Friday HighlightOct 19 2018

Why we need a holistic approach to costs and charges regulation

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Why we need a holistic approach to costs and charges regulation

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.

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.  

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.

We need a more holistic, customer-driven approach to regulation of costs and charges. We need to join up our thinking.

For example, Mifid introduces fund-based investment disclosure in January 2018, yet in October 2018 the IDD introduces more investment disclosure for insured investments.

Mifid demands quarterly disclosure. The IDD and pension regulations are annual. Some investment ‘products’ require illustrations and others, essentially performing the same function, do not. 

Taking a piecemeal approach to disclosure creates cost, confusion and inconsistency.

Instead of illuminating, the information provided obscures and distracts. We really need to work with the regulator on this. None of us can be satisfied with the lack of customer understanding and the only way to address this is collectively.

The FCA, platform providers, investment providers and advisers need to get together and listen to customers.

While returning to a fully bundled model is not a good outcome, neither is providing ever more detail.

As a platform market, we have eschewed opaque bundled fee arrangements and have embraced transparency. Sadly, however, other parts of the long-term savings and investments markets are regulated differently and to lower standards of transparency.

Sometimes, however, transparency itself can be the challenge. The relentless pursuit of ever increasing detail just surfaces even more confusing charges.

It also does not guarantee good behaviour. Where is the best place to hide a tree? In a forest, of course.

The challenge with ever increasing itemisation is highlighted in the review, with the FCA expressing concern about the complexity of charges incurred by some customers. And I have some sympathy.

When we go beyond the three to four big charge categories - adviser, platform, DFM and funds - there would seem to be diminishing returns from further unbundling. 

In truth, delivering a tax wrapped investment solution to a customer involves hundreds of processes each with associated cost. But I don’t think anyone is proposing this level of itemisation.

For me, Mifid crossed a line in demanding disclosure of charges that the customer has no discretion over. While returning to a fully bundled model is not a good outcome, neither is providing ever more detail.

Beyond the myriad of paper flooding through consumers’ letterboxes and inboxes, we need to think differently across the industry.

In the past six years much of the platform industry’s time has been devoted to keeping up with the latest regulation rather than enhancing the experience for platform users.

This is where the regulator can really help; by providing businesses with the space and time to innovate and evolve, by proactively removing barriers to doing so, and, by working with the industry and customers to rationalise and align the disclosure regulations we already have.

With the FCA acknowledging that competition is working well, the Platform Market Review is a pretty good report card for the platform market.

It could be glowing, if we can sort out the muddled disclosure and truly help clients to understand.

David Tiller is head of adviser and wealth manager propositions at Standard Life