The FCA plans to change its adviser charging rules for vertically integrated firms in a bid to encourage more firms to invest in developing advice services.
A quarterly consultation paper,published today, says the proposed change follows a Financial Advice Market Review recommendation to consult on guidance around cross-subsidisation rules and their interpretation.
The rules were introduced as part of the RDR and aim to stop vertically integrated firms from subsidising the cost of providing an advice service with other parts of the business, such as products.
In the FAMR call for input, the FCA received feedback that the cross-subsidisation rules have reduced flexibility for firms being able to develop business models aimed at less wealthy customers. It was argued this was because firms cannot cross-subsidise in the first years of business when costs are not being recovered on a standalone basis.
It was suggested to the FCA that if the cross-subsidisation rules were more flexible it would help firms to develop these business models.
The regulator’s current guidance around cross-subsidisation says: “The allocation of costs and profit between the adviser’s charge and product cost should be such that any cross-subsidisation is insignificant in the ‘long-term’”.
However, ‘long-term’ is not defined and each case is considered individually.
The FAMR report says: “When considering this question, the FCA generally looks, as a starting point, at whether the costs will be recovered over a payback period which is reasonable compared to the time which may be available to non-vertically integrated firms investing in new business models as well as not being inconsistent with the firm’s standard payback period.”
The regulator says many firms assumed the time they had to recover costs was limited.
In the latest consultation paper the regulator is proposing replacing ‘long-term’ in the current guidance with a five-year timeframe.
The consultation paper says: “We recognise that some firms will have return on capital measures across businesses which exceed five years and, in such cases, the guidance will indicate that a longer payback period is also acceptable when determining adviser charges.
“By removing uncertainty on the meaning of long-term, we expect to see more firms investing in advice services which will increase competition for consumers seeking advice. The increase in the flexibility (from a position that was perceived as very limited) should also have a positive impact on pricing as spreading costs over a longer period should result in firms being able to reduce adviser charges thus encouraging a larger take-up of advice.”