JOB OF THE WEEK

On the 29th April the FSA published its initial thoughts paper on the RDR and a very welcome paper it was too!

I made it no secret that we fundamentally disagreed with the original raft of proposals that were contained in the original RDR Discussion Paper. I thought the FSA were taking the industry in the wrong direction, that they were anti-consumer and that the paper contained proposals we would live to regret if implemented as they would do further damage to the reputation of the sector.

For me the real goal of the RDR should be to address 4 key public policy issues:
- how do we encourage consumers to save more,  protect themselves better, build a better retirement income and reduce their debt burden. In short, how do we re-engage consumers with their own long term financial wellbeing?

If we could achieve these bold goals we would have a better market for consumers and a more profitable one for firms.

We undertook a significant research project with UK consumers about what would entice them back into dealing with financial services.  Some clear messages came out from this - and they formed the bedrock of AIFA's response.

Consumers wanted to know the real motivation of the person they were talking to: was it someone who was their agent, who could offer them independent advice, who was interested in dealing with them (their family or business) over the long term - or was it someone who was interested, first and foremost, in selling them a product, and the more products the sold the the better!  That fuelled our thinking that we needed a clear separation between independent advice (which needs to be recognised as a profession and promoted) and sales.

Sales can still be conducted ethically and honestly, but no one should be in any doubt that the motivation of a salesperson is to sell as many products to as many people as possible. This is NOT the same as that service which is offered by a professional, Independent, Financial Adviser - whose guiding principle is to do well by the client.

FSA has said it was impressed by our RDR response and by the Manifesto for Advice.  Both have had a major impact on the proposals we now see emerging from FSA.

Members will recall the original proposals for independence to be appropriated by the tied channels, for the introduction of something called 'primary advice' (that made it easy for 'simple products' to be sold by banks - but with reduced FOS scrutiny), for different tiers of advisers (which would have been a 'divide and conquer' strategy), the demand to hold more capital (to pay for mis-selling!), and to raise the standard of qualifications too high too quickly. Looking at the new proposals, it is easy to see what a motivated, passionate, professional trade body can achieve for its members.

There were many members involved in AIFA's work during the RDR: our working party, the Council, those who worked on particular aspects of the proposals. A big thank you to them and to over 700 members who responded to our survey. Also thank you to those members who submitted their own response direct to FSA, supporting AIFA. FSA received 880 responses - most came from the IFA profession - well done!

Today is the day when the Bank of England will announce its plans to help ease liquidity in the mortgage market.  Given the Bank's news, today will also see us publicise our White Paper on solutions to the credit turmoil.  We have been using these proposals as the springboard for conversations with policy makers at all levels.
 
It is important to say that we do not see any "silver bullet" solution to the current market difficulties. Indeed, I always mistrust silver bullet solutions, life is complicated and credit markets especially so - given that at the root of the current turmoil are issues of trust and confidence as much as credit standards.  The £50bn discussed looks like a substantial number but there are caveats that need to be considered.  If the big banks simply hoard the liquidity, to shore up their capital reserves or to provide more certainty for regulators, the consumer will not benefit - and neither will smaller lenders who have experienced most pain to date.
 
We have described the solutions advocated in the White Paper as 'green shoot' market interventions in the hope that a coalition of the willing will join to nurture them into the sturdy oaks that can be the foundation of new market strength.
 
We wish to see the return to proper functioning market, focused on meeting the needs of mortgage borrowers today and tomorrow.  For those in current difficulties, the Government may have to review the ISMI rules given the special nature of today's problems.
 
There is much more to be said about a way out of the market's current travails and the White Paper marks our view of where to start.

Alistair Darling delivered his first Budget yesterday.  Like the rest of us, he must have been hoping for a more benign set of economic conditions as a background for the speech.  With very little room for manoeuvre, and a clamour for few changes, a Budget of few surprises was widely predicted. 

The tax burden of smaller firms has been increasing and I would have welcomed a respite year.  Unfortunately, the Budget has done nothing to reverse this trend. Darling confirmed that he would cut corporation tax by 2 pence to 28 pence from April 2008 – had been announced in the 2007 Budget, in which was also announced that the small companies' corporation rate will rise from 19% to 22% in stages.

It is true that the Treasury is increasing Research and Development Tax Credits and adding £60 million to the Small Firms Loan Guarantee, but this is little relief for IFAs, who will see their tax bill rise by at least 3%. Like other professions, IFAs will not be users of the Small Firms Loan Guarantee scheme as they can already access ready credit (usually with better rates) from banks and do not invest in capital equipment (such as plant and machinery).  On the wider CGT point affecting business owners, AIFA is pleased to see the entrepreneur's relief introduced and confirmation that there will be a new 10% rate for the first £1 million of gains on business assets. This should be of real benefit to smaller businesses.

One positive announcement in today's budget is the capital fund of £12.5 million to specifically encourage more women entrepreneurs. The IFA profession has seen an increase in women advisers as the flexible nature of the IFA business model facilitates a better balance between work and other life priorities.  

I was disappointed that the ISA allowances were increased further and that a firm commitment to keep them increasing wasn't forthcoming.  For me, they should be linked to inflation - with a regular review period, say three years, so that their value can be protected and enhanced.  The roll out of the Savings Gateway was a positive step as it is a further move to encourage the savings habit and that can only be a good thing for a nation for too much in love with easy access credit.  Surprisingly, there was no mention of "Money Guidance" despite the report being presented to the Treasury ahead of the budget.

There had been speculation that the Treasury may reverse some of its proposals affecting the tax balance between bonds and such vehicles as OEICs. The decision not to do so may well see some organisations targeting IFAs with a message that it is timely to review a client's investment portfolio and move them out of bonds. Too swift a move, given the scrutiny that will follow any wholesale reinvestments, could expose firms to regulatory risk. But I am confident that IFA firms will put client needs first and act in accordance with the TCF principles so well entrenched in firms: "suitability first, opportunity second" is the real "golden rule".

There wasn't much to cheer on the mortgage front either.  The Bank of England's announcement to extend its £10bn offer of three-month loans against a wider than normal range of collateral is a positive move.  I like the idea of the introduction of a "gold standard" for mortgage backed securities as long as the net is not drawn too tightly and includes such asset classes as buy to let.  Certainly a thorough review is needed before quick decisions are reached.

Finally, the other area where more thought is needed is in the topic of long term fixed interest rates for mortgages.  The UK benefits from a flexible and mobile workforce.  Mortgage products that lock borrowers into a house or area are a worry for me - people must be free to move home and leave one part of the country for another to pursue their careers and search for work.  We have left the days of "Coronation Street Communities" where families live within streets of each other, behind us.  Consumer attitudes are luke warm to these products too.  It seems to me that more reflection and consultation is needed before such products receive a formal approval.