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New light on an old debate

The proposals contained in CP121 are at the extreme of what was expected in a reform of polarisation.

Regulation is a central force in shaping our fin-ancial services industry and change on this scale will mean a new period of upheaval for providers, advisers and consumers of packaged investment products.

However, most people would agree there are still problems with the workings of the retail financial services market.

The appropriate question is not whether it is perfect but whether it can be imp-roved and what is the appropriate mechanism for bringing this about.

While strong opinions are being expressed on both sides, one of the lessons of these high-temperature debates is that they can rarely be resolved by opinions and qualitative arguments alone.

A submission stating a strong opinion is countered by an equally impressive opinion from a different market participant, leaving us no closer to the truth.

The reaction of the FSA on this occasion has been to commission a considerable amount of new independent research on the issues and publish it for the industry to consider and comment on.

The FSA is to be congratulated on approaching the consultation in this way because it pushes the deb-ate into new, more factual territory. But research res-ults rarely lead to a single policy conclusion.

The work I led at CRA for the FSA is a good example of this. We threw new light on the old debate about whether commission affects new business volumes. Anecdotal evidence of pro-viders failing to get on to panels because they do not pay enough commission or losing volume due to their rivals&#39 aggressive commission rates suggests that commission is one of the more important factors in determining investment advice.

We showed that commission does affect advi-sers&#39 behaviour, but only for a few products, and that most of the industry is free of bias.

Our results could be read in favour of current practices (since most products are free from bias) or against them (since there is bias in at least some areas).

The FSA proposals need to be assessed in terms of whether they are consistent with the evidence and whether they represent the “best” regulatory solution.

So it is for the industry to look carefully at the research and the conclusions that can be drawn from it in light of what is known from other sources.

Can the findings be read in support of a different interpretation of the pros and cons of regulatory change? For example, could they have chosen to emphasise the fact that bias is restricted to a few products and proposed a less sweeping set of changes? Or are there pieces of additional research that the industry could reveal that would fill out the picture and move the debate forward?

Even if the industry believes the FSA&#39s research is complete, there may be a range of conclusions that are consistent with the evidence.

The challenge for the industry is to show that there are alternative regulatory solutions that achieve similar benefits as the proposed regime but at a lower cost.

The questions posed in CP121 will provide evidence for the cost-benefit analysis which the FSA will need to undertake when consulting on changes to the rules.

Replying to the consultation using some of the structure of cost-benefit analysis would therefore improve communication between the industry and the regulator.


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