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Speech by Adair Turner, Chairman, FSA
FSA Retail Distribution Review Conference
25 November 2008

Good afternoon.  This afternoon’s conference is about the outcome of the Retail Distribution Review and the proposals the FSA is now making for the reform of retail distribution.  It marks the end of a long road – stretching back over the last 2 years to the launch of the Retail Distribution Review in mid 2006 – but also further back, to the extensive debates about the structure of retail distribution which have gone on for more than two decades. 

And so it is useful to start by revisiting why it has been such a long road, why we at the FSA, and most people across the market, whether consumer representatives or industry players, have believed that change is required in this market.

The problems witnessed in the retail investments market are well known.  It is a market which over many years produced a distressingly large number of mis-selling problems: pensions, mortgage endowments, SPLITS and Scarps.  But also which, even aside these severe problems, left many people worried that it was delivering neither best possible results for consumers, nor a satisfactory sustainable business for providers.  Why was that? What is it about this market which has made it operate sub-optimally?

Well, many of you have had views on that subject, have shared them during the RDR process, and have contributed to the understanding which we believe we now have.  The core problem is that the market for the distribution of retail investment products has been characterised by a number of market imperfections and market failures.  In particular:

• Products which in some ways are inherently complex, with the benefits to consumers, for instance, inherently difficult to quantify when dependent on future investment performance.

• But products where that complexity has also been magnified by opaque charging structures which makes it as difficult for consumers to understand the cost as to understand the benefits.

• And a severe asymmetry of knowledge and information between producers and distributors on the one hand, and consumers on the other, with consumers only very infrequent purchasers of products, and often, indeed usually, lacking the financial capability to be informed purchasers making their own independent judgements of which product  or which provider is most suitable for them.

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These asymmetries have of course created the need for consumers to seek advice from professionals, and that need has created an extensive advice industry.  But not an advice industry which has left participants, whether they be the product providers, advisers or the customers, with a strong sense of satisfaction.  It has been an industry of varying professional standards – including the very good, but also the not so good; and it has been an industry where the system of remuneration, through commissions based on sales, has created two inherent dangers:

• First, that consumers may be sold products which are not always suitable, or best value, and indeed sold products in circumstances where the best advice would have been to buy nothing.

• Second, that the business system has been characterised by excessive churn, with persistency in more than half of regular-premium personal pension policies as low as four years.

A churn reflected in, for instance, the strange paradox, which I first came across when chairing the Pensions Commission, that the stated sales of pensions and other investment products by the industry kept rising even as it was obvious that the total aggregate level of personal savings was not.  And a churn which added costs to the whole system, extra costs which had to mean some combination of lower profitability to providers or poorer value, poorer returns to consumers.

No wonder then that my predecessor, Sir Callum McCarthy felt compelled to say – over 2 years ago now, “we have a system which serves neither the provider of the services nor the consumer of the services”.

And no wonder that the total costs of the system, of the underlying advice, plus the increasing churn, plus the cost of regulation designed to prevent poor advice and unnecessary churn, no wonder that some customers were left with options which didn’t make saving attractive.

And no wonder that the industry scored none too well in terms of consumer trust in it.

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Faced with all these problems, one of the regulatory levers available is to require more disclosure, and the FSA has for many years been in the business of doing that.  But the FSA and much of the industry reached the conclusion some time ago that disclosure alone was an insufficient response and that we needed to do more to address the imperfections of this market on both the supply and demand side.  That "more" has included:

• An increased commitment to our financial capability work, recognising that it may take some years, but trying to improve the ability of consumers to make independent judgements, via our work in schools and via the new Money Guidance Pathfinder.

• A push to remind firms of the principles of treating customers fairly, since ultimately if you are driven by that principle, that in itself can make a big difference.

• But also via the Retail Distribution Review, focussed not on financial capability, nor information provision, nor principles, but on the structural characteristics of this market, which have been an impediment to effectiveness.

The RDR has therefore been central to the FSA’s retail strategy over the last 2 years.  Implementation of its proposals will be central to our work here over the next several years.  And in a few moments, Jon Pain and then Amanda Bowe will talk you through the specific proposals.  And I will not steal their thunder by setting out the most important and newsworthy proposals.

But I would like to thank you in this conference for your input to the RDR, for your help in getting to these proposals.  The FSA has tried in this exercise to be a catalyst for change, to work in a very open fashion.  At the end of the day, we have had to go away and make decisions about how we think it all fits together – but many of the ideas and the insights about what will work in practice have come from industry participants, and I‘d like to thank you for that, and in particular thank the many small firms as well as the large, which have devoted management time to this debate.

What has come out of this debate are proposals for quite significant change.  We know that the market is already developing and changing. More people need access to advice on their financial futures than ever before, and many firms are already changing the way they operate and how they design, deliver and charge for their products and services.  But these proposals will demand further change. 

We recognise that these proposals will create challenges for many industry participants, but we also believe that for the industry as a whole, they represent a major opportunity to define new ways of working, new incentive structures, new professional standards, and new ways of signalling to customers what they can expect in terms of independence, of advice and of responsible sales in different distribution channels.

These proposals, we believe, represent a golden opportunity to put the industry on a sounder footing for the future, better able to deliver good quality products to consumers and to earn their confidence and trust.  I hope the industry will embrace the changes proposed.

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