Banks and building societies say they have no plans to review their adviser charging models despite the FCA raising concerns about payments based purely on product sales.
As part of its findings on how firms are implementing the RDR, published last week, the FCA highlights concerns about “contingent charging”, where a client only pays the adviser charge when they buy the recommended product.
The FCA says: “If a firm operates such a business model, we consider this to be a higher-risk approach than a time-cost charging model due to the need to sell products to generate revenue. Firms operating contingent charging should ensure they have adequate controls in place to manage this risk.”
The comments echo those made by FCA chief executive Martin Wheatley last month, who suggested “dealing bias” still exists where firms only get paid when a product is sold.
Lloyds Banking Group charges an upfront fee starting at 2.5 per cent on the first £300,000 invested, with a range of ongoing charges if new investments are made.
A Lloyds spokesman says the bank has the checks and balances in place to ensure a product recommendation will not be made if it is not suitable. He says: “We constantly monitor all aspects of our advice model to take into account client, market and regulatory feedback.”
Nationwide charges 3 per cent initially and 0.5 per cent for ongoing advice. Head of product, protection and investments Guy Simmonds says: “We undertook extensive customer research to understand consumer reaction to adviser charging and different potential models.
“The overriding conclusion from this was that our customers wanted to be informed of the costs of advice and more readily understood a percentage of their investment, with a personalised illustration, as a basis for calculating the advice fee over hourly rates.”
Legal & General has bancassurance partnerships with 87 per cent of the building society advice market, including Nationwide.
A spokesman says: “We believe the contingent business model for adviser charging is appropriate for the majority of our customers. Our research ahead of the RDR implementation showed four out of five consumers, regardless of income, prefer to pay for advice through the product. Our consultants are salaried and do not need to sell products to achieve their level of remuneration.”
Barclays, which levies a percentage charge on assets placed through its advisory investment service, declined to comment.
Royal Bank of Scotland and HSBC charge a fee of £500 for a financial plan or where clients choose not to take up their recommendations.
Ernst & Young financial services director Malcolm Kerr says: “If firms are only generating revenue from selling a product, that creates a degree of risk which has to be managed very carefully. I am quite surprised so many firms have gone for a model that looks just like commission and I do not think the regulator imagined that.”
Lansons regulatory consulting director Richard Hobbs says: “Most firms have adopted this method of charging because that is what consumers want.”
Barretts Financial Solutions senior partner Kim Barrett says: “It seems strange the regulator allows firms to charge the way they do but then says it is risky.
“It would make more sense to make everyone go down the fee-based route.”