Over the past 15 to 20 years, there has been a growing tendency on the part of many organisations and businesses to try to quantify the benefits of particular decisions they want to make in their chosen spheres of activity.
For example, we are increasingly told that if the state spends ABC on something – anything from extra schoolbooks to more wheelchairs – the advantage of doing so will be XYZ. Or that the future price of not doing something will be far greater than the immediate cost of taking action now.
This ledger-book approach to corporate and political action is undoubtedly a necessary evil. The old approach of spending money on a whim, or with no idea of what the precise costs and benefits of a particular course of action might be, can lead to disaster.
At the same time, all of us, in whatever sphere of life we operate, have faced situations where, increasingly, the tendency to try to justify decisions by reference to cost-benefit analysis has led to some pretty ropey figures being bandied about.
Last week, in an article on the Money Marketing website, Money Marketing editor Paul McMillan drew our attention to a letter from FSA chief executive Hector Sants, addressed to the Treasury select committee just before Christmas, in which he explains the cost of consumer detriment that the proposed RDR changes are trying to address.
Let me say at the outset that I have no idea if these figures from the FSA are correct. My experience of the FSA – and of the Treasury for that matter– is it often sucks figures out of its thumb to validate decisions it wants to make.
In this instance, as Paul has pointed out, the estimate of consumer detriment in Sants’ letter ranges between £400m and £600m a year and is based on a series of assumptions that are almost impossible to verify without a far more detailed understanding of how charges on sales of financial products are being applied, or what the breakdown of misselling between different distribution channels actually is.
But it is also true, as Sants points out, that there has been a massive reputational damage to the financial services industry as a result of its inability to get its act together.
In his letter to MPs on the committee, Sants mentions personal pension and endowment misselling. As it happens, a few years ago, I worked on a story looking at the effect that stockmarket movements were having on the topped-up personal pensions of people compensated by the pension review.
You may not remember this, or wish to, but of 1.1 million people who received compensation, the vast majority’s missing contributions could not be reinstated, so the industry offered to top up their personal pensions by an amount likely to deliver the same returns as they might expect to receive from their former company schemes.
The top-ups were carefully calibrated on the basis of extremely complex actuarial calculations which took into account a person’s age, years to retirement, expected wage increases, future rates of inflation and – crucially – an assumed rate of return to maturity.
It is about the industry acknowledging that, at long last, consumers have a right to expect minimum standards from their advisers
Unfortunately for those who were compensated, most received those top-ups just before the stockmarket crash between 2000 and 2003. After five years of further growth, markets then plummeted again as a result of the more recent financial crisis, before rebounding in the recent months back to the level they were at back in late 2007.
Over the past 10 years, it is almost certain that many people’s personal pensions will not have delivered the returns expected of them when the levels of compensation were set back in the late 1990s and the first year or two of the Noughties. For every year that markets undershoot these targets, those pensions are less and less likely to deliver what they might have expected at retirement.
The endowment situation is very similar. Millions of people sold products that were not suitable and are almost certain not to pay off the mortgages it was assumed they would. Those whose policies did so, in my own case back in 2008, are in a tiny minority.
Almost every misselling scandal of the past two decades has led to successive cohorts of people who listened to advice, took it and are now much worse off.
As a result, there are millions of families out there whose hopes and dreams have been badly dented, if not shattered. Were anyone to suggest to them the reforms now being proposed should be delayed because there has been no study into a possible detriment caused by a decline in the availability of advice they would receive a hollow laugh.
If you were to ask me the exact amount of consumer detriment the RDR will avoid once introduced, I would have to tell you I haven’t a clue. More to the point, I suspect the FSA does not have a clue either.
But this isn’t simply about pounds and pence and ledgerbook calculations. It is about the industry acknowledging that, at long last, consumers have a right to expect minimum standards from their advisers.
Delaying the process further in the name of “pragmatism” and “flexibility” ignores those who have suffered – and continue to suffer – the consequences of unprofessional behaviour. Enough is enough.
Nic Cicutti can be contacted at firstname.lastname@example.org