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Alan Lakey: The true cost of RDR ‘savings’

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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There are 33 comments at the moment, we would love to hear your opinion too.

  1. I would like to add that this column was reduced or censored, whatever and that the initial paragraph was removed. This said

    “My last column excited comment because the titling by the sub-editor only partially connected with the content. This provoked some posters into claiming that I had become an anti-RDR jukebox which, apparently, is a bad thing.”

  2. Isn’t it fantastic that the chaps at the FSA are now using foresight instead of hindsight – if Alan’s figures are correct then they have the foresight to ensure that in 42 years they can balance the books!

  3. Well said Alan, the damage that is being done to the industry is an absolute disgrace and may well do such damage that the industry may never recover.

    The UK used to a the leading financial services economy generating billions for the treasury in taxes and economic growth. Now thanks to nanny state government the public are to be protected from themselves at the expense of the people best placed to help them – how a one proud reputable industry has been crucified by self centred bureaucratic idiots.

    Government needs to wise up and stop things before it is too late

  4. The unfortunate thing Alan is that most of the ‘root and branch reforms’ in the UK since 1997 have cost fortunes and achieved negative outcomes. This seems to be what we do best as a country. This is also why in due course, the UK will end up owned by interests beyond our shores. We have become muppets in short. Many of the persons in senior public positions are not fit to run a bath, but there are a lot of them and they take car of their own. RDR will happen, a range of hideous results will unfold, but hopefully most of us will survive. I hope you are one of them as I would miss your contributions.

  5. Keep at it Alan. Most of us are behind you.

  6. Alan, you are clearly missing the point. All of this gave the FSA something to do once they had proved beyond doubt that they failed at everything else.

    Plus, it will prevent consumers losing money ever again.

  7. Hector said they thought that if they raised standards everyone could become stockbrokers….

    What a pink and fluffy world they must inhabit.

    In the meantime the regulatory juggernaut is still concentrating on IFA files, systems & controls and reams of sheets with boxes ticked rather than consumer outcomes.

    Reminds me of the Xmas panto…. look behind you!!

  8. No one has mentioned the extra cost the nation will bear, with advisers drawing benefits from the state!

    Also the cost on prescriptions, I have just returned from the Docs and have for the very first time ever been diagnosed with anxiety and depression! No prescriptions seem to be available for Hectoritus!

    My Doc tells me to look for another job in order to save my sanity and was horrified to hear what hoops I am trying to jump through in order to keep afloat!

    Why oh why do we not have an organisation that would back us! I listen to smug comments from some people on here, the “I’m all right jackers” they fail to see that this will bite them in the ass, if not now, very soon! Alan’s comments echo most advisers’ feelings, many who dare not comment for fear of recrimination. Thanks Alan for your bravery!

  9. 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

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

  11. Terence P O'Halloran 3rd February 2012 at 3:52 pm

    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.

  12. 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.

  13. 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.

  14. 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).

  15. 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

  16. 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.

  17. Get with the programme ... RDR 4th February 2012 at 9:43 am

    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!

  18. 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

  19. @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

  20. 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.

  21. @ 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.

  22. @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.

  23. @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.

  24. 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?

  25. @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.

  26. 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 ?

  27. @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.


  28. 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.
    e-mail is

  29. The RDR is a farce compared to what really needs sorting.

    What the FSA needs to be acting upon is the regulation of the banksters and the derivatives market. As there has been NO seperation of investment banks & retail banks – ALL of our savings and pensions are at risk from these off balance sheet bets that are placing the whole global economy at risk.

    Pity Adair Turner says that the banksters are TOO clever to regulate.

    Brooksley Born told congress what needed doing back in the 1990s but she was hounded out!

    It’s an absolute joke that IFAs are being screwed over with regulations and exams when the REAL villains of the piece are allowed to get away with helping themselves to client funds out of segregated accounts in order to place bets on soverign debt – this is exactly the situation with MF Global.

    Just a total disgrace. WHY is NO ONE publically decrying that in 1997 when the FSA came to power there were about 400,000 insurance mortgage brokers and IFAs? How many will be left by the end of this year? 10% of these….or even fewer?!!

    That’s not regulation – that’s decimation!

    History will look back at these times with disbelief and horror. Nero fiddled whilst Rome burned!

  30. Let’s just not forget also that the biggest misselling scandal of all over the past few years is PPI and single premiums being bolted onto loans.

    RDR does NOT deal with protection scandals at all.

    I’m almost at RDR and I’ve been adviser charging for years, but I still see the unfairness of what’s being done and what’s NOT being done.

    RDR is a huge deflection on the real regulation that needs to be carried out for the proteciton of the consumer.

    However no one at Whitehall has the power to carry this out. We are literally been taken over by the Banksters.

  31. Why oh Why wont the Goverment listen to the point Alan Lakey is making. Just look at the replies and support. Why couldnt this have been harnessed before now. The FSA have ruined an industry and still remain to do so. Very Sad and Worrying

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