My Lords, my noble friend Lord Flight has spoken eloquently on the issue of the retail distribution review both on this and a number of other occasions, both when we have been discussing this Bill and at other times as well. Clearly, his concerns go to the heart of the RDR. I respect him for the force and strength of his arguments and for the clarity with which he has put them. However, I think that my noble friend Lord Hodgson of Astley Abbotts, in his short remarks, takes a more realistic and pragmatic view of some of the things that are necessary in the RDR and of the practicalities of where we are now some five or six years into the process which was initiated back then by the FSA.
The RDR certainly goes beyond the requirements of the markets and financial instruments directive; that is true. It is to be implemented at the end of this year. It will, among other things, as we have heard, prevent product providers from offering commissions to advisers. These rules will go beyond the requirements of the directive, which does not prevent product providers paying inducements to intermediaries. I think that it is a bit of a leap from there to say that the EU has taken a positive view that commissions should be paid in the way that they have been to date, as I think my noble friend possibly recognises.
The Government are supportive of the RDR, which is intended to address long-running problems that impact on the quality of advice and consumer outcomes in the UK retail investment market. The financial detriment caused to consumers as a consequence of poor, biased financial advice leading to the mis-selling of products cannot be overstated and has led consumer groups such as Which? to support the measures in the RDR. For example, following the FSA’s pensions review in 2002, 1.7 million consumers received compensation totalling £11.8 billion due to pension mis-selling alone. More recent scandals such as Arch Cru, where between 15,000 and 20,000 people lost out on thousands of pounds because they were told that high-risk investments were low risk, demonstrate the devastating effects of poor financial advice. Indeed the FSA has estimated detriment to consumers to be in the region of £223 million per annum, so we cannot wish the problem away.
To tackle the problem, the RDR will raise the professional standards of investment advisers, address the potential for adviser remuneration to distort consumer outcomes and improve transparency for consumers. As part of this, the rules banning commission payments to advisers will tackle the risk as well as the perception that commission paid by product providers may bias advice, and rules requiring advisers to agree their charges upfront will promote transparency for consumers. Taken as a whole, the Government’s view is that the RDR should improve consumer confidence and trust in investment advice and it fits with the Government’s wider agenda on increasing transparency in the market.
I am not going to repeat all I said in answer to my noble friend’s recent Question, which led into the points about training. Again, while he and my noble friend Lord Naseby are quite right to raise concerns around the transition, I think that my noble friend Lord Hodgson of Astley Abbotts is right to point out the need for and desirability of professionalisation, but also that the bar has not been set excessively high. I do not want to trade data, but I think that this is quite important. The FSA’s latest research shows that the proportion of advisers who meet the RDR’s new qualification requirements has increased from 50% in summer 2011 to 71% in spring 2012. The FSA research also shows that 93% of advisers are still on track with their prediction—93%, not 91%. I know that my noble friend challenges that, but the FSA has looked at this very carefully and its advice and research shows that 93% are still on track with its prediction to complete the appropriate qualification in time.
Having said all that, I should just spend a minute on the amendment itself. As we discussed in Committee, the FCA and the PRA will be required to have regard to the principle that any burden they impose should be proportionate to the benefits that flow from it. This proportionality principle will apply to any proposed requirement whether it originates in EU law or purely domestically, so it already covers gold-plating. I would also point the House to government Amendment 44, which we will be debating in due course, and which adds a new regulatory principle giving the regulators the duty to have regard to the desirability of sustainable UK economic growth. That is a principle that will apply also to both the FCA and PRA. I am sure they will take it very seriously when they consider gold-plating. It will also be pointed out to them as a hook, as it should be, to avoid unnecessary gold-plating. So, in short, I do not believe that the amendment is necessary, nor does it fit with the Government’s wider aims in this area. I hope that my noble friend will feel able to withdraw it.
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