A survey by the International Organization of Securities Commissions (Iosco) elicited strong comments from respondents that the risk of harmful conduct related to the mis-selling of products; a culture of greed evidenced by excessive fees undermining the quality of retail financial products; and deficient disclosure of financial risks leading to investors making decisions on the basis of inaccurate information.
It is no wonder, therefore, that new regulation is taking shape that seeks to ensure that distributors act in the best interests of the end-customer and that questions continue to be raised about whether commissions paid by manufacturers or out of products create unacceptable conflicts of interest.
The regulatory approach differs from jurisdiction to jurisdiction, but is commonly some combination of higher qualification standards for advisers, a focus on monetary benefits but attention also to non-monetary benefits (including hospitality), and some form of ban, restriction and/or increased disclosure. A regulatory pick ’n mix.
The UK Retail Distribution Review (RDR) led the way and the regulatory debate is now circling the globe. There is, though, increasing awareness of an advice gap for those with only modest amounts to save, who cannot afford or who are deterred by the initial advice fee. While the FCA ponders how to respond, it will no doubt wish to reflect on what approaches are being adopted elsewhere.
Within Europe, MiFID II bans commissions paid to independent financial advisers and wealth managers (not currently covered by the UK rules). Any form of inducements paid to other parties must pass a “quality enhancement” test with regards to the service received by the client.
MiFID II’s impact could be profound in the longer term as it will increase transparency and could have a substantial impact on the distribution landscape and the cost structure of the industry. Initially, however, fragmentation of the Single Market is likely. Some member states will apply additional restrictions on inducements, there may be different national interpretations of the quality enhancement criteria, and there might even be slightly different interpretations of “retail client”.
There is likely to be low impact in an already fee-based environment. In bank-dominated distribution markets, banks may initially retreat from their tentative steps towards “open architecture”, unless and until the quality enhancement test bites. Distributors will focus on a smaller number of products and providers and thus avoid the ban.
In Australia, the debate has been conducted under the Future of Financial Advice (FoFA) banner and impacts all providers in the industry not just financial advisers. Legislation codifies a best interest duty on advisers and product manufacturers, and bans all conflicted remuneration. The ban is not limited to trailer fees paid directly to an adviser, although existing arrangements are grandfathered. The reform has required significant business model changes across all market participants. All advisers have to be registered, with details of their licence and competency recorded so that consumers can select and verify their details. And proposed legislation aims to raise the professional standards of advisers.