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Have the RDR and FAMR really been a success for the advice market?

Michael Klimes and Hope William-Smith assess what the outcome of the watchdog’s review of RDR and FAMR might produce  

As the FCA launches a call for input to gauge the effectiveness of its regulatory shake-up, advisers reveal where more action is needed

No two pieces of regulation have changed the advice profession in the past decade more than the RDR and the Financial Advice Market Review.

The RDR raised the minimum level of adviser qualifications, changed the way charges and services are disclosed to consumers, and banned the use of commission to pay for financial advice. Most of these rules took effect in 2012, although advisers have mixed views on whether loopholes still allow for less-than-ideal practice.

The regulator published its first post-implementation review of the RDR in December 2014, concluding that advisers were actively raising their levels of qualification and that product bias and product charges had been reduced.

However, the review also found that while the quality of advice had improved, the cost of it and, subsequently, the advice gap had risen considerably as well.

FAMR was launched in August 2015 by the Treasury and the FCA, with the aim of finding ways to stimulate the market for affordable advice and guidance in a post-RDR environment.

Its initial review came in 2016 and included 28 recommendations for the FCA and the Treasury. That, in turn, was met with mixed reviews by the industry, with many stating it had failed to directly identify the sector’s grittiest issues.

An Aegon survey from April 2018 suggested only one in seven advisers believed that the measures introduced in FAMR were actively helping to close the UK’s advice gap. It also found advisers did not think the measures were helping individuals take advantage of full financial planning services in practice, two years on from the release of the final FAMR report.

While 70 per cent of advisers agreed with a new definition of regulated advice designed to make the distinction from guidance clearer, 69 per cent thought it would not boost engagement.

Furthermore, nearly half of the respondents said clearer guidance on what can be provided through streamlined advice was a positive, but only 16 per cent believed it would have a “real-life” impact.

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Last week, the FCA published its long-awaited call for input to assess whether the changes brought about by RDR and FAMR have been effective after more time to bed in.

The review has 24 questions relating to the effective functioning of the industry have now been presented.

These ask respondents to consider accessibility of advice and different consumer groups, barriers to accessing and affording advice, and the historic lack of trust in the industry. Also flagged are issues around the development of new models, their capacity to deliver advice to underserved consumers, the growing influence of robo-advice and the difficulties regulating it, and the emerging risks for the market.

The FCA also asks if its regulatory system may drive too many people into advice as opposed to guidance, and what barriers may be limiting provider competition.

The call for input has been welcomed by commentators, who have flagged up the benefits RDR and FAMR have brought to the advice profession, but also the areas that need work.

Expert view

We just want customers to get the right advice

The key thing we want to get in our call for evidence is whether consumers are receiving the right guidance and advice. We also want to hear if consumers are getting value for money, to understand the impact of regulation in the market and future market developments as well.

When it comes to value for money, the key point in our review is you have to look at not only cost, but the broader proposition too.

RDR and FAMR have had benefits in terms of improving transparency and prices.

We want to understand some of the benefits more deeply, as the early signs have been encouraging, like the changes in technology and innovation. All those things might have an impact on consumers’ experiences and that is what we want to test. In terms of how this work slots into our co-operation with other bodies, I can say this: the review is looking at advice and guidance in the market in the broadest possible way.

Therefore, it is relevant to any work we do with the Money and Pensions Service and The Pensions Regulator.

If there are certain things we need to involve them with, then we’ll do that. Similarly, our recent intergenerational discussion paper is about how income and wealth could evolve. It is relevant because societal changes will have different influences on various consumers.

Both of these pieces of work are crucial in understanding different consumer needs both now and in the future, in terms of guidance and advice.

Nisha Arora is director of policy at the FCA

Pace of change

The call for input mentions previous pieces of research to measure whether the RDR and FAMR changes have been effective so far.

The FCA’s data bulletin from June 2018 published information on the market for financial advice relevant to RDR.

It said the reported number of adviser staff across all firms was 26,311 in 2017, an increase of 3 per cent compared with 2016.

The  number of intermediary firms had also increased, from 4,970 in 2016 to 5,048 in 2017. Furthermore, the number of firms has been increasing steadily, by 10 per cent since 2013. Finally, the bulletin noted revenue from commission as a proportion of total revenue for retail investment businesses continued to fall following the RDR commission ban.

In August 2018, the FCA published interim consumer research to inform its ongoing work on FAMR. Some of the findings from this show there was a statistically significant increase in the number of people taking regulated financial advice after 2017, putting the figure at an additional 1.3 million.

There was also a significant increase in the use of guidance services and automated advice services to help with financial planning decisions.

More men than women received advice, and the propensity to take advice was found to increase markedly with age, wealth and education levels. The call for input goes on to explain a number of steps that will build on this research going forward to widen accessibility for advice. The watchdog has now laid down plans to host several events to gather feedback from interested stakeholders and conduct further research over the course of 2019.

