OpinionJul 25 2013

What we learned from FCA’s first RDR review

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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.

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

Away from proposition labelling, the FCA stated its disapproval that some advisers are providing charges in percentages, rather than cash terms.

Examples of a lack of clarity with charging included advisers charging for initial advice in cash terms and then imposing an ongoing adviser charge as a percentage of the amount invested.

Many advisers have told us in months following the RDR coming in that clients prefer charges coming out of the product so this method of charging is clearly popular, but the FCA wants to see cash equivalents offered that give a good steer as the range of ultimate costs that may be charged.

This means providing an example of a hypothetical amount invested and the adviser charge that would be charged in cash terms, showing how it would fluctuate based on different amounts being invested.

What does ‘review’ mean?

Most firms include a review as part of their ongoing service, however the FCA said there were examples where firms did not give enough information on what the review would include or whether it was automatic or the client needed to request it.

As the word ‘review’ may mean different things to different people, firms should make it clear what these involve and how they are arranged, it added.

The FCA gave one ‘good’ example of a firm who provided three service options to its clients, which included one transactional service and two different levels of ongoing services.

The FCA praised the disclosure documentation which used a table to clearly illustrate the differences between the two levels of ongoing service - and in particular said it liked documents that use colour to differentiate key sections.

It has been well documented in the past how clients do not read disclosure documents. It seems you’ll get no respite on how much you need to put into these monolithic tomes, but will be instead expected to make them easier to read.

It’s not over yet

The FCA is currently doing a three-stage thematic review to assess firms’ overall approaches to the RDR and the first stage, which involved 50 firms, is now complete. It has provided feedback to those firms and warned that it may take supervisory or enforcement action if this is not heeded.

So the first level of scrutiny is over but the next, with a wider sample of firms, will be due in October 2013 and will “test whether firms have acted on our feedback”.

The Association of Professional Financial Advisers said the review was positive overall and pointed to “surprisingly few” issues being raised (did it expect its members to be further behind the curve, then?), and called for another positive outcome to the second review to prompt the third to be abandoned.

I doubt this is likely. It’s more probably the reviews will be used as this one has: to tighten up the rules and remove inevitable ambiguity. I’ll let you judge if that is for the best for clients.

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