FCA issues Call for Input on RDR and FAMR effectiveness
For intermediaries only
The FCA is preparing to evaluate the effectiveness of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). While it has previously published outcomes and indicators of what success looks like, the FCA has issued a Call for Input, asking for views on what it should now focus on. This comes ahead of consumer research and data gathering from a sample of firms.
FAMR was a joint initiative between the FCA and the Treasury, and they’ll both be involved in this review.
The deadline for responding is 3 June and we’d encourage intermediary firms to highlight to the FCA the issues they believe should be considered. This is an opportunity to shape future regulatory change to enable an even stronger market for advice and guidance that works for both intermediaries and your clients.
You can find out more about the review in the FCA document - Evaluation of the Retail Distribution Review and the Financial Advice Market Review and a recent article that appeared in Money Marketing - Have the RDR and FAMR really been a success for the advice market?
Since the RDR and FAMR were implemented, we believe the need for advice and the value it provides have continued to grow. We’re pleased that the FCA is looking not just at the original intentions behind these reviews but recognises that the market has evolved considerably. It’s also considering current and future market trends and developments in the advice and guidance space, something we’ve publicly called for. This includes:
- EU initiatives such as the Markets in Financial Instruments Directive II (MiFID II);
- the establishment of the FCA Advice Unit to encourage innovation such as automated advice;
- the Investment Platforms Market Study;
- suitability reviews and work on pension transfers, and
- the Retirement Outcomes Review.
Looking ahead, the FCA points to how Brexit could also have a significant impact on the need for advice and guidance.
The FCA is also considering the drivers behind changes in consumer needs for advice and guidance including an ageing population, intergenerational inequalities, difficulties getting on the housing ladder, pension freedoms, changing attitudes towards debt and technological advancements.
The original objectives of RDR and FAMR
The FCA’s Call for Input sets out the original aims behind the RDR (introduced in December 2012) and FAMR (launched in 2015). The following offers a summary:
‘The aim of the RDR was to establish a more resilient, effective and attractive retail investment market in which consumers would have confidence and trust.’
The RDR introduced higher minimum qualification levels for advisers, banned commission and improved the way charges and services were disclosed to consumers.
‘FAMR’s objective was to identify ways to make the UK’s financial advice market work better for consumers. The review had a wide scope, and looked across the entire financial services market to assess the accessibility and affordability of advice and guidance to help people with their financial decision-making.’
Like the RDR, FAMR also aimed to improve the sustainability of advice firms. It produced 28 recommendations all of which the FCA says have been implemented.
Progress to date
The intermediary community rose to the many challenges of the RDR and we believe allowed it to deliver its objectives of improved professionalism and greater transparency of charges, while also addressing concerns over product bias resulting from commission.
While a 2014 FCA post-implementation review found little evidence of reduced availability of advice, banning commission took away cross subsidies between client groups, and this may have made it harder for less wealthy clients to obtain affordable advice. This, coupled with transparent costs, may have meant advice became less attractive to some, which was partly why the FCA and Treasury initiated the FAMR.
In research we’ve carried out, intermediaries tell us they continue to support the principles behind FAMR, but they don’t believe the regulatory changes have delivered on their potential to drive real change.
The current Call for Input
The FCA is seeking input ahead of collecting evidence and data from firms and consumers. While it already collects much of the data it needs, it will survey a sample of firms to obtain additional data.
It states it has concerns that in some parts of the retail investment sector, ‘there may be problems with conflicts of interest, poor treatment of consumers and misleading or confusing communications’. It also says ‘Consumers can struggle to assess the cost of advice and may overpay for services which they do not need.’
They also refer to concerns about the availability of value-for-money advice for customers with small pots to invest. These are likely to shape this Review’s focus.
The Call for Input asks 24 questions and covers subjects including:
- How different groups of customers access appropriate advice and guidance and any barriers.
- The affordability, quality and choice of advice and guidance.
