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