While reflecting on regulation and the retail distribution review recently, I pondered on the original ambitions of the RDR architects and how this interminable roadshow is addressing them.
DP07/01 dreamed of “a retail market where consumers are capable and confident, information for consumers is clear, simple and understandable, firms are soundly managed, adequately capitalised and treat their customers fairly and regulation is risk-based and principles-based. The aim was for a market that works efficiently.
There is nothing in these sentiments that any balanced individual could possibly disagree with but, as always, it is the mechanism used to achieve the end result that grates. We know from various research that the public does not value advice sufficiently highly to pay above £75 an hour, so the potential for additional engagement is shackled by the removal of the commission option.
DP07/01 focused on potential provider and product bias even though research by both the FSA and the Association of British Insurers unearthed the dreadful reality that bias was more perception than reality. Nonetheless, in November 2009, the FSA’s Sheila Nicoll envisaged the perception and reality of bias being removed and in March 2010 she confirmed: “We are very concerned that commission bias, actual or perceived, affects the advice.”
Ignoring the extraordinary and convoluted thought process required to consider perceived commission bias as affecting the advice process, we have a clear regulatory viewpoint, from the horse’s mouth so to speak, estab-lishing that bias, whether real or imagined, is a thing of horror that must be obliterated. How strange then the recent admission by FSA head of investment policy Peter Smith that, “product bias will still be possible within the market but I do not think it is a feature of the restricted channel, I think it is a fact of life.”
This, of course, is not the only nugget of truth espoused by Mr Smith. Earlier this year, he confessed that the FSA had no contingency plan if the RDR nirvana turned to hell. “We are trying to achieve a market which allows more consumers to have their needs and wants addressed. If consumers still do not want to engage with it, then we probably will have to do something else.”
The FSA is being very clever in focusing on this appalling perception of bias because the one advantage of wrestling with an imaginary foe is that you can keep the battle going for as long as you wish and always call for reinforcements when things are perceived to be going badly.
Our old friend, consumer detriment, made an appear-ance a few weeks back when HM Revenue & Customs provided clarification regar-ding Vat and fees. This is welcome news for those advisers with a masochistic streak because the £80 an hour maximum has just plummeted to £66.67. Naturally, such costs must be passed on to consumers, thus, by design or otherwise, consumers will suffer priva-tion when agreeing some fee basis for advice.
Those clients willing to pay the going rate will clearly have to shell out a bit more for their advice. But, no matter, it is all in a good cause because in our new financial nirvana, consumers will happily engage and pay the relevant price. Is this what is meant by markets working efficiently?
Alan Lakey is partner at Highclere Financial Services