In a letter to Treasury select committee chair Andrew Tyrie, FSA chief executive Hector Sants sets out why he believes the RDR should be implemented without dilution or delay.
Central to Sants’ argument is the suggestion that consumers will continue to suffer £400m to £600m of misselling each year without the RDR.
However, there are more than a few question marks over these figures.
For instance, the FSA suggests £43m of consumer detriment is currently being caused due to poor advice on pension switching. This is based on 16 per cent of sales being unsuitable in its 2008 review and 2007 figures suggesting average commission of 5.6 per cent.
MPs’ concern has focused on IFAs, yet this figure is skewed by tied and multi-tied advisers. At least one big retail bank fared badly in the pension-switching review.
The calculation takes no account of falls in commission levels or behavioural changes you would hope would have taken place as a result of the publicity over the review and compulsory adviser workshops set up by the regulator in its aftermath.
Two other calculations in the letter are 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. It found a minority of IFAs and tied advisers sold unit trusts or investment bonds without first making use of an individual’s Isa allowance. Again, the FSA used 2007 levels of commission to make its calculations which do not appear to take into account falling IFA bond sales.
The FSA then rounds up its £223m calculation by a few hundred million to get its £400m to £600m estimate.
The biggest flaw in these calculations is the fact they take no account of the increase in standards and move away from up-front commission that continues in the IFA sector.
MPs and advisers who have concerns about the RDR are not asking for the clock to be turned back on professionalism and more transparent charging. The market is already moving in the right direction.
They are just asking for the FSA to be more reasonable about the way the RDR is implemented to ensure as many IFAs as possible continue to advise and that the review’s goal of ensuring an industry and regulatory framework that truly works in the interests of consumers is met.