Smooth out the RDR

26 November 2009

Chris Cummings Viewpoint

Looking back on the financial services business prior to Callum McCarthy’s 2006 declaration at Gleneagles that it was “bust” reminds me of the opening line of LP Hartley’s novel, The Go Between: “The past is a foreign country: they do things differently there.” Callum decided at that time, and in that “country” that the distribution of retail invest-ment products should, from 2012, be done differently.

If the relatively benign economic circumstances of 2006 had continued, delivering the RDR improvements would still have been a challenge but we have had a banking crisis and a long recession. It is time to look at the context in which firms are now operating and ask if they are confident the costs they are being asked to incur will yield tangible benefits to their clients.

Let us remind ourselves and the FSA that over the last 18 months, the IFA industry has weathered the financial storm without taxpayers’ money. Consumer trust in IFAs is stronger than ever. How unfair it would be if IFA firms were to have their stability threatened by regulatory intervention.

Firms can still meet the RDR’s original objectives if the FSA phases in the recommendations. Imposing a cliff-edge date may have been the right thing in 2006 but not now.

Any transition needs to be smooth. More intrusive and forthright supervision is needed in the banking sector (which caused the current crisis) but to map this across to the investment sector (victims of the crisis) would be illogical. A less of a stick and more of a carrot approach to firms that are good regulatory citizens would help. Aifa has offered to help develop a regulatory dashboard of dividends which would act as incentives to nudge firms towards the right behaviour.

Firms that invest in compliance and management ability present a lower regulatory risk and should enjoy lower regulatory fees. Capital requirements should be tiered and based on behavioural indicators such as a firm’s compliance record, membership of trade and professional bodies and firms that pose fewer risks should be subject to less intensive regulatory scrutiny.

The recession has sharpened the desire of some consumers for personal advice as opposed to a sales-driven offering. As the economy improves, this situation may change but the RDR will have failed if consumers remain as confused about the offerings of the various financial services institutions as they were in 2006.

It is a guiding principle of Aifa that change costs money - but improvement is affordable. Yes, they did do things differently in the past but we can and do support the original objectives of the RDR. By introducing a sensible timetable, providing regulatory dividends that allow for a smooth transition, we can ensure that, in the future, both firms and consumers will reap the benefits of things being done not just differently but better.

Chris Cummings is director general at Aifa

 

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