Still time to influence the RDR
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The RDR consultation period ends on October 30 and whilst the proposals have triggered mayhem in the adviser ranks it seems that the response rate has been exceedingly poor.
Advisers may be thinking that it’s a done deal and that any response would be pointless. Of course, if advisers adopt such an attitude it provides fodder for the inevitable retort that few advisers raised objections.
Adviser Alliance believes that many of the underlying assumptions are flawed. What’s more, we are aware that research on behalf of the FSA validates this view. Not all of this information feeds through into the public debate so now is an appropriate time to jog memories and enlighten.
In the original discussion paper, DP07/1, the FSA confirmed that, “No other country has such a large percentage of its distribution network attempting to give independent advice as we do in the UK. In some respects this puts the UK substantially ahead of other countries if we believe that independent advisers provide the best chance of providing impartial advice to consumers.”
They also commented on other countries which had already moved to different business methods; “Two markets are widely spoken of as being examples of possible ways forward for the UK, namely the US (because of its alleged successful fee-based model) and Australia (because wraps have supposedly eliminated most initial commission business). However, allegations of commission bias continue in both countries.”
Thus far we have the acknowledgement that the UK is far ahead of the world in terms of providing independent advice and the acceptance that allegations of bias continue even in non-commission environments.
In January 2002 the FSA unveiled research by Charles Rivers Associates Ltd into product and provider bias. The findings were not highly publicised, although various RDR publications make reference to the portions of the research where it suits the preferred conclusion. The findings deserve a wider audience and below is a selection of the conclusions.
“The advice market is not riddled with bias. This suggests that for the most part the advice market is working reasonably well, and that adviser recommendations are not dominated by self-interest.”
“The statistical evidence shows that there has been little significant bias in the advice given on any regular premium product. The market research evidence suggests that there is no bias currently. Rules on personal pension advice are now so tight that there is little room for advisers to make biased recommendations.”
“The level of commission can be seen as a margin that providers pay to intermediaries for distributing their products. On the face of it, providers have to pay this margin out of their total costs, and one would expect to find that levels of charges and commissions paid by different providers are strongly correlated. If this is the case, then higher commissions would be associated with consumer detriment. We know of no quantitative research demonstrating this to be the case, however.”
Charles River Associates then suggested; “The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation, because many customers and potential customers are thought to make insufficient savings.”
So now we have the judgment that commission-based selling is required to stimulate savings.
They found evidence of consumer detriment in respect of some with-profit and distribution bonds sales but concluded, “Despite anecdotal evidence that some IFAs and IFA networks do take advantage of their position to recommend products that yield them the greatest commission, there is little sign that this is happening on a large scale.”
Tellingly, the FSA’s Peter Andrews produced an April 2009 paper entitled ‘Did life and pensions “disclosure” work as expected?’ He touched on this research and questioned whether bias extended to fee-based advice, “Charles River Associates finds limited evidence of such behaviour (‘commission bias’) in the market for UK retail investment products. The evidence is a comparison of the outcomes of commission-remunerated sales with fee-remunerated sales and assumes no bias in the latter. That assumption may be unsafe. Fee-remunerated advisers may reason that selling a high-risk product increases their chances of repeat business. Therefore bias may be greater than the paper suggests.”
The point of this information is that the foundations upon which the RDR bricks are being laid are far from solid. and it is not good enough that the FSA uses its research in such a discretionary manner that the RDR recommendations fail to reflect their own research.
Advisers need to make their views known - it is no good lamenting in years to come, this is your opportunity.
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Readers' comments (18)
Anonymous | 21 Oct 2009 5:18 pm
If anyone can give me one instance when the FSA responded positively to feedback from the IFA community I'll make a full response to the consultation paper.......thought not. they're going through the motions. They have their anti-commission, pro-bank agenda in place and they are going to run with it. It's a done deal.
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Evan Owen | 21 Oct 2009 5:37 pm
Yes, still time to talk but no time left for moaning.
