With all the current focus on implement-ing the Mifid II cost and charges disclosure, as well as the product governance rules, it is easy to forget the FCA will review the RDR this year.
It will not be lost on the regulator that, earlier this month, a special government-appointed inquiry berated Australia’s financial sector for misconduct.
Australia’s Future of Financial Advice Reforms was introduced on 1 July 2013. The reforms were the Australian equivalent of the RDR, with the banning of commission and better training two similarities between them.
The report highlights the fact that more regulation does not always lead to better client outcomes.
Death of protection commissions, new titles and no fee flexibility: What Australia’s Royal Commission has ruled for advisers
The Australian public inquiry heard 11 months of shocking revelations of the industry’s wrongdoing, including fees being charged to the accounts of dead people and aggressive tactics being used to sell an opaque product to a young man with Down syndrome.
The conservative government, which was initially opposed to the setting up of the inquiry, promised it would act on all recommendations.
So, what might the FCA draw from the conclusions?
Firstly, there is the issue of trail commission, which the Australian report recommends is turned off completely for some classes of business. Trail commission still has a big part to play in retail financial services.
In 2018, research by Fitz Partners confirmed that, six years on from the RDR, 34 per cent of retail assets are still held in old-style share classes. Based on the difference between the legacy retail share classes and the so-called “clean” classes, this is estimated to cost investors £890m.
Indeed, what is interesting is that total profits of £699m in retail financial services in 2017 is still less than legacy income. If a chunk of the income associated with legacy funds drops straight to the bottom line, then any hastening of its demise is significant.
As part of its asset management study, the FCA consulted on whether it should remove trail commission on share classes sold before RDR. At the time, it had “no immediate plans” to change its policy but is still considering the issue. Will the Australian experience have any bearing on its thinking?
Another recommendation of the report that will no doubt cause consternation among advisers is that fees must be renewed annually by clients, with firms recording in writing each year the services the client will be entitled to receive and the total amount that is to be charged.
In addition, firms will not be permitted to receive the payment of fees from any account held for or on behalf of the client, except with the client’s written authority.
We continue to run these risks as a profession still not in total control of its income.
Mifid II is designed to ensure greater transparency of how much is charged and for what. However, ask yourself this: if the FCA decides to introduce a ban on legacy income and clients are expected to agree annually to a fee, then just how would your firm cope?
Tim Sargisson is chief executive at Sandringham