Where RDR went wrong
On the eve of the Treasury Select Committee’s report into RDR, prompted by widespread lobbying of MPs by financial services firms who thought the FSA had over reached itself, we publish our own analysis, in a research paper, of where the FSA went wrong.
In most of RDR’s key respects, Parliament’s intervention has come too late, realistically, to delay or scrap it, although we highlight two aspects that it is not too late to work on: Simplified Advice and the proposed new distinction between Independent and Restricted Advice.
The impact of RDR will be to accelerate the widening ‘advice gap’ as rising costs push the entry level for access to advice beyond the reach of more people. The other side of the trade off is higher standards of advice for those that can reach it. Higher standards are hard to argue with but, in light of the likely impact on access, the FSA needed a high burden of proof that the trade off was worth making. This it failed to do, with barely any rigorous quantitative analysis to support its presumption of better outcomes for consumers.
The paper supports the FSA’s actions on perverse incentives that have clearly damaged outcomes. Indeed, we have long criticised the FSA’s foor dragging on commission bias and its apparent inability to deal with high street banks’ remuneration strategies that clearly encourage mis-selling. The original independent reviews that highlighted these problems (including one I wrote up for the Centre for the Study of Financial Innovation) go back a decade or more. But if action on incentives could change behaviours as the FSA believed, it was not necessary at the same time to risk the trade off it did between imposing a ‘professional business model’ on the industry (a luxury the economics of the advice market simply do not support) and widening the advice gap.