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A closer look at Hector Sants’ RDR estimates

Speaking before Christmas at an event organised by PanaceaIFA, Treasury select committee member Mark Garnier told assembled IFAs the committee was a rather dull bunch, reliant on data and facts to reach their collective conclusions.

Garnier was impressing on advisers the need to back up their emotional views on the RDR with evidence of the potential damage that could be caused to the industry and consumers if the review is implemented without amendments.

The TSC is investigating a number of technical issues at present and committee members only have a limited amount of time to devote to each one. They crave the type of reliable facts and figures that strip away the incessant noise created by lobbying campaigns and offer a simple picture of the possible effects of the issue they are investigating. 

It is to this end that FSA chief executive Hector Sants recently sent his open letter to TSC chair Andrew Tyrie, ahead of a full body of evidence, which included an extrapolated calculation that between £400m and £600m of annual consumer detriment  is being caused by the sale of inappropriate products. This figure is then presented as the major justification as to why the RDR should be implemented without dilution or delay.

Admittedly the FSA has an unenviable task in trying to draw up an estimate of consumer detriment. To my mind it appears impossible to put an accurate figure on the amount of money consumers are losing annually due to poor advice.

But if you are implementing a policy which you estimate will cost between £1.4bn and £1.7bn over the first five years and lead to a radical reshaping of the retail market, number hungry politicians are going to want this kind of costed justification.

The problem for the FSA is that it is hard to see how its estimates of consumer detriment stand up to much scrutiny.

For instance, the FSA suggests that £43m of consumer detriment is currently being caused due to poor advice around pension switching. This is based on 16 per cent of sales being unsuitable in its 2008 review and 2007 menu figures producing an average commission of 5.6 per cent.

MPs’ concern has focused on IFAs yet these figures are skewed by the inclusion of tied and multi-tied advisers. It is understood that at least one large retail bank fared badly in the review.

In calculating this figure the FSA has taken no account of falls in commission levels or behavioural changes you hope would have taken place as a result of the huge publicity surrounding the review and the compulsory workshops set up by the regulator in the aftermath of the review.

Two other calculations were made based on mystery shopping of advisers as part of the Charles River Associates 2005 review which found no evidence of bias being prevalent in the advice market. The research mystery-shopped 94 IFAs, a mixture of fee-based and commission-based, and 73 tied advisers.

It found a minority of IFAs and tied advisers sold unit trusts or investment bonds without first making use of the individual’s Isa allowance. This represents a continuing annual consumer detriment of £162m, according to the FSA. Again the regulator used the 2007 commission menu, using examples of products paying above average commission, to make its calculations and therefore takes no account of the continuing move away from upfront commission. The calculations are also based on bond sales from 2007, the year before Government changes to Capital Gains Tax led to a dramatic fall in IFA bond sales.

The FSA then rounds its £223m calculation by a few hundred million to get its £400m- £600m estimate on the basis that there are other areas of misselling in the market that it has been unable to quantify.

As Lansons director Richard Hobbs points out in this week’s Money Marketing, the FSA has made no attempt to calculate any possible detriment caused by a decline in advice.

Aifa’s Manifesto for Regulation, published in November, suggested a 10 per cent drop in adviser numbers would lead to a £650m drop in long term business in one year, a £1.76bn drop in sales of Oeics and unit trusts and two million less policies resulting in a reduction in pension benefits of £4.4bn. The FSA suggests adviser numbers may fall by up to 20 per cent, yet in his letter Sants ignores any potential consumer detriment around this point and suggests the RDR will not affect the supply of advice.

There continues to be examples of poor advice given by a minority of IFAs- for example evidence exposed through the FSA’s review of Lehman-backed structured product sales.  But the majority of MPs and advisers who have concerns about the RDR are not asking for the clock to be turned back on the continuing move towards increased professionalism and more transparent charging or for the FSA to tone down its efforts to clampdown on poor advice.

Many, however, are asking why the FSA cannot be more flexible and pragmatic about the implementation of the review to ensure as many advisers as possible remain in the industry to serve their clients. The FSA’s shaky estimates on consumer detriment are unlikely to have quelled MPs’ fears about the RDR.

