The regulator's about-turn to allow commission payments on Holloway-style income protection plans after 2012 proves the RDR neglected lower-premium paying consumers from the start.
After 12 months of intense lobbying by mutuals, the FSA has finally relented and is proposing to exempt most Holloway products (HP) from RDR adviser charging and professionalism rules.
For advisers who don't sell these products, which are mainly bought by poorer, blue collar workers, the significance may be muted.
But the u-turn highlights two big problems with the RDR; the bluntness of a one-size-fits-all rule change, and who it overlooks.
About 70% of HPs, those with a "small" investment element, would be exempt under the FSA's proposals. This is a huge amount.
The change of heart - it bears repeating - happened only after intense lobbying. The FSA has finally recognised these products are essentially protection products (i.e. income protection (IP) policies) where risks to consumers are more limited than with investments.
For anyone familiar with the product, the only question is how much time and money has the FSA wasted working out that obvious little nugget?
Holloway plans provide good value IP by not discriminating against lifestyle or occupation in the way policies from larger providers often do, but they also give a small share of an invested surplus pooled across all those who hold the plans.
They are bought by HGV drivers, manual labourers and smokers - people who otherwise struggle to find cover because of their jobs or health.
But advisers would stop selling HP rather than jump through the time and money hoops necessary to offer them RDR-ready, shrinking the choices available to these more marginal consumers.
Not to mention the psychological barrier paying for advice would likely be for HP customers', another deterrent to buying.
The FSA paper admits all this. It states an exemption would avoid imposing additional costs on the sales of HP policies, "which in turn, would ensure Holloway policies will continue to be available....therefore maintaining the product variety in the market".
Listen up, this is the regulator saying it was about to make a sound financial product uncompetitive and effectively price it out of the market for its target consumers, drastically reducing their market choice, not to mention decimating the successful business models of a dozen Friendlies.
Thousands of IFAs plan to leave the industry before 2012 as a result of the RDR. A large chunk of those who stay will seek out high-net worth individuals because, as they see it, that is the only way they can remain profitable.
Add this to uncertainty around less wealthy clients' willingness to pay fees and it is difficult to see how the irony of the HP 'exception to the rule' can be lost on the FSA.
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