Alan Lakey: The true cost of RDR 'savings'

3 February 2012 12:00 pm

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)

  • Alan Lakey | 6 Feb 2012 10:21 am

    @Get With The Programme.

    Your comments make no sense.

    The figures I quoted show that even if the FSA calculation of consumer detriment is correct (which it isn't, because it used 2005 sales figures, etc) the cost of the RDR still massively outweighs the savings.

    As I've said before and no doubt will again, if the FSA did its job properly it would stop certain situations before they become a scandal. The RDRby itself will not do this

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  • David Ferguson | 6 Feb 2012 10:49 am

    Seems to be that even at £1.8bn the cost of RDR benchmarks pretty favourably against the £2bn per annum life companies used to pay IFAs for selling with profits bonds.

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  • Ken Hayden | 6 Feb 2012 11:30 am

    @ Alan

    I don't necessarily agree with your position Alan but I do admire your spirited attack on a body which spends our money in ways which are hard to fathom!

    In a previous posting, you suggested that I lick stamps for the FSA which I thought a little harsh! The point that I tried to make and which is relevant to this post is that the RDR involves tremendous changes to IFA practices which I don't believe the FSA has either costed or considered. Having gone through the process ourselves, I can't see any change to the way that we conduct business with our clients other than the contractual basis for receiving our income having changed from being with the providers to now being with the clients! Our experience is that they do pay.

    What does concern me and here I do agree with you, is that vast sums of money are being spent on something which is unlikley to deter or prevent certain sections of our industry continuing to behave in a manner that could lead to customer detriment. Most IFAs do not fall into this category but they are being forced out of the industry or to pay ever increasing costs that are ultimately paid for by the very people that the FSA purport to protect.

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  • Alan Lakey | 6 Feb 2012 1:04 pm

    @David Ferguson.

    David, the commsision paid has no relation to the potential for mis-selling. The FSAs own research acknowledges this, although they keep quiet about this bit.

    There are many satsified with profit bond clients. Also, you and I both know that the 8% commission merchants are, by and large, the banks and other profit-driven outlets.

    The elements within the industry who are profit-motivated will devise other means of fleecing consumers no matter what regulation is in place.

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  • David Ferguson | 6 Feb 2012 1:53 pm

    @Alan Lakey - surely you don't believe that there is absolutely no link between commission and mis-selling? I'm a huge admirer of your conviction but I think the argument would be far more robust if there was recognition that at least some IFAs had contributed to the historic problems of the sector.

    Your comment on profit-motivation perhaps conceals the root of the problem - the general failure of IFAs to run profitable businesses has left them at the mercy of the life companies. Sadly, many have elected to fall in line.

    Delivering client-aligned financial advice surely requires the creation of a well-managed, profitable, highly-qualified advice sector. The implementation of RDR has been patchy in the extreme but the propensity for the status quo to persist was close to nil.

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  • Cap'n Birdseye | 6 Feb 2012 1:56 pm

    Hi All

    What we really need is a day of protest, banners and all, at Canary Towers and then in Parliament Square. Peoples' livelihoods and client's financial well being are at stake.

    RDR is a government department driving how consumers and businesses interact with one another. Government should not do that. Period.
    The role of government should be very limited. At its most basic it is:
    1) Maintaining the defence of the realm
    2) Making treaties
    3) Declaring war
    In other words, simply maintaining a safe environment in which business can create wealth.

    RDR is the biggest imposition of government on freedom that the UK has seen for decades. And, like any government interference in business, the results will be calamitous.

    One has to see it in the context of history: Socialism centralised planning turned the bread basket of Europe (the Ukraine) into a famine zone. RDR is a classic example of socialist centralised planning and will result in similarly undesirable consequences.

    Since when has central planning resulted in anything useful?

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  • Alan Lakey | 6 Feb 2012 4:15 pm

    @David Ferguson

    Two Charles River Associates surveys for the FSA and the ABI failed to unearth much bias. It did find limited bias for with profit bonds (hardly much of this sold anymore) and mortgage endowments (which no longer exist).

    Of course, I guess both you and I would be satisfied if the regulator had colluded with the OFT and agreed to re-instate a maximum commission agreement.

    None of this RDR experiment would have been required if this sensible route had been followed.

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  • Anonymous | 6 Feb 2012 5:47 pm

    At a time of recession with the 'government' trying to create jobs how can RDR be allowed to continue ?
    Extra state benefits paid out for what reason ?

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  • David Ferguson | 7 Feb 2012 9:05 am

    @Alan - I certainly agree that the process does have a bit of the sledgehammer and the nut about it, particularly as the market was already moving in a pretty clear direction.

    Cheers

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  • Unknown IFA | 7 Feb 2012 5:45 pm

    Dear All

    Apologies for the all inclusive comment. I am very concerned by the ramifications of RDR and the implications of the proposed change to the less well off. I have a proposed meeting with David Cameron coming up over the next month, with regards to a separate issue I must add, but wish to raise my concerns with him, as i am so concerned with the lack of representation the IFA community has. I am therefore asking for all constructive comments to be made, e-mailed to me (admittedly my junk e-bay purchase account), to be made. If you wish to send a blank e-mail to request a call back (to confirm identity) I will happily. To Alan Lakey, I could not agree more that , while this wonderful Utopia which is trying to be created, is a fantastic idea, it flies in the face of reality.
    Thank you for reading this comment.
    IFA
    e-mail is cjp100704@hotmail.com

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