Compliance Consultant Tony Catt reflects on the significant regulatory and compliance changes which the financial advice sector has witnessed over the past ten years since 2011.
Whilst I congratulate IFA Magazine on reaching its’ ten year anniversary, it reminds me that this is almost exactly the same length of time as my own compliance business has been operating. We have certainly shared some interesting times. Very much under the old Chinese curse “May you live in interesting times!”
The one thing that has been constant over the years across the financial advice spectrum is that things will continually change. I must confess that this has all been fairly positive for compliance consultants as firms have needed help at every step of the way. The last ten years has been no exception. In this article I will highlight some of key regulatory initiatives which have been brought in since 2011 to change the way which advice is delivered for the benefit of clients.
Tackling TCF
Way back in 2011, firms were still getting to grips with the then regulator, the Financial Services Authority’s (FSA), Treating Customers Fairly guidelines. Treating Customers Fairly (TCF) is an outcomes-based regulatory and supervisory approach designed to ensure that regulated financial institutions deliver specific, clearly set out fairness outcomes for their financial customers.
The six outcomes of TCF are as follows:
- Culture and Governance. Clients are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.
- Product Design. The products and services marketed and sold are designed to meet the needs of identified customer groups and are targeted accordingly.
- Clear Communication. To give clear information to clients and keep them informed before, during and after the time of contracting.
- Suitable Advice. Where clients receive advice, that the advice is suitable and takes account of their circumstances.
- Performance and Standards. The performance of products and service levels are according to our clients’ expectations.
- Claims, Complaints and Changes. Clients do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.
None of these outcomes in themselves involved any change in practises to most advice firms which were acting ethically. However, firms needed to prove that TCF was embedded in all their processes, rather than simply being a tick box exercise.
Ta-dah the RDR
The next regulatory change was the Retail Distribution Review (RDR) which was launched by the FSA, with most of the rules it introduced taking effect at the end of 2012.
Some of the main points from the RDR were:
- Firms must operate on either an Independent or Restricted Advice basis.
- Advisers needed to qualified to at least Diploma Level to continue to advise.
- Advisers could not charge commission and could only operate on an Adviser Fee basis.
The classification of firms made some sense but did not stop networks from describing their panels as some kind of independence.
The adviser fee issue was a well-meaning attempt by the FSA to move advisers from sales to a client–centred advice proposition. Whilst this should have meant better value for clients, many providers and advisers simply re-badged commission to adviser fees. If they were charging commission of 3% of AUM, they simply charged a fee of 3%.
Raising professional standards in advice
The increased qualification requirement for advisers simply forced many adviser stop advising, either altogether or on regulated products. Personally, my experience is that higher qualification does lead to better advice and outcomes for clients so this was a positive thing for all those advisers still able to practice. The higher qualification level which advisers were required to attain may also have weeded out some of the sales-orientated advisers and thereby helped to lead to greater focus on the client’s needs and objectives throughout the advice process.
The RDR’s higher qualification requirement was introduced in an attempt to bring financial advisers into line with other professionals, such as accountant or solicitors. However, I believe that a further step to level six qualifications such as the CII’s Chartered Financial Planner status achieves this and that step up can only be a matter of time.
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