The Financial Conduct Authority said it expects to see changes to advisers’ charging models as part of the new consumer duty later this year.
Speaking at the Dynamic Planner conference yesterday (February 7), Therese Chambers, director of consumer investments at the FCA, said it was important to mark the transition from the retail distribution review (RDR) 10 years ago to now.
She said in the past, advisers were incentivised to sell rather than advise.
“RDR sought to drive a sea change in the way financial advice firms and their advisers operated and it did this by making several significant changes in the way investment products are sold.”
The three changes made were: the banning of commission - with firms setting their own charges, improvements made to the way advisers disclose their services and charges and an introduction to a minimum level of advice or qualifications for advisers.
Chambers explained that at first, this was also controversial but now the majority of financial advisers attain qualifications that are significantly beyond the minimum.
Similarly, she explained that the consumer duty will improve the market in the same way.
In terms of price and value, Chambers said the FCA highlighted concerns that some clients may be receiving ongoing services that do not represent value for money.
“We found that adviser charges were clustered at a small number of price points,” she said. And that interestingly, more expensive advice services did not have noticeably different features to cheaper services.
“Now, it's important that these issues are not allowed to persist, they are incompatible with the consumer investment market that society needs.”
Chambers said one particularly important change for financial advisers will be a change to their role.
Pre-existing governance rules have been placed on advisers as distributors of investment products.
However, along with the duty, this will change and providers of services such as advice and discretionary management, will be regarded as manufacturers of the services.
“This means that advice firms need to think about whether the advisory services meet the needs of different consumers within identifying target markets,” Chambers said.
“This will be a new challenge, a new approach that firms will have to engage with.
“They will also need to ensure that their charges are commensurate with the value provided to customers that they serve.”
Chambers added: “So firms with a homogenous one size fits all service in the larger model should be thinking about that. We are expecting to see changes to charter models.”
Discussing what the consumer duty means for financial advisers, Chambers said it was important to note this is not just “treating customers fairly rewritten in a slightly different language”.
“I want to be crystal clear about this,” she said. “The consumer duty is about expressly raising regulatory requirements and the standards expected.
“Customer outcomes need to be at the heart of a firm's business models. Firms will need to understand the impact of their business, positive and negative, through the lens of customers' objectives which encompasses every aspect of the firm's operations. This includes product design, marketing, customer service levels, staff training and management and our iteration policies, amongst many other things.
“We expect that the firm pays as much attention to customer outcomes as it does to adjusted revenues or profit and loss accounts and this will need to be reflected in both governance and operational processes.”
Retirement income advice
Another area Chambers discussed was the review of retirement income advice, which she described as an "opportune moment to examine this market more closely".
Since pension freedoms in 2015, the way consumers access their retirement savings is completely different, she explained.
"There's obviously been a distinct shift away from annuities to drawdown solutions," she said. "We're also very well aware that advice in this area is complex for a wide range of products or a wide range of pathways and its essential that financial advisers understand the needs and the objectives, and ensure that their solution is delivering suitable advice consistently."
Chambers said the regulator will use the findings from that review to help inform its future strategy for the sector, and a holistic review of the advice guidance boundary that its currently serving with the Treasury.
The current sector
Chambers said it was important to be honest about the state of the current advice market and where it could, and should be, performing better.
The regulator’s consumer investment strategy has highlighted the fact there are still a number of important aspects of the market that are not functioning as well as they need to and Chambers said firms need to improve outcomes for their clients.
“We've had to intervene significantly, particularly in the market of DB pension transfer advice, and redress liabilities, as a result of scams, frauds and high risk investments, remain significant,” she said.
“In terms of access to advice, we have highlighted the fact that there's a significant population of over 4mn consumers who are holding their money in cash, rather than investing, and are missing out on the opportunity to make their money work better in the longer term.”
She said the FCA believes financial advice has never been more important as consumers are increasingly responsible for making ever more complex decisions about their financial future.
“Whether that is planning for important goals, dealing with unexpected shocks, saving into a pension, or saving to fund retirement, we know that when they have the question of how they invest, they're faced with a bewildering choice of products, far greater than ever before,” she said.
“Increased choice has many benefits of course, but the complexity also increases the risk of things going wrong.
“It's more important than ever that advisory firms step up to help consumers to make informed effective decisions on how best to meet their needs and objectives.”
Chambers added: “I know that you're all working really hard to get your businesses ready for consumer duty to get ready to go live and as the regulator, we're very grateful for all that effort."
sonia.rach@ft.com
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