Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable

Some will say it started with McCarthy’s Gleneagles challenge last September. The truth is it started much earlier. In his speech, Sir Callum McCarthy, head of the Financial Services Authority (FSA) gave his frank diagnosis of the state of retail distribution of financial services. The model, he said, is broke, not fit for purpose. And he issued a stark warning – fix it, or be fixed.

On 27 June we will take another step towards a new model, when the FSA issues its Discussion Paper on the retail distribution review. This paper will no doubt reflect the five separate analysis workstreams, which are ongoing, and led, primarily, by the industry.

The first workstream looks at how to meet the needs of a wide range of customers. Our model serves many people well, but there are undoubtedly some who we cannot afford to reach. We need other mechanisms, and generic advice may help here, acting as a ‘triage’ service, and directing customers to the most appropriate distribution channel.

The second workstream looks at remuneration and incentives, and how to introduce clearer separation between the cost of the product and the advice. ‘Factory gate’ pricing - or ‘customer agreed pricing’ - would allow advisers to set the right prices for their services, on top of the manufacture charge for the product. Adopting this would help with the general move away from commission to fees, whilst recognising commission will always have its place. In Aegon’s recent IFA Insights survey, 68% of advisers said they would be happy to review their remuneration model, and 48% would like to move to fees, but can’t see how to do so at the moment. If the appetite is there, we need to find a way to make it happen. Providers have a role to play here as well, devising products to help advisers make this transition.

This links to improving the perception of the industry’s professionalism, the third workstream. Financial advisers need to be seen in the same light as accountants or solicitors. The current qualifications could be reviewed, and regulation designed to recognise those qualifications, for example by being factored into FSA’s risk assessment of firms.

Importantly, the transition to a new model will never work successfully unless regulation changes as well. Late last month, the FSA published an update on where it is in its move towards more principles-based regulation, with less reliance on detailed rules. This is a welcome development. By focusing on outcomes, not the detail of how we get there, advisers can develop the best models to suit their customers.

But it’s also about risk-based regulation. The FSA is fighting the rumour many small firms are ‘flying below its radar’. That needs to change. And if firms are going to see a tighter regime, there needs to be a clear dividend for those who can show they are well-financed, soundly run, and treat their customers fairly.

The final workstream considers how to develop a stable industry, one that consumers can trust. Considering elements such as capital requirements, and how to link burdens for the financial services compensation scheme to how well firms treat customers, are a couple of ways to build a professional well-respected industry for the benefit of everyone.

The FSA’s discussion paper needs to draw on this previous work, and have a good look at the changes advisers have already made. If there are to be rule changes the FSA will consult further with any new rules introduced late 2008 or early 2009, and a final implementation date of late 2009.

I would disagree with McCarthy’s opening gambit. The existing model isn’t necessarily broke. Instead, it has served many people very well. But that doesn’t mean we shouldn’t all be working hard to improve and add to it. We need to tackle the increasing lack of consumer confidence in the industry. We don’t have all the answers at this stage, but the FSA’s review should be designed to work through as many of the various possible solutions put forward.

The stage is set for change. This review isn’t about the simple headlines of choosing commission or fees, it’s far more complex than that. It’s about providers and advisers working together to create a more stable, trustworthy and professional platform for products and services. But change focused solely on financial advisers won’t deliver a more successful market. Action is also needed to improve the demand side, through financial capability and generic advice, as well as review the regulatory model.

McCarthy set us a challenge. Let’s grab it with both hands and take control of our future.