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Sunset Clause May Cost More Than 15,000 IFA Jobs

Heath Report
Heath Report

Garry Heath, author of the Heath Report, tells IFA Magazine that the 2016 Sunset Clause may cost more than 15,000 IFA jobs

You have to hand it to Garry Heath of Mountain Consulting, the author of The Heath Report, he knows how to get your attention. Heath, who is currently hard at work lobbying the Government and the Financial Conduct Authority about the end of trail, is claiming that if legacy trail commission is banned in 2016, as currently scheduled, then the IFA sector may lose well over 15,000 adviser jobs over the next couple of years.

And that even the best case scenario points toward the loss of 7,000 advisers – representing just over 20% of the total IFA base.

Phew. The 15,510 advisers who Heath says might go have a current capacity of three million consumers. And the total potential job losses after trail commission disappears, including ancillary tasks, could even exceed 50,000.

Garry Heath is speaking soon at an event organised by Gunner and Co, Mountain Consulting and Equifax. It’s a unique event which looks at how IFAs can unlock the secrets of building their business and is being held in London at the beginning of July. Details can be found on the IFA Magazine website.

A Heavyweight Voice

Heath’s new report, entitled The Heath Report Two (THR2), and subtitled ‘A Report on the Consumer Detriment Caused by the Introduction and Continued Prosecution of the Retail Distribution Review’, sets out a bleak future for both IFAs and their clients. But is he overdoing the grief?

Garry Heath
Garry Heath

Well, Heath ought to know what he’s talking about. He was Director General of The IFA Association between 1989 and 1999, and he was a central player in the introduction of regulation into the financial services industry. He was also instrumental in the reform of FIMBRA and the creation of the PIA. He created the Financial Services department of BIPAR which still exists as the EU body for advisers as well as the Financial Adviser 5 Star awards.

Heath represented the Association as its public face including promoting members’ interests to Government, the civil service and regulators. He is also a regular media contributor and speaks at industry events throughout the world.

Some Ballpark Numbers

Heath starts out by declaring that historically 23 million consumers have accessed advice via IFAs and Banks, but that since RDR was announced around 15.8m consumers have lost their access to a professional financial adviser. In the last four years, he says, IFAs have lost 7.6 million of their consumer capacity and banks have lost a further 6.2 million of capacity. That’s a total of 13.8 million consumers without potential advice.

Since RDR was announced, he says, 13,500 advisers have left the industry along with a similar number of administrators. Couple that with the jobs that could still go, he says, and you have initial job losses in the region of 25,000.

How We Got to Here

The THR2 report looks back at RDR’s two main aims – which, he says, was to firstly increase the academic level of all advisers regardless of age and experience (so no grandfathering was offered), and secondly to create a “commission free” market which would not be tainted by mis-selling.

The problem with the first ambition is that it resulted in 5,750 mostly older and established advisers leaving the industry. “And the problem with banning commission,” he says, “is that you remove access to advice from millions who wish to take advice sporadically and pay for it by commission. It is these clients who lose advice either by their adviser exiting the industry, or else by their adviser filling his lists with clients who wish a regular relationship.”

In the past, says Heath, the average IFA Adviser had 405 clients. Since its peak in June 2005, however, the IFA sector has lost 6,500 advisers – entailing a probable 2.6 million loss of capacity.  The other 7 million of lost capacity, he says, has come from advisers downsizing their clients from 405 to 231 in 2010 and to just 195 by 2014.

The Trail Issue

It is the trail issue that is at the core of future problems believes Heath. The FCA is of course already insisting that advisers must use the new “commission clean” funds – it’s the last parts of legacy trail commission that must go by March 2016.

“The only practical way this can be done is to move the investment from their current fund and place it in the new clean funds,” says Heath. “But you can only do this if the client benefits from the transfer, and in up to 40% of the cases the client loses.”

“Some of the providers of these policies are enthusiastic to cut trail, as they will have to keep an additional 0.5% that they would have paid to the adviser. Different types of advisers are impacted in different ways, with the more established and those who advised on a transactional basis being the most badly hit.”

According to Heath, there are two main impacts:

Firstly, there is the loss of income. Research from THR2 suggests that only 1% of advisers have no trail commission, whereas around 51% depend on trail for between 20%-60% for their turnover (and beyond). Which leaves only about 46% of advisers depending on trail for less than 20% of their turnover.

The Value of IFA Businesses

Then there’s the loss of value. “Clearly, these numbers demonstrate that the removal of Trail will compromise the future of many advisory firms,” says Heath. “Trail commission used to represent the one income that was easily transferred to another adviser. Before RDR, a business was valued at least three times the annual Trail income. So the sector was valued at circa £9bn. But if 40% cannot be transferred, then Heath suggests that £3.6 billion has been removed from the value of IFA businesses by regulatory interference.

“This not only compromises the existing advisers”, says Heath. “It also creates issues for those who wish to create new forms of distribution, because investors are unlikely to be unwilling to invest in businesses in a regulated market where a company’s value can be altered in this way.”

