RegulationDec 16 2014

RDR review fails to find evidence of consumer benefit

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There is no clear evidence yet that consumers have benefited from the Retail Distribution Review, despite the new regime apparently meeting its objectives in relation to professionalism and supply-side cost pressures, the regulator’s two-year post-implementation review has found.

Europe Economics’ final ‘phase 1’ report on the impacts of the RDR, published today (16 December), generally gave a glowing review of the rules meeting stated objectives.

However, it states that while the RDR has initiated a move towards increased professionalism among advisers, increased advice costs have mitigated cost falls elsewhere; and it admits “more time will be needed” to see whether any improvements translate into better consumer outcomes.

It adds that the RDR has led to improvements in information disclosure, but argues consumers are still confused over charges and the differences between independent and restricted advice.

The FCA acknowledges in its summary that consumer understanding of the independent and restricted adviser labels “appears limited” and these rules are “unlikely to have their desired effects”.

The watchdogs says it is therefore set to consult on the matter and “wants to hear stakeholders’ views for better ways to present information to consumers on the nature of advice services”.

It says: “This could include, for example, developing a proposal put forward by the Smaller Business Practitioner Panel to introduce a simple label that better sets the consumers’ expectations by explaining the scope of the firm’s advice.

“This work will also take on board the implementation of Mifid II changes on advice labelling. We are also interested in ideas for how to better present information on advice charges, for example, using insights from behavioural economics to improve consumers’ understanding of the cost of advice.

“This work will form part of the FCA’s wider work on the provision of information to consumers, due for publication in Q1 2015.”

As part of a separate thematic review, one firm has been referred to enforcement over charges disclosure.

In terms of identified successes, Europe Economics found the ban on third-party commissions has reduced product bias, and that consumers are increasingly shopping around between different direct to consumer platforms and exerting competitive pressure on platform charges.

Charges for retail investment products have also been falling post-RDR, Europe Economics found, although it also found evidence that the cost of advice has increased.

The report says: “In relation to total cost of investment - or indeed the benefit to consumers from the advice received - the evidence does not yet enable us to draw firm conclusions as to whether this has changed post-RDR.”

The Association of Professional Financial Advisers said last month that financial advice can only become affordable when regulatory costs fall.

Europe Economics also found that there remains a large number of firms and advisers to serve consumers and it states it is not convinced that an ‘advice gap’ exists.

It found three groups of consumers who may need advice but are not receiving it: those who are not engaged with the investment market; those unwilling to pay for advice “at true cost”; and those seeking advice but firms are unable to provide it.

The first group does not constitute an advice gap, the report says, stating in addition that the second group of people existed prior to the RDR, therefore this group’s perceived gap is “arguable”.

The third group, “which is likely to be small”, will be resolved “in time” once “firms are willing to provide advice to lower wealth consumers”.

This will likely be when there is more innovation in the market. Europe Economics found that while the RDR has “created an opportunity for innovation in the market”, actual innovation “has been limited”.

It continues: “This applies particularly to simpler or more automated advice offerings. However, there is a widespread perception of regulatory risk which is likely an inhibiting force.”

The Treasury Select Committee has previously been critical of the RDR but said last year it would not carry out its own review of the RDR until at least after this two-year review to allow all the changes to bed it.

The FCA’s next phase of the post-implementation review is planned for publication in 2017. In the meantime, the regulator said it will continue to monitor trends throughout this period.