The Retail Distribution Review and the subsequent removal of commission reduced the availability of advice significantly, according to Sir Howard Davies, former chairperson at the Financial Services Authority.
Speaking at a hearing with the Financial Services Regulation Committee, Davies spoke about how the RDR had affected the advice market.
He spoke about how, in the current environment, many individuals with less than £100,000 are unable to get advice because the market has pulled back due to the costs and burdens of providing advice.
The committee asked Davies his views on whether the regulatory requirements are actually to the disadvantage of the most vulnerable customers.
“Yes, I believe that's true,” he said. “When I was running the FSA, we twice reviewed the advice market, and there was a lot of pressure on the regulator at the time in parliament, but also from outside, to say that the practice of paying commission to financial advisers was a bad thing in that bias in certain ways.
“There was some truth in that. But the question was, should one outlaw advice and really tighten up the regime in a significant way?”
Davies said during his time at the FSA, it was reviewed twice and they came to the conclusion to not change it.
The reason for that was because the FSA felt that if it did so, it would reduce the availability of advice significantly, and would make it difficult for firms to give advice that they would essentially withdraw from the profession.
He left the FSA in 2003 and later in 2013, the Retail Distribution Review reached a different conclusion.
“The conclusion from the RDR at that time was effectively to outlaw commission and really tighten up on the fact finding and the due diligence and everything. That had the consequence of causing a number of firms to very significantly reduce the advice that they were prepared to give customers,” he said.
“This is because the compliance burden of doing so was so difficult that you effectively couldn't meet it and accept the high cost, and you couldn't recover that cost unless the client had quite a decent amount of money to invest so it had the consequence that was expected.”
He explained that the Singaporeans who follow very closely what the UK does in the sense of monitoring did not follow this.
“They carried out their own review on the basis that the FSA had decided then to outlaw commission, and they concluded, once again, that they shouldn't, because they thought that the availability of advice would be reduced, and that the net consumer benefit of that would be negative. That remains my view.”
Growth
Also in the session, Davies said the changing regulatory duties will require trade-offs with the government in order to achieve the growth and competitiveness objective.
This followed on from a speech by FCA chief executive Nikhil Rathi earlier this month where he called for a debate about risks and discussed how the industry needs to accept how there will have to be trade-offs with the government.
