect those advising on mortgages where the FSA similarly proposes a more intrusive regime and more aggressive enforcement.

The FSA’s response to industry feedback on its Mortgage Market Review (MMR) discussion paper is due shortly. The main aim is to ensure firms lend only to people who can afford to pay the money back.

The main provisions include:
• affordability tests making lenders ultimately responsible for assessing a customer’s ability to pay
• income validation replacing ‘self-cert’ mortgages with a requirement to verify a borrower’s income
• sale restrictions on products with ‘toxic combinations’ of characteristics that put borrowers at risk
• new safeguards to ensure firms do not profit from people in arrears.

The MMR suggests all mortgage advisers be personally accountable to the FSA which – as with the RDR – proposes the same adviser categories of ‘independent’ and ‘restricted’. Watch this space.

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