Lee Werrell, Managing Director of CEI Compliance Ltd, gives the FCA a C minus on its post-RDR enforcement record
As we are all aware, the RDR reforms were introduced on 31st December 2012 to ensure that financial advice is:
• From appropriately qualified (QCF Level 4) financial advisers;
• Free from bias;
• Clear for customers on the cost of advice.
The RDR reforms also banned the payment of commission by product providers and required financial advisers to operate as either:
• Restricted (only able to recommend certain products and/or providers), or
• Independent (able to consider all types of retail investment products)
The central goal of RDR was to improve the quality of investment advice and for the measures to be effective, investors should be clear on the amounts and what they are paying for as well as, sometimes forgotten by advisers, clearly being able to compare services. To enable this across the industry, this obviously means how firms explain these points to clients in documents are critically important. Documents should be clear and concise so they are easy to understand – unlike many previous examples or letters of engagement, terms of business, fee structures and ongoing services.
Starting with good intentions
Initially, the FCA announced a three-stage thematic review to assess firms' overall approaches to the RDR. The first stage initially involved an online questionnaire which was sent to 50 firms reflecting a cross section of the industry, including small financial adviser firms, large advisory networks, banks and insurers. The sampling was not intended or designed to be statistically representative, but the regulator was seeking a qualitative response by asking firms how they devise, disclose and deliver their services and charges.
Additionally the FCA also requested copies of firms’ disclosure documentation which was assessed and then followed up with some firms, performing a more in-depth review. The results of this activity were published in July 2013, in Thematic Review TR13/5 (Supervising Retail Investment Advice: How Firms Are Implementing the RDR, http://tinyurl.com/nwwz8vk).
The FCA also appointed NMG Consulting to conduct consumer research on the topic – leading to the publication in July 2013 of a report entitled “Adviser Charging and Scope of Service: Qualitative Research to Investigate Consumer Understanding of Adviser Disclosure Documents.”
Still too much uncertainty
The results of this small sample were generally positive – but, unsurprisingly, some adviser firms and clients were seen to be having difficulty in coming to terms with the meaning of “restricted” advice. Despite this being seen as a major issue, the FCA has no pre-set wording, and it continues to require individual firms to decide how they will best describe a service which is not independent. So tell me, is this an example of the FCA’s much-vaunted new strategy of regulation management rather than heavy handed rectification?
Of the other concerns, it appears that some advisers are still not disclosing their charging structures clearly in writing, and ideally in cash terms. Investors should know the likely final cost of any work to be done early in the advice process. And it found some advisers are claiming advice charges on single premium products by instalments, despite the ban on this practice.
Many advisers were failing to describe adequately their ongoing services and the associated costs. Now, minor teething problems were always expected, but these indicators have been serious enough to prompt the FCA to launch a much wider review, with the threat of enforcement fines to encourage full compliance. So is that the ‘Forced rectification’ or the ‘no-nonsense regulation’ that the FCA has promised?
The key areas that firms can improve their documentation and ultimately their offering on are;
• Percentage based: Very clearly laid out cash examples – at useful price points – to ensure that people are equipped with a ‘benchmark’ for the costs of advice.
• Hourly rates: Ensuring that ‘typical costs for an investment customer’ or ‘typical costs for a pension customer’ are shown. Highlighting very clearly that a personalised quote will be provided before the customer is liable for any charges, highlighting that there will be a ‘cap’ on charges to ensure people feel protected against the fear of ‘writing a blank cheque’
• Fixed fees: Absolute clarity of which fixed fee service is suitable for an individual’s needs.
One other main area of concern is of firms that offer a contingent charging as part or their entire business model as the regulator considers this to be a higher-risk approach than a typical time-cost charging model due to the need to sell products to generate revenue. Firms operating contingent charging should ensure they have adequate and robust controls in place to manage this risk as well as effective and pertinent management information.
Frightening the little guy
Somewhere along the path to RDR implementation, the needs of the mass affluent or non-HNW investors for value face to face investment advice seem to have been ignored. Deloitte has recently flagged up the likelihood that, under the RDR reforms, well over five million adults could stop using advice because they feel it isn’t available affordably or cost-effectively.
To nobody’s surprise, all the high street banks have withdrawn the investment advisers from their branches. And, as forecast, full “whistle and bells” advice has become the exclusive area of HNWs – who, of course, have the ability to pay upfront fees and who more readily recognise the value of ‘full advice’. Indeed, many adviser firms, due to their long time established fee based models, are only marginally affected by the RDR.
Danger of unintended consequences
There is little doubt or argument that financial capability remains in its infancy in the UK – with the biggest danger that investors faced with an upfront fee may take no further action. The FCA is relying on the Money Advisory Service for free online generic advice, but although the earlier Financial Services Authority (FSA) discussion papers dabbled with ‘primary advice’ for simplification purposes, none of the regulators have properly tried to champion the cause.
Part of the problem lies in the fact that EU-inspired regulations demand nothing less than the full rules governing suitability and appropriateness in all situations where face-to-face investment advice is being given. The argument is that those very same less sophisticated investors require the maximum levels of protection.
The general conclusion of most pundits is that the RDR can only boost the vast savings and protection gaps that already exist. And our government must be praying that auto-enrolment does the trick with triggering pension savings. Inevitably, advisers might look for retail investments that are outside the scope of the RDR reforms to earn sales commission, but the definition of a ‘retail investment product’ is sound.
The commission ban
Interestingly enough, while some EU Member States agree with the FCA on the banning of commission, European legislators working on the MiFID II proposals have not come out for a total ban. This confused situation means that all regulators across the globe must henceforth be mindful of the real prospect of double-charging, since product charges will not automatically reduce to compensate for the introduction of advice fees.
But empirical evidence suggests that online sales may open the way. Lloyds Banking Group recently announced that it saw ‘orphan’ investors (those who post-RDR have lost their IFA connection) as a major growth area for its Scottish Widows subsidiary, which offers an online non-advised sales process.
And so to the greater professionalism required by the RDR. Although consumer groups will say that the minimum QCF level 4 qualification and the greater emphasis on ethical standards is long overdue, it may take a generation for the consumer to value ‘advice’ and to trust its investment advisers alongside other professionals.
But the goal is now clear. Consider this year’s 6% upsurge in the numbers of active advisers as a vote of confidence in the spirit of the RDR.
Impact on IFAs
As Tracey McDermott, the FCA’s Director of Enforcement & Financial Crime, stated recently: “What we have to do as a regulator is to make sure that [firms are] focusing on the outcome that they're getting for their consumers and not their unnecessarily burdensome compliance,' she said. There is work to do to carry on doing that and it's certainly something that's on the agenda.'”