The other day I received an email from a financial adviser. He was writing to tell me of a major life company trying to get round the RDR by offering “distribution allowances” on annuities and, perhaps, other products too. Commission by other means, in simple terms.
Speaking to other IFAs in the past few weeks, it seems that particular company is only the tip of an iceberg. Several more names were given to me in addition to this one.
Last week, Money Marketing published an opinion piece on the same subject. Apparently the regulator is becoming increasingly antsy about the way some providers are looking to “circumvent the RDR through excessive payments, related to services like training and events, which look to secure distribution.”
My own experience over the past 20-plus years suggests these tactics are nothing new. Every time regulators have tried to impose a new set of rules aimed at improving transparency or to benefit the consumer, the industry has found ways to sidestep them.
Last year I wrote how companies had deliberately lumped charges on to the front end of their pension products, reducing them massively, often uneconomically so, at the back end of their stated time periods.
This allowed providers to officially comply with the regulator’s disclosure requirements at the time, simultaneously claiming ultra-low RYI figures. Given payments into the vast majority of pensions tended to stop after barely five years, these claims were false. Providers were – and still are – ripping off millions of pensions policyholders who fell for their con.
Why do I mention all of this? Well, last week Money Marketing also published a story to the effect that the cost of implementing the RDR over the next five years “could” reach £2.6bn. This includes “up to” £1.5bn in one-off costs, plus “up to” £233m in ongoing annual costs.
Understandably, this left some commentators – including supposed RDR champion Martin Bamford – gulping for breath, although he makes an interesting point I’ll come back to later. In common with several observers, however, Martin reflects that ultimately it will be policyholders who pay the cost of this allegedly vast RDR bill.
Always assuming, of course, this is a precise estimate of the actual cost. Astute readers of this column, and there are one or two out there, will have noticed that I placed quotation marks around several words in my earlier paragraph: “could” and “up to”. That’s because Money Marketing did so in its original story.
To obtain it, the paper submitted a FoI request to the FSA. The regulator replied by “signposting” relevant policy documents and consultation papers containing various estimates for implementing the RDR. Adding the figures together produced the “up to” £2.6bn sum quoted.
Let me stress that the story itself was a totally legitimate one to pursue. Shining a light on the cost of introducing one of the most important changes in the regulatory landscape over the past 15 years or more is a vital task for journalists. Money Marketing must be commended for doing so.
At the same time, using the words “up to” to qualify the amounts involved suggests there were other figures available. Generally, in most regulatory documents I have seen over the years, costs are based on a range of estimates, both high and low. In this particular story we only appear to have been given a top estimate.
For example, speaking to the FSA, a large part of the quoted one-off bill involved £460m for totally replacing providers’ existing computer systems to comply with the requirement for commission-free products. Yet many providers only needed to tweak their systems, or make relatively minor changes to them, costing less than original estimates.
Other figures in the FoI information supplied by the FSA tell a similar story, including estimates of RDR implementation costs for banks: as we know, several have decided exit the market instead.
It might be helpful for those of us who scavenge off the excellent research so often carried out Money Marketing if all relevant figures are published at some stage.
More importantly, what the paper did not do – almost certainly because it was outside the scope of this particular story – was to also measure the potential benefits of the RDR for consumers.
We know the FSA is targeting a range of outcomes to determine the RDR’s long and short-term success, or otherwise. Some are directly cost-benefit related, others focus on improved transparency, increased persistency and more “consumer engagement with the market”.
We will discover in a year or two’s time whether the RDR has delivered on these desired outcomes. But it is worth noting current anecdotal evidence that some of them, including lower charges, are already beginning to filter through. In other words, RDR costs are mitigated by other benefits for consumers.
Irrespective of any future assessments, one further point must be made now: the ultimate high cost of the RDR has been caused by the industry’s historic and occasionally dishonest resistance to all previous attempts to introduce more transparency and higher standards.
As Martin Bamford implies in his column, this is the price of dragging the financial services industry – kicking and screaming – into the 21st century. Rather than complain, advisers should be asking themselves why their inaction over many years led to the RDR. Ultimately, you reap what you sow.
Nic Cicutti can be contacted at firstname.lastname@example.org