Friday Highlight  

Why we need a holistic approach to costs and charges regulation

Why we need a holistic approach to costs and charges regulation

Have you heard the joke about the driver asking a local for directions and, after much pondering, being told “well mate, if I was going there I wouldn’t start from here”? 

It feels a bit like this when considering the Financial Conduct Authority's questions on disclosure of cost and charges innovation in its Interim Report from the Investment Platforms Market Study.

For over 20 years we’ve seen new layers of disclosure rules in an attempt to improve consumer understanding of these costs and charges.

And in the past six years alone, platforms have undergone an unprecedented level of regulatory change, much of it disclosure-focused: from RDR in 2012, through to unbundling of platform and investment charges in 2013 to 2016 and now Mifid, Priips and Insurance Distribution Directive (IDD) in 2018.

The FCA’s own customer research, admittedly carried out just as the latest Mifid II disclosure regulation was being implemented, showed consumers are still unclear on the charges they’re paying, are confused by charges or used inconsistent terminology to describe what they were paying.

So 23 years on from the first push by the Securities and Investment Board to introduce explicit charges disclosure to consumers in 1995, clearly things are still unclear.

If we ignore the fact that some consumers just aren’t interested in trying to understand this sort of stuff – and the FCA’s consumer research showed that some customers stated this was one of the reasons why they employed the services of an adviser – the fact remains, despite a vast amount of investment we’ve not made much progress when it comes to customer understanding. 

We should be worried by this. Think of the innovation and market efficiencies we could have delivered instead; developments that ultimately benefit our customers.

How much further on would we be with digital technologies without regulatory disclosures gumming up change portfolios? 

With little by way of realised benefits and a very substantial opportunity cost I think we need to step back and reflect on how to best help our customers understand. And, the good news is that I believe there is genuine understanding of the challenge within the FCA.

So what’s the solution?

For me, the starting point is obvious. We actually have to focus on customer outcomes and, in doing, so accept that more information and numerous communications might not always help their understanding.  

The traditional approach to disclosure is piecemeal, with the market viewed as a series of mutually exclusive ‘products’. This feels rather disconnected from today’s platform-based reality.

It is also creating an uneven playing field, where different standards are being implemented on different ‘products’ at different times.

Why is it that open architecture platforms offering the widest range of customer choice are subject to higher levels of disclosure that vertically integrated models restricting a customer’s choice? This is totally counterintuitive.