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FCA relaxes cross-subsidy rules to boost access to advice


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.”



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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Perhaps, they could allow firms to charge a larger amount up front to cover the cost of advice and a lesser amount longer term as a result. The customers who hold the investment products over the long term for which they are designed will in the long term not be disadvantaged. What? You mean they used to do that. And what happened? Oh the regulator changed that. And what might happen now? Oh the regulator will change that back. So that wasn’t a colossal waste of time and money then? No, every time the regulator gets things wrong, they learn. Really?

  2. Didn’t companies pay out a % of the investment so that no matter the amount invested the clients got the advice they needed. Oh yes that was a commission and the FCA stopped that!!

  3. Jonathan Hardwick 2nd December 2016 at 4:23 pm

    Duh! Erm, ‘hello’ – welcome back to preRDR!! