Retail Distribution Review

Written evidence submitted by Martyn Young

The following is taken from Money Marketing on Jan 13th 2011.

I find it revealing that when the FSA seeks to use research in support of its proposals, it conveniently ignores the alternative interpretations that are frequently placed on the same data by the researchers.

One example is the lack of industry trust that Callum McCarthy and others have frequently alluded to. In 2008, the FSA helped produce Consumer Research 65a. This confirmed that accountants, solicitors and bank managers were the most trustworthy occupations, with financial advisers not far behind.

Consumer Research 76, also from 2008, established that between 67% and 92% of consumers considered advisers worthy of high or medium trust. In September 2010, the FSA’s annual consumer confidence research found 98% of those questioned believed their adviser had treated them fairly. Banks scored 83%.

FSA Occasional Paper series 32, in April 2009 confirmed, "Charles River Associates (2004) finds limited evidence of commission bias in the market for UK retail investment products." This is not new but it is nice to see the FSA confirming it.

The 65a Research asked consumers what they considered important when purchasing a product. The three areas highlighted were product information, if the adviser is independent or not and id the adviser meets regulatory requirements. The least important? – How fees or commission is calculated.

Charles River carried out further FSA research in January 2009 and this included the statement, "It is often argued that providers offering higher commission will ‘buy’ market share. We did not find evidence to support this."

Another part of Charles River research related to advisers recommending distribution or with-profit bonds instead of equity Isas. The research in 2002 allocated £49.5m a year of consumer detriment on the basis that each sale lost the consumer up to 0.5%.

In June 2009, Oxera calculated commission on bonds has been reducing year on year, falling from 5.25% in 2005 to 4.32% in 2007. Additionally, back in 2002, total sales of such bonds were 433,000, a figure which fell to 71,439 for the year ending September 2010. IFAs were only responsible for 45.6% of these sales.

The detriment figure should be zero if we also take into account Charles River’s observation that the RIY on bonds is sufficiently lower than Isas that after 10 years the detriment disappears. Many of the other FSA assumptions are built on hills of sand?

January 2011