Cicero Policy Briefer

Issue 24, May 2008

Summing up the winners and losers in the great RDR debate

By John Lappin, Editor, MoneyMarketing

“We may be violently agreeing with each other next week”, one senior insurance company director suggested to me in the run-up to the FSA’s interim paper on the Retail Distribution Review.
 
The violent bit might be correct anyway. But what happens now in the nasty playground fight?
 
Is it simply a case of “IFAs  unhappy, banks happy” changing to “banks unhappy, IFAs happy”?
 
As a side argument we now have multi-ties deeply unhappy, IFAs and AIFA happy, financial planners and, dare I say, the professional bodies not as happy as they were six months ago.
 
And finally the weird one. Life offices unhappy, probably, despite IFAs being their main distribution channel and fund managers happy to take the assets under management wherever they come from—bless ‘em.
 
Now I am going to argue that it doesn’t really have to be this way and that the interim paper doesn’t have to change too much to become the final one. I would of course say that, as the editor of the generalist paper for IFAs. There will still be generalist IFAs, they will still need a decent weekly newspaper and therefore I win too.
 
But for what it is worth, here is my argument about what each of the supposed losers did wrong and and why they shouldn’t make a massive racket trying to win the tug of war, swing the pendulum back or whatever game we are in.
 
First, life offices. I believe the life offices when they say they have a big problem with money moving around between them. But in solely blaming IFAs for this and failing to properly accept that some of it is switching (often good), rather than churn (always bad for the client), they failed to make their case. The accurate assessment would have been to say that the market has a problem which affects both providers and distributors, and indeed UK Savings plc in general, if not necessarily clients in particular. The proper way to sort this out would have been to work with distribution and regulator to move from big upfronts where the commission is being used by life offices to ‘bribe’ both adviser and client to move to them, but to accept commission may be necessary in some circumstances. To sacrifice IFAs’ freedom of action in a bid to stop this churn through some kind of FSA enforced limited multi-tie was madness.
 
Life offices should be using proper discussions with intermediaries as partners. They and their distribution probably now have an ability to change together to everyone’s benefit. There is a business case for advisers to move too. Insurers should make the case themselves. If it’s really hurting, take away the agency.
 
Second, banks. I think the banks’ mistake was that they fought their corner too well in the industry-led period before the first RDR papers and found themselves successfully hijacking the process. No one likes a hijacker. RDR Version One risked handing a massive advantage to banks at least, partly by hammering existing IFA distribution. Perhaps it would have been better to ask how can best practice be achieved in bank distribution without it straying into misselling as has happened in the past. This applies to both the top end, the mass affluent and mass market. In this scenario if banks really want to take IFAs’ existing clients then they should compete on quality of advice and service in the free market, i.e. by acting very like IFAs. With one part of the market not threatened with extinction perhaps now banks, providers and everyone else involved can work at how to harness this distribution to get more people saving.
 
Third, multi-ties. This is more difficult. These advisers can actually offer some very high quality advice. But I would say it was high time the transparency of their processes was considered by the regulator. It is a few years since regulation allowed multi-ties. But in the next few months, if they wish to hold on to the title of adviser and avoid the tag of salesman, multi-ties must demonstrate that their processes and advice are transparent. They don’t even need to make all but the most passing reference to IFAs. They should make their own case.
 
For professional bodies and financial planners, I would point out that a few planners simply thought they were ‘quids in’ from the RDR. Some advisers thought the professional bodies were thinking that way too. Planners are still very well positioned but they will be saved from the temptation of inflating their fees. Most planners do provide excellent value for money. They and the bodies they dominate should do one thing: lead by example. The model works. Inspire the rest—don’t revile them.

As for IFAs, they do have responsibilities. I think they should meet them by engaging with the FSA. Of course, I also think they should keep their eyes and ears open in case people start disagreeing violently.

I also think consumers win. They still have access to IFAs—they nearly didn’t. Now all we have to do is get advice to more of them.

John Lappin is the editor of MoneyMarketing and can be contacted here.