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Sants tells MPs that misselling costs the public £600m a year

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.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. If, as I strongly suspect, Sants’ estimated misselling cost of £600m is based on the total amount of compensation paid out, then he ought to quantify this figure on three counts:-

    Firstly, what proportion of it is attributable to the IFA sector?

    Secondly, what proportion of it is a result of hindsight reviews instigated by the FSA, as opposed to actual customer complaints.?

    And thirdly, how much compensation was paid out not as a result of any admission of wrong doing but because of pressure to meet deadlines dictated by the FSA, i.e. it was less trouble and less costly for the institutions concerned just to pay up than to argue the rights and wrongs of each and every case to the bitter end?

    Maybe this is another case of lies, damned lies and statistics (as usual, to meet the FSA’s predetermined agenda).

  2. I doubt that anyone knows how much damage is caused by lousy advice, just before Xmas a widow came to me with a horrendous tale, in less than a year she had lost £380,000 from what was supposed to keep her and the children in the manner to which they had become accustomed until her GP husband passed away at a young age.

    If the FSA had been on the ball this might not have happened and to make matters worse the firm is still being allowed to trade! The people running this firm are highly qualified crooks.

    Most of what the FSA is using as evidence in support of the RDR might have been avoidable had the regulators been able to spot the ‘trends’ created by changes in legislation such as ‘break free from those chains of your occupational pension scheme’, this is where the supervision by the regulators has been absolutely abysmal, the damage caused to the UK is all down to a lack of vision and coordination. The rest is history but we are still paying for it and so will our children and their children.

    Making more and more rules is not a panacea (no pun intended), it is no substitute for effective supervision.

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