FAMR: Mass market advice held back by misunderstanding of RDR rules

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Advice firms are reluctant to develop mass market advice models because they are misinterpreting cross-subsidisation rules introduced by the RDR, the Financial Advice Market Review says.

The RDR introduced requirements to stop vertically integrated firms using advice as a loss-leader to sell their own products.

Its guidance states that the relationship between advice and product cost should mean any cross-subsidy between the two is insignificant “in the long term”.

However the FAMR, published jointly by the FCA and the Treasury today, says firms wrongly believe the cost recovery period is limited.

It says the payback period should be reasonable compared to the time it would take for non-vertically integrated firms to invest in new business models.

As a result large firms say this has been a barrier to developing robo-advice models because of the high up-front costs involved.

The FAMR recommends the regulator consult on improving its guidance around cross-subsidisation.

It says: “FAMR believes that the basic principles set out by the RDR remain valid – that vertically integrated firms should not be able to exploit their control of product manufacturing to secure an unfair competitie advantage in the provision of advice.

“Equally, as envisaged by RDR, it is reasonable for firms to be given initial flexibility in recouping the costs of advice services through adviser charging.”