14 Jan Let’s give the FCA a break…
The FCA is damned if it does and damned if it doesn’t. From the time that RDR was announced through its long gestation and even since its implementation, there has never been a shortage of naysayers predicting that it will have a terrible impact on the fund industry.
This week there has been another wave of criticism at recent comments by the FCA’s acting head, Tracy McDermott, that commission could be reintroduced in some circumstances.
She was speaking to Radio 4’s, Money Box progamme and said “We do not want to go back to a world where we had the problems of the pre-RDR, what we do want to look at is actually what is the best way of delivering advice and guidance across the market so I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the RDR.”
The industry is apparently outraged at the idea, but it’s something that we predicted more than a year ago. But before we rip the FCA to shreds, we need to go back to the beginning and understand what the RDR’s objectives were, namely:
- Maintain an industry that engages with consumers in a way that delivers more clarity for them on products and services
- Create a market which allows more consumers to have their financial needs and wants addressed
- Have remuneration arrangements that allow competitive forces to work in favour of consumers
- Maintain standards of professionalism that inspire consumer confidence and build trust
- Have an industry where firms are sufficiently viable to deliver on their longer-term commitments and treat their customers fairly
- Build a regulatory framework that can support delivery of all these aspirations and which does not inhibit future innovation where this benefits consumers.
The biggest failing of RDR is the growing advice gap. Removing the cross-subsidy inherent in ad valorem management fees and advice charges may be fair (after all, does it really cost 10 times as much to advise or manage 10 times as much money, so why should wealthier clients bear that cost?) But the problem with the RDR is that it did not replace it with anything, or consider the downstream impact on lower- value customers. The FSA may have been comfortable with 20% of advisers exiting the industry, but nowhere in the goals of the RDR does it say they would like fewer consumers to access advice or investment product (please see the second bullet above).
In fact, the impact of the ban on commission, when combined with the withdrawal of the high-street banks from mass market advice, has created an advice gap in the UK and certainly has done nothing to serve as a template to broaden the penetration of investment product beyond the 10% across Europe that already own it. This is an example of the industry and regulator failing to work together.
Against a backdrop of pension freedoms and the Financial Advice Market Review, the FCA is rightly reviewing why RDR may not have worked in the way that it wanted, and how it might address the advice gap. In some circumstances, that could mean that commission is the right way forward. Consider a person on a modest income with modest savings. Even a £250 advice fee could be out of his or her reach, so should that stop him/her from getting advice? Of course not.
There have been kneejerk reactions to the word commission, but it does not have to be the old-style commission. It could be reintroduced in a limited capacity for a limited range of products. It could also be the same rate for every fund group. The ideas are endless. So rather than shout down the FCA, let’s put our heads together and come up with a way to provide cost-effective advice to the very people who need it most — those who can’t afford it.