There are also two annexes that accompany the call for input which explain how the FCA will measure the effect of RDR and FAMR. Annex 1 reveals how the FCA will measure both the short- and long-term indicators of success of RDR.

These include to what extent consumers understand the distinction between different types of advice, advisers who meet required standards of professionalism and fewer unsuitable sales. Annex 3 does the same for FAMR outcomes, and mentions measuring affordability, quality and access of advice as the indicators of success.

Adviser view

Justin Modray
Owner, Candid Financial Advice

The FCA banning commissions in 2012 was a really positive step, but many consumers are now paying a lot more for financial advice as a result of advisers hiking their fees. The FCA needs to get tough and compel advisers to display a clear rate card on their websites.

Scrapping sales commissions at the end of 2012 as part of the RDR was also a seismic step towards cleaning up the financial advice profession. Removing the financial incentive for advisers to recommend one product over another has undoubtedly benefited consumers as well. The unintended consequence is many advisers effectively doubling their annual fees since.

Different perspectives

Aegon pensions director Steven Cameron is positive that the call for input will generate some much-needed focus. He says: “The 2019 review offers a real opportunity not just to assess effectiveness against the original aims of the reviews, but to reflect on recent changes and look ahead at how regulation can best-meet the future needs of both consumers and advisers.

“We are keen for the FCA to re-focus on closing the advice and guidance gap.

“Recent measures to protect individuals who don’t seek advice are helpful, but enabling more people to get advice would be a better solution.”

The negative focus on defined benefit schemes in the past two years stemming from the British Steel Pension Scheme fallout made them an area of interest. Cameron is worried about the potential barriers to accessing advice for members of DB schemes in particular.

He says: “There is a real risk of a growing advice gap for members of DB schemes, where advisers are struggling to obtain affordable or adequate professional indemnity insurance.

“While a DB transfer is unlikely to be in the majority of people’s interests, having a market where only a minority are able to even explore whether it’s suitable is not helpful.”

He adds that the adviser charge and the pensions advice allowance – a government tax incentive to take advice – should be merged to simplify arrangements for consumers.

Adviser view

Simon Cowley
Financial adviser, Walker Crips Wealth Management

It is clear that the RDR and FAMR have been successful as the underlying suitability of the advice being provided across the industry has greatly improved.

Client outcomes have become more of a focus of advice, improving trust and forging better relationships between advisers and their clients. An unintended consequence of both the RDR and FAMR, however, is the reduction in available advisers and corresponding increase in costs to clients. Advice has become a preserve of the wealthy.

Another major consideration is the ongoing issue with “phoenix firms”, where failed advice firms reinvent themselves as claims management companies.

Banning this would increase trust and reduce bad practice.

Cameron concludes: “We’d also like to see the FCA renew its efforts to move to risk-based Financial Services Compensation Scheme levies for intermediaries, and we’re keen for the FCA to offer more practical support to employers to grow advice and guidance through the workplace.”

Intrinsic chief executive Andy Thompson says the watchdog’s questioning about the value of advice will be the main point of interest for respondents.

He adds: “The RDR and the FAMR were wide-ranging and time has moved on since then, so it’s important that the regulator focuses its energy on the most pertinent part of those reviews.

“This is an excellent opportunity to tackle some of the challenges within the advice industry that mean it isn’t working to the best of its ability to help the public make the most of their money.

“The FCA’s questions reveal its areas of interest, which include a number of questions on value for money. As currently phrased, those questions are slated as ‘what do consumers value from advice and why?’

“It’s important to recognise that one of the major challenges the advice industry faces is how it articulates its value and helps consumers understand what they gain and how.”

While Mifid II has laid down the need for advisers to explain fees and corresponding value more clearly, Thompson argues this has been limited in its requirement. He says: “Historically, the focus has been on investment returns, but that does not capture what advisers are actually doing.

“The basics of what advice offers also include taxation, and helping clients navigate their own biases and uncertainty around finances.

“This, combined with investment choices, provides a measurable, quantifiable difference. As an industry, we need to do a better job of flagging that value.”

While the necessity of advice continues to build, Thompson notes there are fewer advisers per adult in the UK than ever before.

Approximately 750,000 people retire each year and represent just one category of potentially financially vulnerable consumers in need of advice.

Thompson says: “The FCA needs to consider carefully what the misunderstandings are around advice and how it can help boost its positive profile in this review, because trusted, insightful financial advice is the best way for people to achieve financial security and prosperity.

“Greater political emphasis also needs to be placed on the importance of expert financial help, whether that is guidance, debt support, help budgeting, or professional financial planning.”

