In its latest paper on the impact of the Retail Distribution Review and the Financial Advice Market Review, published on May 1, the Financial Conduct Authority called for industry's input on the role of regulation, admitting some of its rules may harm advisers and their clients.
The FCA said: “While regulatory costs can be seen as the cost of doing business well, we are also aware that our actions can have a negative impact on the market and, by extension, on consumers.”
The City watchdog also asked if any barriers to effective competition existed in the advice market and what barriers might be preventing advice and guidance services becoming more affordable, and gave a deadline of June 3 for initial feedback, with a view to publishing its final report in 2020.
There have been claims and counterclaims about whether the RDR limited access to financial advice, but the reality is more complicated.
Unintended consequences
The RDR was launched by the FCA’s predecessor, the Financial Services Authority, in 2006, though most of the rules it introduced took effect in 2012, which aimed to establish a more resilient, effective and attractive retail investment market in which consumers could trust.
Indeed, the RDR made several significant changes in the way investment products were distributed to UK retail consumers; it raised the minimum level of adviser qualifications, changed how charges and services were disclosed to consumers, and banned the use of commission to pay for financial advice.
In a statement published on May 1, Christopher Woolard, executive director of strategy and competition at the FCA, said: “Consumers and the market are changing rapidly, as technology, employment patterns and intergenerational challenges change the way consumers interact with financial services.
“As well as looking at how the market has evolved since RDR and FAMR, it’s important that our work looks ahead to see how we ensure that this important sector works well in the future.”
Indeed, at the heart of RDR was the overriding need to increase consumer confidence in the financial services industry, and very few would contest that this did not need to be addressed, says Verona Kenny, head of the intermediary at Seven Investment Management.
She says: “The high-level principles and impacts of RDR were relevant and impactful, but as with any sweeping changes of an industry, it is the unintended consequences which have become the focus.”
She continues: “Overall, the financial services industry needs to find solutions to these unintended consequences.
“RDR was the regulator’s answer to shortcomings of our industry. For me, innovation is the key response we need to have to ensure that all clients have access to the financial services they need.”
Access to advice
While the RDR and FAMR have been successful as the underlying suitability of the advice being provided across the industry has greatly improved, the industry must do more to democratise advice, notes Simon Cowley, Wealth Management Consultant at Walker Crips Wealth Management.
He says an unintended consequence of the RDR and FAMR has been a reduction in available advisers and increased costs to clients, consequently limiting people’s access to advice.
The number of advisers has gone down from more than 40,000 in 2011 to 30,000 in October 2014, with most of the fall seen in banks.
Mr Cowley says: “Advice has become a preserve of the wealthy.
“However, there is scope for the introduction of technology into financial advice which I would expect to improve the situation.
“Client outcomes have become more of a focus of advice, improving trust and forging better relationships between advisers and their clients.”
He continues: “But access to advice is probably the most fundamental consideration facing the industry with a good deal of the population being disenfranchised from financial advice due to the cost.
“This is due to the higher level of professional standards and regulatory obligations that firms must satisfy in order to provide suitable advice.”
He adds: “Another major consideration is the ongoing issue with ‘phoenix’ firms, where failed advice firms reinvent themselves as claims management companies.”
Similarly, Kay Ingram, director of public policy, LEBC Group, says: “RDR has been a success in raising standards of advice.
“The challenge now for advisers is to make the value-for-money case for advice, which is paid for by the consumer… to make advice more affordable and more accessible.”
She continues: “The development of digital channels for the exchange of information, artificial intelligence to perform analysis, and human intelligence to communicate and motivate the consumer is the future of financial advice.
“We hope that more firms will join us in adopting new ways of working and that the FCA review will give advice firms the time and space to fill the advice gap this way.”
What are clients looking for?
Recent research by EY found 44 per cent of the UK clients surveyed were looking to move assets to other wealth providers over the next three years.
The survey was conducted by EY and ESI ThoughtLab with 2,000 wealth management clients across 26 countries, and included insights from 50 different wealth management executives, in the third quarter of 2018.
For some questions clients could choose more than one option: when asked which platforms and services they would choose, 95 per cent said a fintech, followed by an independent advice company chosen by 32 per cent.
The research also showed UK clients have poor awareness levels of trading and product fees, with only 49 per cent of clients fully aware of all the fees they are paying, and 23 per cent said they would switch provider if they offered more transparent pricing and performance results.
In its report, EY concluded that with customers increasingly looking to shop around, companies need to ensure they are offering a service that is holistic and tech-enabled, but still personalised, and ensure there fees are clear and set up as consumers want.
Indeed, clients increasingly want to pay a fair price, valuing personal attention and a tailored approach, notes Matt Lonsdale, relationship manager at BNY Mellon’s Pershing.
He says: “Firms will need to strike the right balance between costs and service because a continuing focus purely on driving costs down can only go so far, beyond which it will have a negative impact on the sector, possibly including some unintended consequences.”
For example, he says a further squeezing of costs could lead advisers to target higher net worth investors to maintain a high revenue per client and the consequence of this would be a widening advice gap and worsening outcomes for smaller investors.
Key points
- The FCA has called for input about the impact of RDR on the access to advice
- Many think advice has become the preserve of the wealthy
- Clients want to pay a fair price, valuing personal attention and a tailored approach
He adds: “The FCA’s latest enquiry has opened the discussion, and hopefully a collaborative approach will follow, taking into accountthe challenges of managingan advice business and the complexity of providing financial advice, while incorporating the need for advice and the desire forfair pricing.”
Victoria Ticha is a features writer at Financial Adviser and FTAdviser.com
