Europe Economics’ final ‘phase 1’ report on the impacts of the Retail Distribution Review presents a very positive review of progress thus far with RDR. Below we list the 10 key points from the report.
1. Advisers are becoming more qualified.
Adviser research, carried out by RS Consulting, shows that in 2010, 22 per cent of advisers did not have an appropriate level four qualification, whilst another 29 per cent had just started studying for one.
By 2012, around 96 per cent of advisers held or were studying to hold a level 4 qualification. Now, there is an increasing trend in the attainment of Level 6 qualifications – chartered or certified status – alongside an uptake in membership of professional bodies.
2. Little evidence of change in trust levels.
The Omnibus Survey conducted for the FCA found that 36 per cent (an increase of 2 per cent in the last four years) disagreed either slightly or strongly that financial advisers make recommendations based on the best interests of their clients.
Despite this, the report claims “indirect indications” that consumer engagement may have increased.
3. Consumer confusion on charges remains.
Maybe unsurprisingly, the report found that there is still confusion among consumers regarding adviser charging and the limitations in understanding of how, and how much, they are paying for advice.
The findings suggest that although consumers’ understanding may increase as clarity improves, other facts, such as the differences in charging structures and the search costs incurred by consumers on obtaining price information, are likely to continue to confuse consumers.
Europe Economics states: “Our fieldwork indicates that many advisers use a charging structure based on a percentage of investment – and which is contingent on the investment being made – which may drive some of this confusion, as the end result to consumers is likely to appear very similar to a commission structure.”
4. Lack of clarity between ‘restricted’ and ‘independent’.
Despite the fact disclosure of information by firms to consumers in relation to the nature of the advice they offer, a significant proportion of consumers still don’t fully understand the difference between restricted and independent advice. Consumers often assume the advice they have received is independent.
This follows the FCA saying in July 2013 that firms are not being clear about what proposition they are offering clients, and at that time the regulator said intermediaries must use the terms ‘restricted advice’ or ‘independent advice’ in describing their service to clients.
It is now considering ditching this altogether and going instead of a system based more on explaining the services offered.
5. Consumers prefer advice when they have £20,000 to invest.
The findings also reveal that consumers prefer advice when they have £20,000 or more to invest and they tend to prefer full, holistic advice with about £50,000 or more to invest. As the complexity of the investment grows, the consumer is more likely to seek advice.
Barnett Waddingham published data earlier this month which said that people were extremely unlikely to pay for a financial adviser until they earn more than £50,000 a year.
6. Charges for retail products have been falling…
Interestingly, post-RDR the charges for retail investment products have been falling. Europe Economics notes that product prices have fallen by at least the amounts paid in commission pre-RDR - and there is evidence some could have fallen even further.
7... But cost of advice is increasing.
Despite product costs falling, advice costs are on the up, much to the surprise of the authors. Evidence suggests that adviser charges have increased post-RDR at least for some consumers.
Clarity on pre and post-RDR distinctions between total cost of investment, or benefit to consumers from advice received, are unable to be drawn at this stage, the report adds.
8. Ban on third party commissions reduced product bias.
Europe Economic’s report also found that the ban on third-party commissions has reduced product bias. This is evidenced by a decline in the sale of products which had higher commissions pre-RDR and an increase in the sale of those which paid lower or no commission pre-RDR.
However, elsewhere in the report there are some residual concerns about provider bias in the form of agreements between providers and restricted distributors, “although we do not have evidence of whether this continues to be an issue following the FCA’s action in this area”.
9. Costs of complying with RDR have been in line or lower than expected.
Compliance costs have been broadly in line or lower than the FCA’s original expectations, despite the higher advice fees. However, Europe Economics is keen to point out in its report that “a definitive evaluation is not possible at this early stage”.
10. Platforms have been growing.
Finally, and in part due to technological advancements, platforms have been expanding. There has been a continuing growth in platforms as distribution channels for retail investments, both for direct sales to consumers and advised sales where advisers use platforms.
The report says that increased retail sales through platforms have been at the expense of (off-platform) direct sales, which have declined from 16 per cent of all sales in Q1 2010 to eight per cent in Q2 2014.
ruth.gillbe@ft.com
