Cicero Policy Briefer

Issue 18, November 2007

The Retail Distribution Review From the Sharp End

An edited version of Tom Baigrie’s speech to the Cicero Forum RDR Policy Summit, Thursday 1 November 2007

By Tom Baigrie, Managing Director, LifeSearch

Unlike Callum McCarthy, I know from 26 years of advising that incentivisation and classification are nowhere near the most important parts of what governs distribution behaviours. Culture, oversight and enforcement are far more important. If malpractice in advice is sought out and punished, it fast disappears.

Financial Services distribution has been led by Callum and his predecessors for 20 years. I’ve been regulated since the start and in that time I have seen regulation work well and seen it utterly fail. In simple terms it succeeds when it is acute and focused on a particular issue. It fails when it seeks to achieve theoretical market improvement with a series of new rules, rather than principles. The RDR is the most general piece of rules based regulation I have seen.

The key problem it seeks (or should seek) to address is that the lack of consumer and marketing confidence in financial services has created huge ‘gaps’ between what people have and what they should have in terms of all financial provision other than debt.

Currently, in financial services the poor buy nothing but debt and the rest don’t know what to buy or how to buy it best. The trouble is that regulation has rendered profitable provision of good advice to the mass market extremely difficult. Those that try—and I’m one of them—end up in a dance with nanny on the head of a pin called ‘Perfecting Advice Models’.

There is one fast growing financial services tribe who don’t do this dance. It is instructive that they are regulated very lightly, indeed hardly at all. They are the bunch that specifically does not give advice. The parallel between not being tightly regulated and not being bust, indeed succeeding rudely, is one all policymakers should study closely. Non-advice is well nigh off the FSA radar and yet it does continual damage to consumers and to consumer confidence in advice. Its entire proposition is that advice is not normally worth paying for. But the non-advised sellers’ key societal failure is to sell only bits of what is needed as if they were all that is needed. That is how gaps are cemented in.

As a solution to the big issue of gaps, the RDR has us at a crossroads. It’s an either/or chance. We either follow the Treasury’s financial inclusion agenda and at the same time the FSA seeks to increase the supply of good advice to meet the needs of all those who become included; or we seek to perfect advice in line with the FSA’s consumer protection agenda and continue on the current path of tightening up the quality, and thus shrinking the quantity, of the best group of advice suppliers overall—independent advisers.

There are five ‘streams’ within the RDR. One is a purely technical regulatory stream ensuring that any new set of rules does not conflict with others across Europe. Read its labyrinthine complexity and impenetrable jargon and see if you too think that it is regulatory red-tape that is (intellectually) ‘bust’.

The consumer access stream is designed to deliver Treasury objectives and is the only one aiming at the right targets. The rest are about sorting out the supply side and they have missed the big issue by miles. The first of these streams, incentivisation, seeks to end what is a compromise long proven in a million markets. That commission, though imperfect, is in a healthy culture a generally fair and acceptable way of earning for giving advice. To end this compromise will, in the mass market, make independent advice appear far more complex and expensive than that offered by the agents of those who can pay their salesmen salaries and bonuses from the profits of product manufacturing. The lie that is ‘free advice’ will live again in the marketing of the banks and insurers and fund managers. It is not commission that is evil; it is manufacturer marketing practice offering encouragement to the unscrupulous. Both sides of that can be easily stopped by the FSA.

The other streams—sustainability, reputation and professionalism—sound sensible, but proposes an incredible maze of fine dividing lines and ruinous change. It is a bit Blairite in that there are previous rules that could do the job, but as there is no will to do the hard work of enforcement, it is easier to develop new rules and see if they somehow work.

The maze starts with generic advice—a good intention—but leads on to primary advice, a wolf in sheep’s clothing that will destroy the concept and value of ‘advice’ once and for all in the consumer’s mind because it does not need to be suitable. It is primary selling, not advice.

Beyond primary advice lie several other sorts. There is no point in me defining them to you; consumers will not care anyway. Paul Lewis gave an interesting talk in which he demonstrates that depolarisation—the last big general bit of regulation—changed the number of different types of adviser from three (independent, tied or non) to 4,731. The RDR will increase even that insane situation geometrically. Paul calls this process ‘complexification’. It is a key strategy of the banks: if you complexify enough, consumers become so confused they can easily be taken advantage of.

Instead of all this, the RDR should go back to basics and focus on getting a clear gap in consumers’ and retailers’ minds between what is advice and what is just selling without regard to suitability.

Instead, the FSA, having created the specific concept of advice as being a process where responsibility for any decision moves from the buyer to the seller (caveat emptor becomes caveat vendor if you give advice), has utterly failed to promote or support that difference as being of value. It has left advice unvalued in the eyes of all but the wisest of consumers.

This was once the only borderline in retail FS regulation. The clearest evidence of how irrelevant that border has become is in the title ‘Generic Advice’, as chosen by the Treasury for the review it asked Otto Thoresen to do. In FSA terms that is a regulatory breach! ‘Advice’ is specific: it is saying, “Mrs. Smith, you should do this.” If I say that and I’m wrong I pay before the ombudsman. When I say, “Mrs. Smith, a lot of people like you might think of this,” that is information. If it is wrong, I do not pay. That is why Otto clearly states in the first bold print he uses in his review: “The service can be more accurately described as providing information or guidance to people.”

The irony in the RDR is that it is the regulator’s failure to police that one line between advice and selling without responsibility, and thus ensure that regulated advice is seen as being different and valuable. If you can’t enforce one border so that even people as well educated as Treasury ministers understand its logic, how can you enforce the dozens envisaged within the RDR?

The first step needed for advice to flourish in scale and quality is for the FSA to promote one key truth: “If you buy with advice you are far better off than if you buy without it.” Only once the value of advice has been re-established can it withstand, in the mass market, the many changes for the better envisaged in the RDR. The RDR should be stalled until that is done.

Tom Baigrie is the Managing Director of LifeSearch and can be contacted here.

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