- If consumers have the right information to compare services.
- Consumer confidence and trust in advice and guidance.
- If consumers who take advice or guidance get better outcomes.
- The key advice and guidance services on offer and new business models including automated advice and guidance.
- What aspects consumers value most and why, and within this what emphasis consumers place on cost.
- If regulation pushes too many people to seek advice.
- Effective competition and regulatory rules.
- How the market and consumer need for advice and guidance have changed and emerging trends.
- How to encourage consumer engagement.
Our proposed priorities
We see this review as an opportunity to prompt regulatory change which will further build on the many strengths of the intermediary sector and encourage more people to recognise the value of advice and have the ability to access it. We’re calling on the FCA to prioritise the following:
- Refocus on closing the ‘advice gap’ rather than designing new protections for those who don’t seek advice, for example when entering drawdown.
- Address the advice gap for defined benefit (DB) members, which is likely to get worse as Professional Indemnity (PI) insurers and firms react to the increased Financial Ombudsman Service (FOS) compensation limits.
- Introduce risk-based Financial Services Compensation Scheme (FSCS) levies so those intermediaries undertaking higher risk activities such as advising on unregulated investments pay a greater share.
- Merge adviser charging (AC) and the Pensions Advice Allowance (PAA), by allowing AC to cover advice on wider retirement planning.
- Offer more practical support for employers to facilitate advice and guidance in the workplace including promoting that employer-paid advice up to £500 is exempt from ‘benefit in kind’ taxes.
Refocus on closing the ‘advice gap’
While our research shows intermediaries continue to support FAMR principles, intermediaries also point to disappointingly little practical change, and no real sign of the advice gap reducing. Recently, the FCA has been focused on developing protection for non-advised customers, including those exercising pension freedoms. While a useful means of reducing risks for this group, we believe the emphasis now needs to return to facilitating more people receiving advice. This needs to consider issues affecting both the supply of, and demand for, advice.
Address the advice gap for DB transfers including seeking solutions to PI problems
We believe the demand for advice on DB transfers continues to outstrip supply, creating a particular ‘advice gap’ here. The new definition of advice has also limited the extent to which firms can offer ‘triage’ without crossing the line from guidance to advice. The supply of advice to DB members has been further hampered by the challenge of obtaining affordable PI insurance, and the recent increase in FOS limits is likely to make this worse. We hope the FCA will take a keen interest in looking at innovative ways to address this.
Merge adviser charging and the Pensions Advice Allowance
FAMR introduced the concept of the PAA which allows individuals to take up to £500 from their pensions up to three times to pay for broad retirement advice. The RDR had already introduced AC which has no limit on the amount or frequency but can only be used for advice on the pension from which it’s taken. Their similarities mean PAA isn’t widely offered or asked for and we’d strongly support merging it with AC. This isn’t fully within the FCA’s remit and we’d welcome HMRC allowing AC to be used for broader retirement planning.
Risk-based FSCS levies
Since FAMR, and in line with our lobbying, the funding of the FSCS has been reviewed with providers now paying 25% of intermediaries’ levies. We continue to support the FAMR proposal to move to risk-based levies as a means of sharing costs more fairly across intermediaries, reducing the burden on the vast majority of well managed professional intermediary firms and passing it to those who choose to undertake higher risk activities such as advising on unregulated investments.
Advice through the workplace
A range of FAMR recommendations were designed to make advice more accessible through the workplace. However, employers continue to struggle to understand what they can and can’t offer without crossing into regulated advice. The industry, FCA and the Pensions Regulator should work together to encourage more employers to engage a regulated intermediary or employee benefit consultant and to better promote the fact that employer-paid advice up to £500 is exempt from ‘benefit in kind’ taxes.
We’re always keen to understand your views so we can reflect these in our lobbying. We’d welcome hearing from you, whether you agree with our priorities, and if there are other aspects you’d like us to build into our response to the FCA’s Call for Input.