The stark fact, says Heath, is that if trail is banned in 2016, between 7,260 & 15,510 advisers are in danger of shutting down, which will compromise a further 1.4m to 3.02m clients.

The following chart is an attempt by Action Consulting, which undertook the THR2 survey, to assess the vulnerability of advisers based on how dependent they were on trail, together with their preparedness for the conversion to service charges:

heathchart

If the tipping point is set to include advisers at High Risk and above, then the industry can expect to lose another 7,260 advisers who are currently servicing 1.4 million clients. That would be a loss of 22% of current adviser capacity.

If the tipping point turns out to be as low as Medium Risk and above, it points to a loss of 15,510 who are currently servicing 3.02m clients. That would be a loss of 47% of current adviser capacity.

The Armageddon Scenario

In fact, A survey conducted by Panacea suggests that the final removal of trail would be “catastrophic to the future of their businesses” for 94% of respondents. That would equate to everything above “Very Low Risk” being the tipping point. If this is correct, argues Heath, then the sector would be destroyed because the surviving companies could not support the regulatory and compensatory overhead.

Regulatory Costs

The financial impact of these changes have been described by Heath as The Spiral of Decline. “The biggest third party cost faced by IFAs is regulatory and compensatory bills,” he says. “Their division is broadly spread amongst the number of advisers; thus as adviser numbers decline the cost per surviving adviser increases.”

“Currently, adviser’s bills are 20% bigger than if the RDR adviser losses had not happened. This will rise to 43% – 55% if the end of trail happens. Each increase triggers the potential for another exit, and the sector gets weaker and weaker. It’s not just strict numbers; advisers may exit because they deem the industry no longer worth participating in.”

New Entrants Deterred

“The regulator hoped that new entrants would arrive to take up the slack by offering “Simplified Advice” Unfortunately the FCA and FOS cannot agree its ground rules

This presents new entrants with a nightmare scenario,” he says. “New distributions will need to invest heavily to create an advisory process with a sufficient scale and width to satisfy large numbers of currently disenfranchised clients.

To do mass advice; the entrants will have to cut down upon on the amount that is known about the clients to just that required to complete that piece of advice. They then will make the assessment of the client needs and the solutions as formulaic as possible. If there was a “Simplified Advice” standard and the process is judged by it – then little danger might be expected.

However if in the future FOS decides that claims made in the “Simplified Advice Market” should be judged by full advice standards, then every case will be non-compliant by virtue of the information gathered.”

There is also the question of parliamentary accountability. Heath maintains that “RDR has presented advisers, regulators, consumers and politicians with an excellent example of the danger of the current regulatory structure and in particular its lack of accountability to anyone but itself.”

“The regulator has forcibly divorced 16 million of clients from the advice they have historically accessed,” says Heath. “How this can be seen as offering consumer protection, promoting competition or enhancing integrity is a mystery.”

An Own Goal on Pensions Reform

The other difficulty is that the departure of 13,500 advisers has happened at the very time when the government wants to liberate the current pension market – a process which in turn generates a need for high levels of advice. This, says Heath, makes it a nonsense to be pursuing a policy that may cause the exit of another 15,000.

Heath regards this as impossible situation. “We have the regulator and the Government working against each other – and yet, under the FSMA 2000, the Government cannot command the FCA to do its bidding.

“Worse still, the FCA isn’t even accountable to the Parliament that created it. Currently the regulator is free to pursue any policy, fill its committees with like-minded individuals, and ignore any criticism.”

Although it can face a Judicial Review, “it has the funds to buy the best lawyers and that Judges can be depended upon to give them a home town decision.” This, he says, allows it effectively to “completely ignore MPs and the Treasury Select Committee”.

 THR2’s Lobbying Agenda

  • THR2 is calling for legislation to restore proper Parliamentary accountability to Financial Services regulation. This is required to prevent consumer detriment by unaccountable and unfettered regulation;
  • THR2 demands that FCA eradicates the planned removal of Trail Commission in 2016 immediately, so that further damage can be avoided;
  • THR2 believes that it is now time to expand the concept of transparency to disclosing the cost of regulation as a separate item. In this way clients can discriminate between the value they receive from their adviser and the cost of regulation over which the adviser has no control;
  • THR2 believes that RDR should be seen as the abuse of power that it is. It is a clear demonstration of what unfettered and unaccountable regulation can do to an industry and a lesson to other industries facing similar issues;
  • THR2 proposes that a Royal Commission should be set up to define what citizens should reasonably expect from the Welfare State and what they need to provide for themselves;
  • THR2 believes that RDR could have been prevented by a more rigorous and robust representation by the IFA trade association which was criticized by the Treasury Select Committee’s report on RDR.
  • As a result: the THR” team have set up Libertatem – a new trade association for Impartial Advisers. libertatem.org.uk

The Heath Report Two can be obtained at www.theheathreport.com/files/101312470.pdf 

Meet Garry Heath at an event organised by Gunner and Co, Mountain Consulting and Equifax. Held in London at the beginning of July, it looks at how IFAs can unlock the secrets of building their business. Details can be found on the IFA Magazine website.

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