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Alan Lakey: The true cost of RDR 'savings'

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In years ahead, when memories have faded, the guilty have moved on to even more lucrative positions and the current savings gap of £9trn will seem acceptable, I want to look back and feel satisfied I did all I could to intercept the RDR travesty.

To achieve anything, we need all the disaffected advisers to publicly denounce the RDR experiment as the sham that it is. Of course, this will not happen - many have been hammered into the ground and no longer have fight left in them. Others raise their heads and shout that they have embraced the changes while even more are making the best fist of it that they can.

As a nation, we are suffering through the most stringent financial crisis since 1929 and, regulators and bankers apart, we are all struggling to keep up. This led me to wonder about the true cost of the RDR, not in human, but in monetary terms.

Back in 2008, the FSA made vague noises about £60m one-off costs, £51m ongoing and around £6,000 per adviser. The one-off cost had risen sevenfold by June 2009 to £430m, with the annual cost miraculously downsized to £40m. In March 2010, policy statement 10/06 supplied an Olympic-sized uplift to £750m one-off and £205m annual. These are just industry costs, the loss to consumers cannot be fathomed although I bet that the average calculator could not cope.

There is another cost that has to be ratified and this is another borne by the industry. I refer to the financial cost attributed by the FSA to its efforts in respect of the RDR. As at January 20, 2012, this had reached a stupendous £5,174,000. I am also advised that an additional £4,805,000 is expected by way of future outlay, making a mind-numbing total of £9,979,000.

If all the latest estimates are correct, then the initial five-year cost, ignoring consumer detriment arising from a lack of advisers, will be almost £1.8bn.

Readers will recall that the FSA contrived consumer detriment figures which were published in the cost-benefit analysis within PS10/06. These figures were also dredged up for the benefit of the Treasury select committee during its hearings. Anybody with a calculator, a half-functioning brain and the available time is easily able to destroy this consumer detriment fiction but, let’s imagine for one moment that these inflated figures are correct. They amount to £1.115bn over a five-year period.

So, let’s get things clear. The RDR is designed to rid the industry of consumer detriment and we (and the Treasury select committee) are told that although the cost to the industry is high, it will be dwarfed by the reduction to consumer detriment. My calculator tells me there are no savings.

After five years, the net cost of imposing the RDR will still be £685m. In fact, if the FSA figures are correct, it will be 2054 before there is a saving.

So, all you RDR apologists who decry outbursts such as this, look at the figures, work out the “savings” and then tell me that the RDR makes financial sense.

Alan Lakey is partner at Highclere Financial Services

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Readers' comments (33)

  • And apart from the truly astonishing amount of money wasted on the experiment and the fact that it does not make any financial sense as my good friend Alan has alluded to so elloquently, the experiment simply will not work on any other level either.

    Oh how easy it is to spend other people's money

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  • Alan, well done yet again! Is there anyone out there in government taking this onboard!!

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  • Alan, I could not have put the case better. You need support (cheque books out people) and I hope that others will give it to you.

    There is too much emotional rhetoric and not enough financial analysis. RDR is a killer - for the consumer and adviser alike. The maths proves the myth.

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  • Alan Lakey is a very impressive individual and I do wish that we could all unite as he suggests.

    An additional, seriously negative result of the RDR is that it will disenfranchise the majority of the population, as they will no longer be able to obtain independent advice. It genuinely amazes me that there appears to be a general belief that the public will easily adapt to a fee-paying environment. It will not and within two years of the introduction of the RDR, the IFA sector as we known it is likely to no longer exist.

    Given that the IFA sector is the best distribution mechanism that the UK has ever had, it seems remarkably stupid to kill it.

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  • Well said Alan there must be thousands of people that would agree with you some of which do not work in the financial services sector.

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  • If memory serves, the word used by Mark Garnier (a member of the TSC) to describe a number of the FSA's Cost:Benefit Analyses that he'd examined was 'farcical'.

    If we add to this the sham of the FSA's consultations (the responses to which it never publishes for all to see and to debate, despite the claims on its website to being "an open and transparent regulator"), Hector Sants' smug brush-off of the TSC last March and the fact that the FSA is currently being sued by John Calland for malicious harrassment, the picture painted is one of which Hieronymous Bosch would probably be proud, with text courtesy of Franz Kafka. The stuff of which nightmares are made..

    As the saying goes: It isn't paranoia when they're really out to get you (despite Hector Sants claim before the TSC that the FSA has no prejudicial agenda against the IFA community).

