Incentive theme

10 March 2010 12:00 pm

In the early days of the retail distribution review, an initial concept of “regulatory dividend” was welcomed by advisers at a time when they were facing a number of market challenges. The idea had particular resonance as it was to apply to transactions whereby the concept of risk management was applied on a day-to-day basis.

Earlier research from Aifa looked at the correlation between the amount of business transacted in the retail market by IFAs against the market detriment caused by that business. In relative terms, the percentage of detriment was very low, particularly compared with other distribution channels.

Taking this hypothesis one step further to look at the likely impact of implementing some of the RDR itself, would a fee-based IFA with more qualifications, more capital in their business and a highly developed customer-centric proposition which wholeheartedly supports positive treating customers fairly outcomes pose less of a threat for the FSA to manage? Surely the answer has to be yes.

As we can see, the IFA sector is mobilising to move to the new model. What now seems to be missing is the original carrot at the end of the RDR stick. We all surely agree that IFAs want to create client-focused outcomes and that, in general, advisers are driven by doing the right things for clients. Surely applying a different level of regulatory supervision to adviser firms that have made the journey to the post-RDR model will encourage others to accelerate their progress to achieve the same objective.

In my view, regulatory incentives could still have a part to play in helping the sector complete its journey. If a regulator can define what good looks like, it can also give a clear steer about the direction firms should be heading in.

With the implementation of a properly constructed professional standards board, IFAs will know without a prescriptive regulatory environment the consequences of not continuing to operate in a fashion that minimises the chance of consumer detriment.

The shape of any incentives is still far from certain but possible starting points could be based on the following criteria:

• Systems and controls within a firm
• Levels of expertise within a firm
• Number of complaints received by a firm or number of cases that go to the ombudsman Actual incentives could take several forms such as:
• Lower regulatory fees charged by the FSA
• A lighter-touch supervisory regime
• Lower contributions to the Financial Services Compensation Scheme
• Lower levies to the Financial Ombudsman Service.

Sustainability of the right behaviour is best achieved through positive reinforcement. Let’s hope that the industry can take that lesson to heart and see some recognition for advisers transitioning to the new world.

Richard Howells is intermediary sales director at Zurich UK Life

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