23rd October 2009
Still time to influence the RDR
The RDR consultation period ends on October 30th and whilst the proposals have triggered mayhem in the adviser ranks it seems that the response rate has been exceedingly poor.
Advisers may be thinking that it’s a done deal and that any response would be pointless. Of course, if advisers adopt such an attitude it provides fodder for the inevitable retort that few advisers raised objections.
Adviser Alliance believes that many of the underlying assumptions are flawed. What’s more, we are aware that research on behalf of the FSA validates this view. Not all of this information feeds through into the public debate so now is an appropriate time to jog memories and enlighten.
In the original discussion paper, DP07/1, the FSA confirmed that, “No other country has such a large percentage of its distribution network attempting to give independent advice as we do in the UK. In some respects this puts the UK substantially ahead of other countries if we believe that independent advisers provide the best chance of providing impartial advice to consumers.”
They also commented on other countries which had already moved to different business methods; “Two markets are widely spoken of as being examples of possible ways forward for the UK, namely the US (because of its alleged successful fee-based model) and Australia (because wraps have supposedly eliminated most initial commission business). However, allegations of commission bias continue in both countries.”
Thus far we have the acknowledgement that the UK is far ahead of the world in terms of providing independent advice and the acceptance that allegations of bias continue even in non-commission environments.
In January 2002 the FSA unveiled research by Charles Rivers Associates Ltd into product and provider bias. The findings were not highly publicised, although various RDR publications make reference to the portions of the research where it suits the preferred conclusion. The findings deserve a wider audience and below is a selection of the conclusions.
“The advice market is not riddled with bias. This suggests that for the most part the advice market is working reasonably well, and that adviser recommendations are not dominated by self-interest.”
“The statistical evidence shows that there has been little significant bias in the advice given on any regular premium product. The market research evidence suggests that there is no bias currently. Rules on personal pension advice are now so tight that there is little room for advisers to make biased recommendations.”
“The level of commission can be seen as a margin that providers pay to intermediaries for distributing their products. On the face of it, providers have to pay this margin out of their total costs, and one would expect to find that levels of charges and commissions paid by different providers are strongly correlated. If this is the case, then higher commissions would be associated with consumer detriment. We know of no quantitative research demonstrating this to be the case, however.”
Charles River Associates then suggested; “The role of commission in stimulating the sale of savings products may be socially beneficial in the current UK situation, because many customers and potential customers are thought to make insufficient savings.”
So now we have the judgment that commission-based selling is required to stimulate savings.
They found evidence of consumer detriment in respect of some with-profit and distribution bonds sales but concluded, “Despite anecdotal evidence that some IFAs and IFA networks do take advantage of their position to recommend products that yield them the greatest commission, there is little sign that this is happening on a large scale.”
Tellingly, the FSA’s Peter Andrews produced an April 2009 paper entitled ‘Did life and pensions “disclosure” work as expected?’ He touched on this research and questioned whether bias extended to fee-based advice, “Charles River Associates finds limited evidence of such behaviour (‘commission bias’) in the market for UK retail investment products. The evidence is a comparison of the outcomes of commission-remunerated sales with fee-remunerated sales and assumes no bias in the latter. That assumption may be unsafe. Fee-remunerated advisers may reason that selling a high-risk product increases their chances of repeat business. Therefore bias may be greater than the paper suggests.”
The point of this information is that the foundations upon which the RDR bricks are being laid are far from solid. and it is not good enough that the FSA uses its research in such a discretionary manner that the RDR recommendations fail to reflect their own research.
Advisers need to make their views known - it is no good lamenting in years to come, this is your opportunity.
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