Paul McMillan is editor of Money Marketing- follow him on twitter here


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Your point regarding pension switching does not consider that probably the majority of switches then were into 1% AMC pensions, where the 5.6% commission was paid by the insurer and not levied on the consumer (other than via the 1%s). Whilst the advice on those cases to transfer may have been wrong, how can the resulting commission be counted as consumer detriment when it was not paid by the consumer nor their pension fund?

  2. How does a calculated figure of £223m suddenly become £400m to £600m?? As IFAs we all know there are a minority of bad advisers in the marketplace, there are in every professional walk of life.

    It is probably also true to say that the bulk of the problems we see when taking on new business comes from the bank/assurers. Perhaps that’s why the calculated figure has been inflated by up to 170% to reach the upper estimate.

    Unless the FSA listen to the IFAs at the coalface and not just to the bank/assurers the only losers in all of this will be the general public, the very people RDR is meant to protect.

  3. Fraser Brydon - IFA 7th January 2011 at 12:57 pm

    No wonder the banks failed when their regulators were incapble of basic arithmetic. Would someone at the FSA start telling it how it is not what they want it to be….be honest about the effect and the costs. IFAs are happy to progress to higher standards and at least 1/3rd are already at RDR levels with two years to go, the banks are in a pile of the preverbial and they know it. Don’t saddle the industry with needless costs – it’s the client who will have to pay when all is said and done. I hope the FSA will be proud to saddle the consumer with more needless costs.

  4. It’s fair to say that the FSA have always been a little biased depending on the argument and agenda it wanted to follow.

    The last govt showed little understanding of this fact, the markets and left the FSA to its own devices and we all know that lead inadvertantly to more problems. I suspect 5 years from the now parts of the RDR will be judged as a disaster , badly thought through and again will be reformed.

    Lets hope this govt coalition shows a little more comonsense. The MPs debate about RDR is a start but trying to bring the FSA onboard and accountable is another problem altogether.

    The Sants figure manipulation (or lack of understanding) illustrate the point perfectly.

  5. The FSA detriment calculations are a mish-mash of figures taken from historic research which fails to take into account the monumental changes in the market over the past five years.

    Whether this is bad mathematics or some calculated attempt to maximise the figures, well, you can form your own opinions.

  6. Canary Wharf Bugged - evidence released!!! 7th January 2011 at 1:32 pm

    The “story” goes like this: Sants went back to Carnary Wharf and asked his team for the evidence.

    “What do you idiots mean”, Sants was heard to say, “We have no evidence? We are spending £1.7b and this Tyrie bloke wants evidence, find some!”

    “Well Hector, we have searched our records and even our own reaseach shows no evidence however we have googled an obscure survey of three Austrailian firms!”

  7. The RDR Fraud is finally being exposed.

  8. Very good article, although I suppose I would say that as an unscrupulous commission hungry IFA.

    It’s a shame nobody ever quantifies how much good advice benefits people, it’s only ever poor advice that they make an attempt to do that with.

    I recommended two ISA’s, a unit trust (OEIC) and an investment bond with a guarantee, in 2009, on a total investment of £97,000 (balanced risk) to a middle aged couple. Recent value was just over £117,000 (approx 21% gain), which is around £17,000 more than they would have received from a deposit account. I have calculated, from that (using the revolutionary Sants quantum binary metaphysical large hadron collider duckworth-lewis method) that the ultimate benefit to the consumer, averaged across all IFAs selling these products, is £343M rounded up to £1.1 billion.

    The cost of implemeting the legislation that will continue to provide the public with this sort of service is, of course, nil.

  9. Come on Hector,admit it,this is “The Final Solution” for IFA’s.

  10. Steven Farrall (Adviser Alliance) 7th January 2011 at 3:25 pm

    “…emotional views on the RDR…” They are not emotional. They are the views of the ‘free market’. Of men and women of far greater experience than anyone in the FSA. Of free men operating in a free market with clients who chose their services from competing offerings. And because all this bureaucratic meddling is destroying their businesses and livelihoods, let alone their clients wealth, of course they are emotional. Which leads me onto…

    “Admittedly the FSA has an unenviable task in trying to draw up an estimate of consumer detriment. To my mind it appears impossible to put an accurate figure on the amount of money consumers are losing annually due to poor advice. Exactly. It is absolutely impossible for any central planning bureaucracy to make any meaningful estimates at all. The whole concept is based on very shaky assumptions which are also very sensitive. The whole point is that the free market, human action if you prefer, is the only mechanism able to make the millions of calculations necessary and then automatically act on those calculations. Essentially bureaucracies don’t work.

