Financial Conduct Authority chief executive Martin Wheatley has been forced to defend the Retail Distribution Review during an acrimonious evidence session with the Treasury Select Committee, during which he faced accusations the rules have created “commission lag bias” and stifled innovation.
Former investment banker and committee member Mark Garnier told Mr Wheatley that the RDR has cost £3bn and has caused severe problems within the industry due to there being fewer advisers, less innovation and increased costs to consumers.
Mr Garnier in particular said the rules had created an advice gap for lower-value clients and that it has created a “commission lag bias”, whereby advisers are deciding not to ‘disturb’ portfolios in order to retain legacy trailcommission.
Mr Wheatley was defiant, saying that the consumer has got a “much more transparent industry” and that the general criticism of the rule changes has moved to concerns over specific areas as the “IFA community has got on with it”.
Mr Wheatley also reiterated claims based on FCA data that adviser numbers are rising, which was met with a stern rebuke fro the MPs who highlighted that numbers remain substantially down on pre-RDR figures.
The latest figures from the FCA revealed that there are 31,220 registered individuals on 10 January 2014, including 21,881working at advice firms. At the end of July 2013, there were 21,684. At the end of December 2012, there were 20,453 financial advisers and in the summer of 2012, 23,787.
The FCA chief said said: “We have moved product bias and created a professionalised industry, higher qualifications, and more advisers today than yesterday.”
To the latter remark, Mr Garnier said: “But less than three years ago.”
Mr Wheatley later added: “When I first joined the FCA there was lots of RDR criticism but now it’s about general points and not condemning all of it. The IFA community has just got on with it.”
To this an MP called out: “Those that are left.”
Mr Wheatley said: “There was a significant drop in the start but in the last year they have picked up.”
He also argued that Mr Garnier’s point about less innovation was incorrect, specifically highlighting new adviser models to tackle the so-called ‘advice gap’.
“Banks worked out they can’t cost effectively give an advisory service at that level. The industry is trying to find more cost effective ways of finding a solution.”
FCA chairman, John Griffith-Jones, who was giving evidence alongside Mr Wheatley, added that the automated simplified advice model is “not perfect” but said it gives consumers an effective answer.
He highlighted that the average cost of advice is £75 to £100 per hour and this “front-end cost weighs heavily” if you have a smaller investment pot.
Mr Griffith-Jones said: “We should encourage innovation in this area, as a fundamental problem is the cost of providing advice for this area.”
Mr Garnier argued that rather than remove a commission bias, the RDR has initiated a “commission lag bias” where advisers think it is better to leave investors in products that may not be good for them so as not to create a ‘disturbance’ where their commission will be switched off.