Have RDR and FAMR worked? The FCA’s 24 questions

  • How do different groups of consumers access appropriate advice and guidance? Does this vary by financial need or consumer group?
  • Are there any barriers to consumers accessing advice or guidance that meets their needs, or to firms providing them?
  • Do consumers have the right information to compare advice and guidance services, and to shop around? How easy is it for them to compare services?
  • What barriers exist to making advice or guidance services more affordable?
  • Do advice and guidance services offer sufficient quality and choice to meet the needs of different consumer groups? Are any consumer groups underserved?
  • Do consumers have confidence and trust in advice and guidance services, and do these services address their needs?
  • Do consumers who take advice or use guidance services get better outcomes than those who do not? If so, how, and if not, why not?
  • What are the key advice and guidance services offered in the market and do they meet the needs of all consumer groups?
  • What new business models are being developed and how will they meet consumer needs?
  • What aspects of advice and guidance services do consumers value and why? Does it vary by consumer group or financial need?
  • What emphasis do consumers place on the cost of advice and guidance, against other elements of value for money?
  • Are there any barriers to effective competition between firms offering advice or guidance?
  • Are the rules and guidance around advice and guidance working well?
  • Are there points where the regulatory system may drive too many people to seek advice?
  • Does regulation support the development of advice and guidance services, including automated advice services, that work well for firms and consumers? How can it be improved?
  • Did FAMR or the RDR result in unintended consequences that have caused consumers harm?
  • How have consumer needs for advice and guidance services changed since the RDR and FAMR initiatives were introduced?
  • Are there any new or emerging trends (for example, the ageing population and increased pension flexibility) that will lead to further changes in consumer demand for advice and guidance services?
  • What changes to the market might be needed to encourage consumer interaction with, and good outcomes from, advice and guidance services in the future?
  • What market developments have taken place since the RDR and FAMR reviews? What impact have these had on consumers, the market and competition?
  • What future market trends do you expect to see and what do you expect their effects will be?
  • What opportunities and barriers are there for developing advice and guidance services in the future?
  • What emerging risks to consumers do you see in the market?
  • Is there any other evidence we should consider in our review of the RDR and FAMR outcomes and indicators listed?

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Philip Castle 9th May 2019 at 9:30 am

    2007 – 2013 Many were changing models to be entirely fee based. Those with level 3 only who wished to remain needed to focus on getting their level 4 and possibly moving to level 6.
    2013 – A significant number of advisers retired early while the banks layed off their advisers and many left the profession as a result I suspect.
    2013-2018 Most of us who remained have been taking on new clients until we have reached capacity.
    SOME of US, but far too few have been training new entrants (I’ve trained 2 admin staff, one mortgage/protection adviser who was one exam short of level4 when we agreed it was time for him to get more expereince by moving to a different firm and a second fully to level 4 who is now advising as of April 18)
    June 2019 onwards, those of us who have trained new advisers and are getting older (I am now 54) have NO interest in taking on younger clients and are very selective about new older clients…… BUT
    May 2019 onwards, those of us who have trained new advisers can allow their younger collegques to focus on how to deliver a serrvice to the millenials who will need their help and whilst not profitable for investment and pension advice for a decade or more, have protection and mortgage needs and want someone to explain their auto enrollment pension while sorting these things out.
    I therefore believe that after the RDR cull, we may start to say the advice gap narrowing, but ONLY if firms have trained new advisers to do this. If they haven’t they need to start doing it NOW.

  2. OK just looking at the main aim of the RDR and FMAR was for better consumer outcomes

    Massive increase in costs = FAIL
    Massive increase in bad advice =FAIL
    Massive increase in scams and fraud = FAIL
    Massive decrease in advice accessibility = FAIL
    Massive decrease in consumer confidence =FAIL
    Massive decrease in competition =FAIL
    Massive decrease in product innovation = FAIL

    I could go on, but lord forbid I don’t want to come across as bitter and twisted !

    • Philip Castle 9th May 2019 at 1:03 pm

      I would read it only slightly differently;
      Massive increase in costs = FAIL
      Massive increase in bad advice = Cause and affect not proven
      Massive increase in scams and fraud = Cause and affect not proven
      Massive decrease in advice accessibility = FAIL
      Massive decrease in consumer confidence =FAIL
      Massive decrease in competition =FAIL
      Massive decrease in product innovation = FAIL

      • Phillip …simple measure as to your “cause and affect not proven”

        Just tot up your FSCS levies since 2012 to date and relay that to the previous number of years pre 2012 then factor in the massive drop in adviser numbers pre and post….

        Cause and effect spot on ! FAIL ….

        Maybe all this exam stuff and renewed qualifications has provided the consumer a better educated criminal and the rewards a lot bigger

        • Philip Castle 9th May 2019 at 2:26 pm

          I disagree as a lot of the claims on FSCS are from Pre RDR advice or SIPP related. The increase in levy fees is not related to the RDR per se.

