Consumer Duty – adviser charging and risk premium

At a recent compliance seminar, there was much discussion about adviser fees in light of the imminent Consumer Duty requirements.


The seminar (not run by ATEB!) covered much of the Consumer Duty ground quite well but the topic of adviser fee scales was not, in our view, entirely on target. See below.

Comments from the audience indicated that some firms are seriously considering changing their fee model so as to have higher research and report fees and a minimal implementation fee. ATEB believes that such a model would more accurately reflect the amount of work involved in each area, and, together with an appropriate combination of maximum and minimum fees, and more use of lower cost solutions for clients, could be a good approach to adviser charging in the brave new Consumer Duty world. This is as it should be.

The problem …

However, the reality is that other than for transfer advice, many, if not most, firms still charge on a contingent basis and that effectively means they give advice for free and the charge is really for implementation of a few applications. In PS20/06 the FCA stated:

“Genuine implementation costs should be a small part of the overall costs to the consumer.”

That comment was in relation to pension transfer advice but is no less true of all advice. Other than the odd complaint about an admin error, all of the risk and liability for firms comes from the advice element, not from the implementation.

So, we would certainly encourage and support firms in rebalancing their fee model in this way, i.e. towards charging for advice not implementation. However, experience since RDR suggests that many advisers are very reluctant to operate on this model, other than in transfer cases where they have no option but where the client generally arrives not only willing but keen to transfer. That differentiates transfer clients from all other advice scenarios where clients generally need to be persuaded to invest, save or, especially, to take adequate protection cover.

Risk premium

The comment that caused most debate in the seminar was that the FCA:

“… do not like risk premium. When contingent charging came in for DB the regulator said if you are quoting a ‘risk premium’ you are not confident with your advice and you shouldn’t be giving advice in the first place.”

ATEB cannot find any evidence that the FCA said this. It is possible that some FCA bod said this at a local seminar but far more likely that this is a mistaken interpretation or recollection for which there is no evidential basis.

What the FCA did state in relation to risk and charging  (in PS20/06) was:

“We know firms think there is a greater risk of successful claims from a recommendation to transfer than not to transfer and some respondents said they should be able to charge to cover the cost of PII for this risk. But firms must hold PII to give advice to remain as well as to transfer, so at least part of the cost of PII is for advice to remain.”

This was not a rejection of charging a risk premium, it was a rejection of charging MORE for advice to transfer rather than to not transfer. Charging the same regardless of outcome was of course the whole point of the ban on contingent charging. But percentage, tiered and other charging models have been adopted by firms for transfer advice and, provided the model results in the same charge regardless of outcome, these models do not contravene the ban on contingent charging rules.

That does not mean that those same models do not have issues, issues that have always existed and which will be further exposed by Consumer Duty. The most obvious of these is the ‘flat percentage ‘ issue, which the FCA have commented  on more than once:

“FCA are not about imposing price caps –recommending unsuitable features the clients have to pay for when they are not required is the issue, it is not a good outcome for someone to receive the same service and pay more for it just because they have a larger investment pot.”

It is not just a ‘percentage fee’ problem. Other charging models carry their own issues too. These issues remain to be fixed – but factoring in a risk premium appropriately is not one of them!

Makes no sense

However, even if the FCA had made the claimed statement, it is, in our view, simply nonsense from a business perspective. And linking it to a lack of confidence is to ignore reality. You might as well say that firms should not have PI cover because they should be confident that they always give perfect advice and nothing ever goes wrong and no client will ever complain! Perhaps not the best example because PI is mandatory but you get the point!

The one thing that firms absolutely must do if they are to stand any chance of justifying price and value on adviser charges and complying with Consumer Duty requirements is to identify what it costs to deliver the relevant service. Those costs comprise:

  • General costs, office salaries etc. which are a function of the business and not directly related to particular clients.
  • Profit margin – again decided by the firm (this can only be in place where a firm has done detailed business planning and set their fees accordingly)
  • Variable costs – those that are more directly related to the firm’s client profile

The cost of risk clearly falls into the third category and MUST be factored in to the cost of delivery which should be the starting point for setting adviser charges. So, the question is not WHETHER these variable costs are accounted for but HOW they are accounted for.

Firms could choose to just  throw them into the big pot of charges and allocate them across all clients or they can choose to allocate them in some justifiably proportionate way to clients – the latter could be described as a ‘risk premium’. We do not believe that the FCA would have any issue with a well-argued and evidenced process accounting for such variable costs within the fee scale. And it could be argued that failure to do so effectively means that some clients are paying higher fees for ‘simple’ advice on a small portfolio than applies to clients with larger portfolios and more complex advice needs. The comment suggesting that ’the FCA does not like risk premium’ can safely be discounted.

Tiers and percentages

We have referred to longstanding issues with different charging models above. The FCA continues to steadfastly avoid being seen as a price regulator. Thus, the FCA does not profess to have a view on which fee model firms choose to operate. The FCA’s concern is that the model is able to be justified in a Consumer Duty friendly way as providing fair value for the client. So, fee models will certainly need to be reviewed and amendments made where necessary to resolve any issues identified – like the ‘flat percentage’ issue and to ensure charges represent fair value.

Time costed fees

The audience at the seminar pretty much unanimously agreed that the ONLY fair way to charge and avoid any Consumer Duty issues is to time sheet absolutely everything you do for that particular client and only charge clients for what you physically do, both upfront and ongoing. As it happens, we doubt that this is the ONLY way but it is clearly one way! The problem here is that experience strongly indicates that few firms will make this leap not the brave new world – at least for now. That this is likely to remain the case at least in the near future was confirmed by the feedback from the seminar audience. Not one of circa 80 advisers said they would do this!

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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