The FSA has written to the Treasury select committee ahead of its formal submission of written evidence, claiming the RDR will help stamp out up to £600m of misselling each year.
The TSC called for written evidence in November on whether the RDR would meet its stated objectives of increasing access to advice, transparent and fair charging, a better qualification framework for advisers and greater clarity over the type of advice being offered.
Last month, FSA chief executive Hector Sants wrote to committee chairman Andrew Tyrie to explain how the RDR will address a market “that was not working”.
Sants argues that fundam-ental changes are needed to address problems with misselling, citing four incidences of misselling the FSA has investigated since 2005.
In its 2008 pension switching review of IFAs, multi-ties and tied advisers, the FSA judged that 16 per cent of sales were unsuitable, costing £43m in annual consumer detriment.
In 2005, Charles River Associates’ research of IFAs and tied advisers for unit trust versus equity Isa sales found between 12 and 20 per cent of sales to be unsuitable, with consumer detriment costed at £70m a year. The CRA research also found the same proportion of investment bond versus equity Isa sales to be unsuitable, with a consumer detriment cost of £92m.
Another personal pension review in 2005 indicated a link between commission payments and market share, resulting in a consumer detriment cost of up to £18m.
The total cost of consumer detriment arising from these misselling reviews adds up to £223m. The FSA estimates annual detriment from unsuitable product sales to be closer to between £400m and £600m.
In his letter, Sants also sets out the logic behind the FSA’s refusal to allow grandfathering for advisers. He said: “Our experience in allowing grandfathering rights for mortgage brokers has been that it has seen a continuation of misselling. Without applying the new qualifications to the whole industry, problems of misselling may continue under the new regime, further undermining confidence in the industry and at a cost to consumers.”
The FSA’s cost-benefit analysis puts the implementation costs of the RDR at between £1.4bn to £1.7bn over a five-year period. Initial costs to advisers and providers are estimated to be between £600m and £750m, with 18 per cent of the costs met by advisers, 30 per cent by banks, 37 per cent by insurers and 15 per cent by stockbrokers.
Sants maintains the RDR will not threaten the availability of good quality advice and argues the annual consumer benefit of the RDR outweighs the annual implementation costs. He says: “Any dilution of the proposals will result in an increase in the cost to consumers through continued misselling.”
But advisers have criticised Sants’ assertion that access to advice will not be hit by the RDR. Paladin Financial Services managing director Tim Purdon says : “If, by Sants’ own admission, 20 per cent of current IFAs will leave the market as a result of the RDR, then it must threaten availability of advice as there will be fewer IFAs to go around.”
Purdon says he has no problem with gaining additional qualifications but believes advisers should be given more time to obtain them. He also argues that higher qualifications will not bring an end to misselling.
He adds: “There is no way that the benefits of imposing the RDR will outweigh the costs. The argument over addressing commission bias could easily have been solved if the FSA had simply demanded that all companies pay commission on a level basis. If that had been the case, then none of this would be required.”
Thameside director Tom Kean says the cut-off date of December 31, 2012 is “madness”, particularly for older IFAs. He says: “Once I have got the exam, I am not going to behave any differently than when I did not have it. It does not make me more ethical.
“I do not believe the benefits of the RDR will outweigh the costs. From the small IFA that handles bread and butter business to big City firms, we are not all the same. The FSA may have done its costbenefit analysis but that is all theoretical and I am yet to be convinced by it.”