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  • I am delighted to see someone of Alan's stature taking up the insanity of the figures provided by the FSA. We know from experience that no official department ever produces figures that even approximate to the real cost, so it is quite enjoyable hanging them with their own figures. I have done this on a number of occasions, including a submission to the Treasury Select Committee, but it is amazing how little reaction it creates. I hope that Alan's article starts people thinking a little more about the fiction that emanates from Canary Wharf, and is reproduced indiscriminately elsewhere.
    Unfortunately, Alan also falls into this category with his statement "The RDR is designed to rid the industry of consumer detriment". It is not possible to achieve that target. It is a myth. It may be possible to reduce detriment, but to eliminate it is a total impossibility. Why? Because we are human. There was a recent article about how bank staff are defrauding account holders. There are frequent articles on the disbarment of accountants and solicitors. Even MPs have had their bottoms smacked of recent times. The world isn't falling apart. We just have a normal level of miscreants, and always will have.
    So getting rid of detriment is a myth. Reducing it is an objective.
    But if we can only reduce detriment what does it do to FSA figures? The costs remain the same (assuming accuracy, ahem!) but the potential benefits fall.
    It is difficult to estimate the amount of the fall. Extrapolating form FOS figures it would appear that the deviancy level in the Adviser market, independent and tied, relative to the total size of the market is extremely small. It would be useful if the FOS put some meat on the bones, but I would make a wild estimate that the deviancy level is under 0.25% of the market. That can still be a large absolute number, but it means that the margin for improvement is extremely small. Based on the assumption that we cannot ever eliminate deviancy (if we could we wouldn't need police) then what is the level beyond which we unlikely to improve. A 50% reduction in detriment would mean that we would be down to 0.125% of the market. Is that likely? It looks optimistic, but in truth I haven't a clue, and the FSA have been careful not to examine this parameter.
    But use that 50% figure to determine the benefits that will accrue to consumers, based on the figures presented by the FSA to the TSC. Their median estimate of detriment was £500m. So we can "anticipate" an improvement of £250m, which is matches their estimate of the annual cost of RDR. And that ignores all the pre-RDR costs. Even on their own figures RDR makes no sense.
    So let's continue to demolish some myths that FSA have created that that we have accepted by implication. Let's replace them with facts.
    The FSA may be competent at dealing with structural problems (highly questionable proposition) but they are totally out of their depth in analysing real time human behaviour. One aspect of human behaviour is that people do not like being conned when it hits them in their pocket. There should be a lot more articles, preferably in the main stream press, that replicate Alan's cost analysis. Consumers may then start to put pressure on their MPs to ensure that the debacle of the FSA and RDR is not continued under the FCA

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  • Come on Alan, it's time to move on. You fought a battle you thought was important, and fair enough. But it's over now. RDR starts in 10 months, like it or otherwise. The best we can all do now is make it work for us and our clients. The alternative is to quit, and that won't help anyone.

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  • The RDR makes a lot of sense mr. Lakey , the adverse customer outcomes from commission carnage by ifa's and bank advisers makes a lot of sense, why don't you add that to the math, and the programme funds itself . Also, your views notwithstanding the ship has sailed ...perhaps your efforts and the rest of the industry are better placed in figuring out how to be compliant and have a viable business. As one of your previous articles mentioned consumers will not pay ...ergo they do not value what you deliver to them today, even if the rest of the ifa's are deluded in believing they deliver value and actually it doesn't matter what it costs you to give the advice, get PI. Cover etc... The bottom line is you lot have a major problem... So get cracking and stop wasting time lamenting the inevitable, RDR is here to stay and here's to the demise of product bashers and the thriving business of true advisers..cheers!

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  • One very good motto I was given in my Royal Navy service was this, when the going gets tough say to yourself "illegitimus non tatum carborundum"

    You all know what it means!

    At 62 I was contemplating moving out of FS and taking up my woodturning hobby as a business, but why should I leave a job I love, just because some ill informed, ill qualified and totally inept organisation comes up with such a bizarre and clearly consumer detrimental idea as RDR and pursue it to the detriment of all else, while the banks ruin our economy.?

    I won't let the mandarins at the FSA win, however, if we may need to use a spratt to catch a mackeral.

    If as Hector has said recently he didn't really want the job, why doesn't every IFA on these blogs and their mates, write to him, spelt out how dramatically he has failed to succeed at a job he didn't want

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