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A year in regulation: RDR, record fines and a watchdog that bites

Many commentators feared the introduction of the RDR at the end of last year would have an Armageddon-like impact on the sector.

And while this year has certainly been an eventful one in terms of regulation – with the replacement of the FSA with the FCA in April and a string of record fines – for many advisers it has been more business as usual than expected.


Adviser numbers have fallen as a result of the RDR although we are yet to see the mass exodus some were predicting.

Money Marketing revealed in March that the number of IFAs and restricted advisers operating on the first day of the RDR was 20 per cent lower than the number operating a year before, down from 25,616 to 20,453.

The regulator then published figures in August showing that the number of advisers rose by 6 per cent between January and July from 20,453 to 21,684.

Independent financial consultant Richard Hobbs believes charging structures may explain the lower than expected fall in adviser numbers.

He says: “With so many advisers operating a charging model of 3 per cent initial charge and 0.5 per cent ongoing, remuneration strategies have not really changed from the old commission models.”

This model may well have a limited lifespan, however, with the FCA indicating that it will take a closer look at charges, and in particular contingency charging and the associated risk of dealing bias in its on-going post-RDR thematic reviews.

EY financial services executive director Malcolm Kerr says: “I expect to see a move towards fixed fees next year, which is probably fairer for affluent clients.”

But Hobbs argues that the FCA is in a difficult position on adviser charging, and that the size of the adviser market could fall further if it introduces more prescriptive rules.

He says: “If the FCA makes changes it could force more firms out of the market and widen the advice gap further.”

From FSA to FCA

Advisers may have been underwhelmed by the change from the FSA to FCA, with many arguing the much trumpeted ‘change in approach’ has failed to materialise.

Regulatory experts, however, say the FCA is a very different animal to its predecessor, and hail this change as the most significant theme of 2013.

Hobbs says the introduction of the FCA’s competition objective in April has meant there is a far greater focus on consumer engagement. This is borne out by the launch of its thematic review into annuities in January in response to concerns that people are failing to shop around when they reach retirement.

He says: “Although it is consumers who are not shopping around, the complaint is a lack of market competition – that is a profoundly different way of thinking about regulation.”

King & Wood Mallesons SJ Berwin partner Tim Dolan says the FCA’s desire to be more proactive has had a significant impact on the way firms approach compliance.

Dolan says: “We are seeing a lot of consultation papers with limited periods before changes are implemented. You need to be proactive now in compliance, not just reactive.”

Kerr says the change in approach from the FCA has been one of the highlights of the year.

He says: “The FCA really seems to be up to speed with what is going on in the industry, ready to take swift action where necessary and ready to engage in dialogue with practitioners. That is very refreshing and welcome.”

Fines and enforcement

The FCA is no less severe than its predecessor when it comes to acting on bad behaviour.

The past 12 months have seen a string of hefty fines and hard-hitting reviews, including the largest-ever fine for a retail sole trader: a £945,277 penalty for a sale-and-leaseback arranger in June.

Kerr says: “My lowlight of the year is the seemingly never ending stream of negative pub-licity about our industry – and I cannot see that letting up any time soon.”

In February, the FSA published the results of a mystery shopping exercise into investment advice offered by banks and building societies, which revealed widespread failings.

And following a separate review by the FSA into sales incentives and misselling, Lloyds Banking Group was last week handed a £28m fine for ‘serious failings’ related to its sales incentives schemes, the largest-ever fine for retail conduct failings.

Other major advice fines include a £6m penalty for Sesame in June for compliance failings and a £1.8m fine for Axa Wealth in September for failing to ensure it gave suitable investment advice.

The FCA is also closely monitoring the impact of the RDR and announced at the beginning of the year that it would carry out four post-implementation thematic reviews.

The results of the first review, published in July, found that firms were broadly complying with the rules but raised concerns over some issues. These included how charges are explained to clients and restricted firms describing themselves as independent.

A separate thematic review into arrangements between providers and adviser firms found that inducements could be undermining the objectives of the RDR.

The continued fallout from this work, plus ongoing debate over the advice gap and restric-ted versus independent labels, means the impact of the RDR is unlikely to die down with the turn of the year.

At a glance: The biggest regulation stories of 2013

  • February: FSA investigates Santander over investment advice after mystery shop. 
  • June: FCA hits Sesame with £6m fine. 
  • July: FCA sets out RDR disclosure concerns in thematic review. 
  • July: FCA chief concern over adviser charging based on percentage of assets. 
  • September: Partnership confirms FCA probe into adviser incentives.


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There is one comment at the moment, we would love to hear your opinion too.

  1. Does anybody know why the regulator has failed to tackle head-on the issue of consumers failing to shop around for independent advice to steer them towards the best retirement income option?

    Unless a policy includes GAR’s, pre-retirement packs should exclude any annuity illustrations. They should also be vastly less intimidatingly bulky, the effect of which, all too often, is to confuse customers. It’s a classic example of regulatory overkill, namely providing so much information that the outcome is the exact opposite of what it should be.

    In terms of informing policyholders what their next step should be, pre-retirement packs should include just an expected fund value and a standalone, brightly coloured laminated page emphasising that a wide range of retirement income options is available and that they should seek independent advice to help them find the most suitable one for them (leave out intimidating phrases such as “needs and objectives”).

    For those who choose to ignore such guidance and, for example, just go to an annuity bucket shop in the mistaken belief that, by avoiding an intermediary, they’ll be saving money, on their head be it. It won’t have been due to the regulator having failed to do its level best to ensure that they took the right course of action and sought out expert advice. There seems to be such a dizzying lack of clear thinking and streamlined processes in regulatory circles. Why?

    Elsewhere (not by me, though I wish I had thought of it), it’s been suggested that the definition of a regulator is somebody who, upon seeing light at the end of the tunnel, swiftly commissions the construction of another five miles of tunnel. And it’s all too often such a terrible waste.

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