Retail Distribution Review

Written evidence submitted by Peter Chesworth, Financial Planner

I welcome the opportunity to provide input to the Treasury Committee’ consideration of the Retail Distribution Review.

As it is very unlikely that I as a sole practitioner will be able to provide a critique of the FSAs formal written evidence I did think it appropriate to comment on the submission by Hector Sants as he does make several assertions in his letter which cannot go unchallenged.

However, before this I do feel that it is ironic that the Chief Executive Officer of the Financial Services Authority who are preaching on the need for qualifications to prove professionalism would not seem to have any relevant financial qualifications himself. If he does he keeps very quiet about it as there is no mention of any other qualifications other than his MA in psychology and philosophy in any biographical pieces.

Mr Sants is slightly disingenuous in his letter when he speaks of those already qualified to level 4. I am one such qualified individual but before I can practice past January 1 2013 I have to "gap fill" 57 learning outcomes out of 132. So far the FSA, with less than 2 years to go, has not disclosed how these "gaps" are to be filled. If the gaps are not filled to the satisfaction of the FSA I will be out of a job.

It is amazing that Hector Sants can quite blithely announce that £15bn has been paid in compensation for pension and endowment misselling and yet the FSA has not conducted any research into the underlying causes of this misselling. Hector says that misselling is a continuing problem, again without any indication that there has been any research carried out into why misselling would appear, according to the FSA be endemic within the industry.

Rather than carrying out any research or making proper enquiries the FSA seems to have been quite happy to accept the vox pox that the underlying cause is commission and qualifications. This is an easy get out for the regulator who has overseen much of this misselling and continues to do so.

The distribution of retail financial products is extremely complicated with levels of interaction between the various parties. The FSA has tried to simplify matters and to quote For every complex problem there is an answer that is clear, simple, and wrong. (H L Mencken) To borrow and expand a quote from Lord Howard the FSA think they have solved one face of a Rubik’s cube and are spending most of their energy trying to draw attention away from the utter chaos on the other five sides

If we examine their calculation of consumer detriment they have taken surveys from a number of different years and then added them together to get the figure. I go back to my original comments about Hector Sants lack of financial qualifications as I cannot believe that anyone would take such figures seriously, then I remember that Hector’s background is that of a banker and the surprise lessens.

The 2008 survey of Pension Switching purported to show consumer detriment of £43m. I am not going to argue this figure in this letter but I believe that the consumer detriment was greatly exaggerated; however, the FSA seems to be indicating that they expect this level of consumer detriment to continue in the future. If the problem has been identified – Why? Why? Why? will the problem continue at the same level. Is the FSA so incompetent at its job that they cannot greatly reduce the detriment even if they cannot eradicate it altogether?

Hector then goes on to mention several other reviews showing customer detriment which he has dated 2005. I have searched the FSA site in vain for these, has Hector just made the figures up? This does seem to be quite usual for the FSA to either make up figures or even better to pay a consultant to make up the figures on their behalf.

Continuing on the theme of the cost of consumer detriment and made up figures Hector make a huge leap of fantasy when he takes the dubious and possibly greatly exaggerated figure of £223m consumer detriment and then bumps is up to £0.4bn to £0.6bn with no explanation or reason. One could speculate Hector has plucked this figure out of the sky because a lower estimate cost of RDR of £1.4bn over 5 years is not really justified by their original dubious consumer detriment cost of £1.25bn. Who will eventually pay the cost of RDR the consumer.

This brings me on to the next significant point about RDR. Just as there is no way to really quantify the costs of consumer detriment., and I will allow that there must undoubtedly be some consumer detriment costs, there can be no way that any calculation or forecast can be made that the RDR will lead to a better consumer outcome at all.

It is rather a strange industry where all the blame for the ills are heaped on one sector. To give an analogy it is rather as if it was an acceptable analysis of the First World to heap all the blame for the conflict on the ordinary soldiers in the trenches. In all the misselling scandals the providers including life offices and banks have very successfully shifted the blame and the perception of fault onto the shoulders of the IFA.

Just as the upheld level of FOS complaints is far lower for IFAs than providers or direct sales staff the level of endowment and pension misselling was, as far as one could ascertain, far greater in the direct sales forces and bank insurers than it was in the IFA sector. BUT the FSA seems to be happy to perpetuate the myth that the main blame was in the IFA sector.

In what other industry where there is a fault with the design of the product is the blame given to the independent sales arm. Had the Toyota faults occurred in the financial sector it would have been advisers who would have been expected to pick up the repair costs whilst Toyota would have washed their hands of any liability.

The FSA keeps saying that it has evidence in support of its case. Unfortunately, I think the same credence can be put on it as the evidence for Weapons of Mass Destruction in IRAQ.

January 2011