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Ernst & Young warns RDR will increase product bias

Ernst & Young has warned that product bias will increase as a result of the FSA’s restricted advice channel.

Speaking at Aifa’s launch of its Advice Horizons report today, Ernst & Young director of financial services Robert Wood said many people will choose the restricted advice route over the independent channel.

He said: “Nine out of ten wealth managers are saying they will be restricted because they can make more money that way.

“An unintended consequence of the RDR is that product bias will increase as a result of high numbers becoming restricted. We could see a second round of bias returning to the market.”

FSA head of investment policy Peter Smith says: “Product bias will still be possible within the market but I do not think it is a feature of the restricted channel, I think it is a fact of life.

“If advisers are tied there is the potential for bias but the FSA is looking at how firms are preparing for the RDR, which could touch on this issue.

“What we expect to happen is that advisers make recommendations that are suitable for their clients. If within their product range they have not got something suitable they should say so.”

When pressed on whether that is a likely outcome, Smith says: “It raises interesting questions for the FSA about how that will work in practice and how we will supervise that.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. paolo standerwick 4th August 2010 at 1:59 pm

    The tied market will grow to more direct sales orientated buisness as that’s where the providers can make money. AVIVA’s tie up with Santander is just one of the 1st. The majority of consumers will receive no choice at all, just direct sales in the main and a few High Net Worth who will be willing to pay fees for IFAs.

    As usual not very well thought out by the FSA with no real consultation with the people in the industry that could have told them not to waste our time!

  2. Robert Donaldson 4th August 2010 at 2:12 pm

    You have swopped a system from twenty years ago of a multitude of direct sales organisations to the same thing but with a limited number of players as most have been killed off.

    You only need to look at the commission payable on bank/building society products to see that it is in their interest to go down the restricted route.

    I am amazed that for a one hour interview/appt and maybe an hours administration the bank recently took nearly £3,000 from a client that has recently joined this firm.

    Come on FSA wake up and smell the coffee. You are pushing the industry into a scenario from whence it came twenty years ago!

  3. I got out of the FS industry a few years ago, so am not up to speed with what RDR is all about, but this appears on the face of it to be pushing the market back to the situation that existed in the mid ’90s with large direct sales teams run by insurance companies and a much smaller IFA community giving advice to the more discerning and wealthier individuals. Also seems to be a muddying of polarisation that a previous incarnation of the FSA was so keen on. From a non-industry persons perspective, I really can’t see how this moves the game on!!

    “Those who don’t know history are destined to repeat it.” Edmund Burke (1729-1797)

  4. “What we expect to happen is that advisers make recommendations that are suitable for their clients. If within their product range they have not got something suitable they should say so.” What ~ like the FSA ensures that the bank salespeople always do?

    And how much did AIFA spend on this “Advice Horizons” report? Just what was involved in putting it all together that AIFA and a team of selected IFA partners couldn’t have done for themselves at a fraction of the cost?

  5. Yet more naval-gazing from the FSA. Confronted with suggestions of increased bias they lamely state that bias “is a fact of life”.

    The whole of this nonsense is predicated on the premise that bias and/or perceived bias will be removed.

    So, the story thus far is as follows.

    There may or may not be product/provider bias but will aim to remove it but..hang on, it’s a fact of life so….doh, it will remain anyway.

    Our statutory objective is to protect the consumer so our proposals will assist consumers by removing….er, advisers!

    Dan Waters and other FSA officers have stated, “The restrictions we impose on the industry must be proportionate to the benefits that are expected to result from those restrictions” So, if bias cannot be eradicated why is it that close to £1bn is being wasted on cosmetic adjustments that will not benefit Joe Public, will remove half of the adviser population, will create bizarre and incomprehensible variations of advice and will remove whole of market advice from a large proportion of the population?

    We have moved beyond madness. The FSA has created its very own Pacman that is busy eating up advisers, profits, commonsense as well as the vestiges of the reputation of the “worlds finest regulator”.

  6. The big boys win with the assistance of the regulators, unwitting or otherwise.

  7. If product bias arises because commission levels differ from one product to another, the answer is to make all commission levels the same.

    Either that or charge a fee for advice then the possibility of product bias doesn’t arise.

  8. Some clients will not or dont want to pay fees, that is a fact of life, only those with large portfolios will pay. Andrew is correct make all commission taken flat rate across the board, its then sorted, no bias… Simples!

  9. “unintended consequence”

    Surely not ?

    It is an absolutely a intended consequence the “review” is all about concentration of distribution and making as much money out of the duped public as possible.
    Nothing more as other above have said we are going back to the bad old days.

  10. Sorry, can someone tell me what the gain is from going restricted?

    Same qualification requirement, same remuneration restrictions, but inferior product selection.

    Surely this only appeals to those that bung all their clients into the same product/platform and can’t justify why?

  11. I really like anonymous’ quote from Edmund Burke. I have heard that before but forgotten it, but how true it is.

    The FSA’s Peter Smith’s comment about bias being a fact of life is also true; but ranks up there as one of the most insultingly stupid remarks I have ever heard considering all the pain his organisation is putting decent advisers through.

    IFAs need to do something that will grab some proper headlines from the mainstream media, like the pensioners who marched on Parliament the other week about the Barclay’s fiasco.

  12. Do the FSA know what there are doing? Of course they do.

    Are they dancing to the banks’ tune? Of course they are.

    Do they really think RDR is a good idea? No they don’t, they’re just following the money.

  13. ..double with both darts John…the quicker the FSA gets business diverted towards the banks, and away from the IFA sector, the quicker the Bank of England will get their bank-leverage loans repaid!

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