    The MP’s on the committe seem to be ignorant of basic Austrian Economics thinking. A study of the simple elements of Austrian analysis will demonstrate to them immediately, that to be emotional, the FSA is talking bollocks. Again or still (depending on your preference).

  11. RDR is the issue of Planet Saints, unfortunately although the off spring has some good point and extreme cost (Which could be also claimed by Pow Pot, Hitler, John Stalin) RDR like its human reflectors should be sent towards the Sun at high speed, taking Planet Saints with it.

    The answer to the imaginary or reality ills of the Financial Services Industry, will only be solved when it recognises the needs of the common people.

  12. Apart from the fact that a guesstimate range of £400 to £600m is so wide as, on its own, to raise questions of credibility, I suspect these figures have been arrived at merely by totting up all the sums paid out in compensation over a given period. So how does this estimate break down?

    For example, what proportion is attributable to the IFA sector, as opposed to the banks? My guess would be that the former is very small and that the latter is very large.

    What proportion is as a result of unprompted customer complaints as opposed to hindsight (oops, sorry, “thematic”) reviews instigated by the FSA? My guess would be that the former may well be rather smaller than the latter.

    What proportion is in respect of merely projected, i.e. as yet actually to happen, mortgage-related endowment maturity shortfalls? Many of these have arisen as a result of incorrect pre-sale illustrations (at the behest of LAUTRO), compounded by the FSA’s diktat as to the basis of mid-term projections. This is not to say that many endowments weren’t sold without a proper comparison of the various repayment methods available. Rather, that the projected shortfalls now arising have, to all intents and purposes, been manufactured by the combination of past and current formulae dictated by LAUTRO and by the FSA. Is that a fair basis on which to calculate an estimate of consumer detriment?

    Also, what proportion of compensation settlements have been made by institutions seeking to clear a backlog just to meet deadlines imposed by the FSA, as opposed to an actual admission of misselling? In many cases, it’s been more commercially expedient just to pay out en masse rather than to plough through the minutiae of each and every case on an individual basis.

    So, without a proper breakdown of the figures that Sants is now citing, how can they be regarded as having any credibility?

  13. If IFAs are still taking large up front commissions and ignoring ISA allowances, they should be out of our industry. That however does not mean commission should be excluded from clients choice of payment for advice, nor will ever increasing exam qualifications, do away rouge advisors. The solution is simple, apply max commissions for each and every product, if then the IFA feels he has not been paid sufficentley for his/her advice he can levey a fee in addition. Frankley the cost of RDR implementation, does not justify the outcome, more rigorous controls of IFAs by their networks/FSA could easily close the commission abuse loophole.

  14. Andrew Pritchard 10th January 2011 at 2:53 pm

    A very interesting article that emphasises the problem of ‘evidencing’ the key points to justify the decision made. I know from my background in marketing that just about anything can be justified by statistics if you have the statistical resources and time to compile them (plus the politicians ability to skew the results by language).

    Remember the FSA need a ‘problem’ to ‘solve’ to justify all of their actions, therefore they will always present their arguments on that basis.

    But as an owner of a small IFA how can I help in providing the counter argument. We need a strong, resourced representative body to put up the argument or significant support so that lots of small IFA’s can get their voice heard with lots of the anecdotal evidence to disprove the FSA solution.

  15. To Andrew Pritchard ~ the strong and well resourced body for which you ask could just be AIFA if, and it’s a big if, it takes on board the results of its latest member survey which must surely have been prompted by the growing tide of dissent amongst its members and the increasing rate of defections to alternative bodies such as the Adviser Alliance.

    If you want to be regarded as accountable to your membership, AIFA, then publish the results of this survey and tell your membership what actions you propose in response to what we’ve tried to tell you.

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