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King Canute | 21 Oct 2009 5:39 pm
Is there a link that will allow us to comment on line? as I dont agree with the first poster on this as if we all took this attitude then things could be a lot worse............. couldn't they?
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Evan Owen | 21 Oct 2009 5:45 pm
Just noticed Mr Anonymouse's comments.
The FSA is not 100% anti-commission, it appears to want to ban it for IFAs alone. If you don't like it then moan to the OFT, if you can wake them up and if you don't mind that the FSA is exempt from competition law in any event.
Go on man, or woman, or mouse, spend more time writing your response instead of cruising the blogs and making the regulators, and politicians, think IFAs have 'serious issues' and the numbers must be decimated in order to bring... er.. order.
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Anonymous | 21 Oct 2009 5:46 pm
Well I'm 46 yrs old and have +20 years Insurance Industry experience. I wholeheartedly support the FSA's attempt to improve and upgrade the Industry Qualification Benchmark, but in the absence of a viable IFA Business Model (following the abolition of Commission) I for one fear the worst and that I will find another Career.
I regard the notice given to me as 3 years Notice to find another Job or Business Opportunity, because I for one have had enough of the FSA's interferance in the way I earn a living - no other Business has to put up with such CR4P as we are expected to do.
The FSA and this Labour Government is determined to Crucify this Industry no matter what and I just don't want to be there when they do ..... UNLESS David Cameron can do something quick!
What's this Country coming to?
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Anonymous | 21 Oct 2009 5:52 pm
From the time that the RDR suggestions have been known I have been getting feedback from my clients to the proposals. I have assessed how they will react to paying fees in the future.
I have been totally balanced in my questionning and other than one exception (a solicitor that works on a fee basis) they have all criticised the proposals and did not see how they could pay me on a fair basis that would be beneficial to them and keep me in business.
Unfortunately I believe they that they are right and so do most of my peer group.
In ten years time when the FSA (or its reincarnation) realise that the protection (if they attach RDR) and savings gap has widened beyond belief they will change the rules again to try and mend the advice culture but will certainly not acknowledge that it was them that broke it in the first place.
Now what does an IFA do after 23 years in this business?
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John Varley | 21 Oct 2009 6:09 pm
My understanding of the overall intention of the RDR was to make access to advice easier for the general public. I have no objection in principle with most of the RDR and indeed I welcome the move which will see Financial Advice become regarded as more of a profession through a higher level of education and qualification. The one area which I simply cannot understand is the whole issue of adviser remumeration. By simply giving only one option of adviser remuneration to the public i.e. to pay a direct fee, will kill the advice process for the vast majority. Only those who are currently used to paying by fee will continue to do so (less than 5% of the public) leaving the vast majority to probably not bother taking advice at all. Specifically speaking, as I operate exclusively in the care fees funding market with an average client age of 87, a purely fee based approach will significantly disadvantage over 90% of my clients. At the moment I am able to offer contracts where the cost of advice is entirely born by the product provider in the event of short term death, which is very common amongst my clients. A move to fees will see this cost being born 100% by my clients. How is that Treating Customers Fairly?
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Anonymous | 21 Oct 2009 6:10 pm
I agree its a done deal, no point in responding, no one is listening at Canary Wharf!!!
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Anonymous | 21 Oct 2009 6:38 pm
2,252 have already responded by petition saying that FSA policies have and will prove disastrous to both businesses and consumers alike! Alan is right however and although the FSA will take no notice we must still respond so that they are unable to use this against us -
PLEASE CLICK AND SIGN: http://petitions.number10.gov.uk/FSANOCONFIDENCE/
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Anonymous | 21 Oct 2009 7:19 pm
This is the same FSA who failed to notice what the banks were up to, and yet come down about the ears of the IFA every time. I have been an IFA for many years and in the Insurance Industry since 1968 and yet I am now expected to undergo yet another set of exams to be completed the year before I retire, to satisfy another set of Labour Party whims.
Why don't they investigate the mortgage brokers as a goodly number of them seem to be paying fines galore for misconduct.
In no other section of business would we have to pay fees to the very organisation who are trying to put us out of business!
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