A retail review to be reckoned with

Brokers can\'t afford to ignore the FSA\'s review of retail distribution in the financial services industry since it will affect the way they do business, says Bill Warren

In last week’s column I pointed out that the Financial Services Authority’s four priorities for its retail work this year are the Treating Customers Fairly initiative, financial capability, payment protection insurance and its review of retail distribution.

Most readers will be familiar with the first three by now but perhaps not so well informed about the fourth area. So what is it, and will it have an effect on the mortgage and general insurance sectors?

The subject of the FSA’s review of retail distribution first saw the light of day in May last year when accountancy firm KPMG reported on the studies it had undertaken for the FSA on the future of advice in the IFA, mortgage and GI sectors.

The reports centred around various scenarios for the future. For example, the report on mortgage advice made broad suppositions that product choice and complexity would help to increase market share for intermediaries and that oversupply of lenders in the higher margin sub-prime sectors would boost intermediary bargaining power, causing proc fees and profits to rise.

It also predicted that the introduction of Home Information Packs would see the proportion of mortgage introductions via estate agency-based advisers rise from 27% to between 45% and 50%.

The KPMG findings resulted in the FSA deciding to look at the subject in more depth with the present retail distribution review, primarily focussed on the advice sector, being announced by the FSA’s outgoing chief executive John Tiner last June.

The review is intended to help the FSA “understand better how its requirements can act as barriers or facilitators to the emergence of a market which is economically sustainable, attracts scarce capital and talent and is able to meet the changing needs of consumers”.

The momentum of the retail distribution review was given a boost in November when the FSA set out the five priorities for the review. These are the sustainability of the sector, the impact of incentives, professionalism and reputation, consumer access to financial products and services and regulatory barriers and enablers.

When announcing these priorities, Clive Briault, managing director of retail markets at the FSA, pointed out that some hard-hitting questions need to be asked – will the structure of the market always lead to adverse behaviour by some to the detriment of others? Is the market capable of change? Does the regulatory framework protect those it is designed to protect without stifling innovation?

The review is being undertaken within a business model where doubts exist about its ability to serve the interests of product providers, intermediaries, and most importantly consumers. Some areas for concern are commission structures in the market, the resulting focus on volumes over quality and the likelihood of provider bias and churn.

Although the focus is on the investment sector, mortgages and GI are not excluded and the stated areas of concern will apply to us.

The most recent development in the progress of the retail distribution review was the announcement in January of the people who would chair the five groups and lead them towards reaching consensus on the issues, identify solutions and barriers to delivering them and engage the market in achieving the solutions. Briault says that the FSA cannot dictate industry change but its job is rather to act as a catalyst to improve the efficiency of the distribution of retail investment products and achieve better outcomes for consumers.

Can we afford to ignore this initiative which, by its own admission, is focussed on the retail distribution of investment products with the FSA only committed to “consider whether there is any read-across for the mortgage and general insurance sectors”?

It is unwise to ignore an initiative that is one of the regulator’s four priorities for the retail sector. After all, mortgage and GI firms are retailers of financial services. Most of us give advice and earn fees from product providers so we must look for the best outcomes for our clients.

Whatever the so-called ‘read-across’ turns out to be, it will affect the way we do business. Key issues from the review of retail distribution will be fed into a discussion paper which is due for publication in mid-2007, at which point we can all have our say.