What we learned from FCA’s first RDR review

Donia O’Loughlin

This morning (25 July) the regulator published its report card for the advisory sector for its efforts to get to grip with the new rules in the first six months of the Retail Distribution Review regime.

Many of the adviser parents reading this with experience of term-end school reports might have read a familiar message underpinning the 14-page review: shows some potential, but could do better.

The report, the first of three thematic reviews the Financial Conduct Authority is undertaking to assess RDR adaptation, appeared to reach one ultimate conclusion: advisers are still not being transparent enough; not about charges, and certainly not about their proposition.

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The regulator wants more from you. Here we go over the key lessons advisers are being told they need to learn to impress the regulator more next time around.

Embrace ‘restricted’

One thing that is clear is that no one has a clue as to what the regulator wants from advisers, especially those that have ditched independent in favour of restricted.

We knew that advisers had to decide whether they were to be independent or restricted post-RDR, but providers and advisers alike were obviously under the impression that there rules around the latter of these options are more relaxed that they in fact are.

For example, Paul Harrison, head of Prudential’s business consultancy unit that is providing post-RDR advice to intermediaries, previously told FTAdviser that restricted advisers may be doing themselves a disservice by over-complying with the rules and openly describing themselves to clients as ‘restricted’ when this is not required.

The FCA found evidence of firms taking Mr Harrison’s advice and has set them straight. You must use the wording ‘restricted service’ in conveying your proposition to clients - and you must divulge the nature of the restriction, too.

Pick a side and stick to it

On the other hand, the FCA also found evidence of advisers eschewing restricted and labelling themselves as IFAs, whilst offering a service that does not meet the new standards for independence.

In particular, it pointed to a case study of one adviser firm that places 98 per cent of business with a single platform and offers a managed funds service into which 99 per cent of business in practice is placed. The firm describes itself as independent and will build bespoke portfolios where requested by the clients, but that just will not pass muster to be an IFA, the regulator said.

That kills the ‘I can use one platform and remain independent’ argument dead, then. And it also has important implications for ‘hybrid’ models: if your default offering is limited, you are restricted. Grey is very much out of season at the regulator; we live in a black and white RDR world now.

Advisers have to pick a side and the independence bar has been reinforced. Maybe we’ll see restricted advice numbers grow in the coming months as a result.

Percentages just won’t cut it with fees