Examination of witnesses (Questions 187
- 199)
THURSDAY 25 JUNE 1998
MR BERNARD
JONES and MR
GARRY HEATH
Chairman
187. Good morning. Is there anything you
would like to say to us before we begin?
(Mr Heath) We have already put, through the secretary,
a note to the Committee so I do not think we need to add desperately
to that, apart from to introduce ourselves. I am Garry Heath,
chief executive of the IFA Association. What our Association is,
how big it is etc., is again in that note. I have been both a
direct salesman and an independent financial adviser before becoming
a full time trade association official.
(Mr Jones) I am currently chairman of the IFA
Association. I am in my third year of office. I have been in the
financial services industry for 33 years, latterly as vice chairman
of one of the large, national IFAs.
Mr Kidney
188. Colleagues are going to deal with the
Phase 2 process and with questions relating to professional indemnity
insurance, so can we try and steer clear of those? Can I first
of all get an idea of the size of the industry at the moment in
terms of IFAs? From your submission, I have that you represent
2,600 firms which you say are about 60 per cent of the IFA firms
in the country. Does that mean there are about 4,000 firms in
all?
(Mr Heath) Yes, if you are talking about serious
companies. We have a bit of a problem because some of those registered
with professional bodies only do a little bit of work so it is
a bit difficult to judge the serious part of the market, if you
like. There are 3,500 in PIA. There are about another 600 within
IBRC and then there are accountants and solicitors. 4,000 would
probably be a good estimate of the serious firms, maybe a little
higher, maybe 4,500.
189. You say that currently IFAs place about
50 per cent of retail financial service products in this country.
Is that the scale?
(Mr Heath) Exactly.
190. Could I ask a question about the change
in the law in the 1980s and the selling of personal pensions?
Has there been any noticeable change in the size of the number
of IFAs in this country since the mid-eighties until today?
(Mr Heath) In terms of the number of individual
advisers, there has been little change. In terms of the number
of firms, there has been very significant change. When FIMBRA
first started in September 1988, you had 9,200 firms. The PIA,
which is its successor, has 3,500, so it gives you an idea that
there has been a significant shrinkage in the number of firms
offering advice. Some of those have gone into networks, which
I can explain if you wish me to, and the rest have buddied up
locally. They have gone from one man businesses to larger businesses,
in a similar way that GPs have done over the last ten years.
191. They are typical business development
changes in the build up of the IFA network across the country
and—tell me if I am wrong—nothing to do with the cost
of dealing with Phase 1 of pension mis-selling?
(Mr Heath) No. Phase 1 has so far not really changed
desperately how many firms there are and how many advisers there
are in them. Those changes came earlier with the cost of regulation
generally and, as that cost increased very swiftly, companies
felt that they either had to buddy it up or go into networks and
that has happened.
192. That answer neatly leads me on to the
next question I want to deal with which is the costs of doing
the business. We have all the normal costs of organising the business:
premises, heating, lighting, rates and all of those things. The
next significant thing is cost of regulation. What do you say
about where the cost is today?
(Mr Heath) The cost of regulation for Mr Average
Firm, which would be a company with three RIs, is about £10,000
a year in the various forms it arrives at. That is a reasonably
high figure. That cost, I have to say, just pales into insignificance
compared with the costs of organising Phase 1 and Phase 2 but
it is a cost. We also have the time cost as well of making sure
that people are compliant, or at least attempting to be compliant.
193. Are those strictly the costs to do
with regulation: keeping records, being open for inspection and
actually registering and paying fees for the regulating?
(Mr Heath) Paying for training competence, professional
indemnity, yes.
194. I want to move on. We are not going
to cover professional indemnity in depth, you and I now, but in
terms of the cost of professional indemnity have you included
the cost of paying the premium for the professional indemnity
insurance as part of the regulation costs that you just told me
about?
(Mr Heath) I have, in that figure, yes.
195. Can we move on to insurance excesses
or professional indemnity insurance? Is that an additional cost
over what you have just described?
(Mr Heath) If you have a claim, of course, and
they have increased enormously. Before any of the Phase 1 and
Phase 2 came about, we were talking about excesses of £200
or £250. We are now talking about a minimum usually of £2,500,
particularly in terms of transfers, which is one element of Phase
2. That means that nearly all the costs fall directly on the IFA
firm because the excess is pretty well the cost of the claim,
or at least the lion's share of it.
196. For every claim that is established
against an independent financial adviser, when a payment has to
be made, there will be an individual excess that the adviser must
pay personally rather than draw on insurance?
(Mr Heath) Exactly. It can be as high as £5,000.
197. If the IFA has not got the capacity
in house to do the loss assessment they go to somebody outside
and pay for that, so that is another expense.
(Mr Heath) £400 to £600 a case, if you
can get it.
198. At the moment, according to your submission,
there is some difficulty in actually finding people to provide
the loss assessment.
(Mr Heath) Just so. The naming and shaming which
the government involved itself in, which concentrated on the larger
firms, basically made the larger firms suck in any spare capacity
and of course they would want policy holders' money to pay for
it. They have grabbed the capacity and it has left us for the
most part without capacity; hence why the ABI has come in with
its rescue package to offer actuarial help from their companies.
That is also dependent on Phase 2's impact on them. At the moment,
we have the rescue package with no one in it and no one available
to be in it, so it is a bit of a busted flush.
199. What do you refer to as "the rescue
package"?
(Mr Heath) The ABI scheme which has been mentioned
at this Committee before, which is the PASS scheme. It is looking
firstly at offering technical, actuarial help to IFAs.
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