          • Pre …post…. SIPP…unregulated investments…the list is long

            Disagree all you like
            What do you think is in the mind of a criminal/scammer/fraudster or someone not wishing to do exams and retire on a high when faced with a window of opportunity ?

            Fill your boots and run until you are caught (Easy when no-one is chasing you)

            Don’t forget we all knew from 2008 RDR was a given (maybe even earlier) also just look at the millions of our English pounds funnelled into scams and miss-sold investments by a very small number of advisers/firms.

            RDR ….the rewards just got bigger

          • Philip Castle 9th May 2019 at 5:48 pm

            I disagree with it being RDR that caused that bit, I think it just meant that alot of people pre RDR decided to make hay while the sun shone for a few more years. They’re now often no lonegr advisers, but the price is still being felt by those still advising. They then became introducers to the SIPPs post RDR and surprise, surprise the advisers are still paying, but that is just poor regulation,supervision and policing of financial crime, that is not RDR relevant other than the fact it meant that the FSA/FCA and honest advisers were forced to focus on the mintiae fo what they did honestly and left fewer people available to investigate and stop the crooks BEFORE each car crash.

    • Christopher Petrie 9th May 2019 at 1:56 pm

      Too late!!

  3. Patrick Schan 9th May 2019 at 12:40 pm

    I am of the same opinion as DH in this. Too many fails in all this.

    Going through the article (in truth I skimmed the second half through a mixture of boredom and then rage) the main comments that came out of it, for me, were:

    “The FCA also asks if its regulatory system may drive too many people into advice as opposed to guidance, and what barriers may be limiting provider competition” What???

    “An Aegon survey from April 2018 suggested only one in seven advisers believed that the measures introduced in FAMR were actively helping to close the UK’s advice gap”

    “The unintended consequence is many advisers effectively doubling their annual fees since”

    “An unintended consequence of both the RDR and FAMR, however, is the reduction in available advisers and corresponding increase in costs to clients. Advice has become a preserve of the wealthy”

    I probably have three or four years left in this business (I’m sure I just heard a few cheers) but I honestly wouldn’t recommend this industry to anybody I liked.

    • Philip Castle 9th May 2019 at 2:29 pm

      My son has been working with me for 3 or 4 years now. I didn’t recommend it to him, he didn’t actively chose it as a job because if the bad things he heard me say about it. When he helped cover for some staff absence, he saw that on balance it is a good job and we make a difference to our clients.Hence why he then did his level 3 and 4 in about 2 years.
      What we do have to do however is recognize who we work for and it is our clients and not the providers, nor the FCA, nor government. We are and remain Independent agents of our CLIENTS.

  4. RDR is a good idea, banning commissions, increased qualifications are good things.

    Its failing because the real issues that needed to be addressed have not been.

    The advice gap has grown at the lower end of the market. The cost of advice was always going to increase based on the higher qualifications and greater responsibility.

    The reported increase in firms is mainly down to individuals leaving networks and going direct not new blood in to the industry. I don’t know many 20-30 year old that can afford the £30,000 up front cost to go direct to the FCA.

    The FOS, FSCS and regulation is failing, it is not fit for purpose, does not work. There is no joined up thinking, each working against each other. The problem being, it is far easier to tinker around with these other areas than face the pain of admitting they are failing. The FOS needs to be a small claims body, up to £50,000, above and it should be settled in a court of law.

    Concerning the FOS, FCSC, SIPP and unregulated investments seems to be dragging on for ever, why, we all know some simple changes could prevent most of these poor outcomes.
    An additional permission requirement to be able to offer unregulated investments is one such fix, which would identify very quickly who is working in this market.

    RDR was a good idea, it has worked, but not in the way the regulator wanted.

  5. I see many negative comments, with which I don’t entirely agree

    However there is still much to be done. The pitifully low exam bar is a bit of a farce, but I guess it is better than what went before.

    The banning of commission was just half a job. Life assurance and the rip off equity release sill have usurious rates of commission.

    I suspect that those bleating about accessibility and affordability were the ones selling cheap products with somewhat high pressure selling to those that didn’t really want the stuff in the first place. The take up probably had very poor retention rates.

    In my view too many advisers confuse financial advice with social work. The secret is in the title Financial – those with finance are now potentially much better served and there has been a big clear out of sub-standard products. That’s not to say that they have all gone. The same regrettably is true of cowboy advisers.

    Overall I think RDR was definitely a move in the right direction and I well recall when on the board of AIFA, that this wasn’t the general consensus at all. Many were dragged screaming into the new (and better) regime. Not least the networks who were a depository and the guardians of lower standards in those days. Their metamorphosis has also in my view been a positive step wholly as a result of RDR.

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