RDR and FAMR Review
Initially due to be undertaken in 2017, the FCA’s review of the Retail Distribution Review (RDR) will now be done this year (2019) and will coincide with a review of the, not totally unrelated, Financial Advice Market Review (FAMR). We make a few comments and predictions below.
Cost of advice
We know an analysis of the ‘costs of advice’ will be included in the review. The FCA has stated “advice is expensive and is not always cost-effective for consumers, particularly those seeking help in relation to smaller amounts of money or with simpler needs”. The FAMR concluded that new technologies can play a major role in driving down costs and it recommended building a clear framework to give firms confidence to deliver streamlined advice on simple consumer needs in a proportionate way.
As such, it’s clear that the FCA will be looking at the effectiveness of FAMR and therefore will be considering how much consumers are paying for advice. David Geale, FCA Policy Director, has confirmed this position by saying “We will be looking at the advice market as a whole [in the RDR review]. We will be looking at what has happened since the FAMR and one of the aspects we will be looking at is the cost of advice”.
The FCA is acutely aware that advisory firms’ profits have increased significantly since 2012 (source: Personal Investment Management & Financial Advice Association) and will question whether more could have been done to drive down the costs of advice to make it more accessible to the wider market.
The FCA’s view on this will be interesting. ATEB’s experience is that there is little appetite within the adviser market to change their charging structure and/or reduce charges.
The Work and Pensions Select Committee opened an inquiry into contingent charging in January 2019, after receiving ‘worrying evidence’ about the financial advice given to members of the British Steel Defined Benefit (DB) pension scheme. The Committee raised concerns that advisers were incentivised to recommend a pension transfer due to contingent fees which pay an adviser only if the client proceeds with a transfer. The Committee believes the charging structure should be banned for pension transfer advice, estimating that over 100,000 people a year are transferring from a DB scheme on the back of potentially conflicted advice.
The FCA previously decided (October 2018) not to introduce a ban on contingent charging but said it would “carry out further analysis of the issues”. In particular, the regulator said at the time there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes.
It feels inevitable therefore, that contingent charging will again be considered as part of the 2019 reviews.
ATEB’s view is that a ban on contingent charging will not solve the problems; if it is banned for transfer advice, surely it should be banned for all aspects of advice, including switching and investment replacements? It could also result in clients being denied access to advice where there is a legitimate need.
The issues arising from DB transfers are far more fundamental and are a consequence of business models that are focussed on income growth and a dependency on acquiring business, but without an appetite or understanding of compliance, regulatory risk and consumer risk. DB transfers are a one-off decumulation strategy – and, since they are virtually impossible to reverse, need detailed consideration, process and risk management.
Let’s be clear here; we’re not saying that a non-contingent charging structure won’t work, only that it needs to be thoroughly evaluated and thought through, so that it is one component of an advisory process (which may be product specific).
FCA Chief Executive, Andrew Bailey, has said that the regulator will examine product governance rules in 2019. The product governance requirements set out in the Markets in Financial Instruments Directive (MiFID II) rules are aimed at making sure advisers are offering their clients compatible solutions by requiring product manufacturers and distributors to identify clearly defined target markets.
During a Treasury select committee hearing on 15 January 2019, FCA chief Andrew Bailey said: “We will do work this year on new product governance and on research unbundling, which has also been quite an issue, and we want to see how that has been working … All that work is a product of our supervisory work as to how effective the application of MiFID II has been”.
Once again, we are clear that this will be reviewed with firms. If you have not seen it, the ATEB PROD article is worth reading.
The FCA has stated on numerous occasions that it will look at the advice market ‘as a whole’. But what does this mean?
There may be a clue in recent FCA statements. Chris Hewitt, FCA Technical Specialist, has said, “… in some cases there were shortcomings found in last year’s review [FAMR] and the FCA was ‘disappointed’, for example, with how some advisers explained charges to clients. There were also signs that some advisers were struggling with disclosure and there were also concerns about client risk profiling assessments. We are therefore clear firms need to give attention to these areas and to demonstrate improvements.”
As they have been around for many years, it is disappointing to find that many firms do not appear to be getting these two fundamental aspects right. So, we would expect to see some FCA focus on disclosure and risk profiling.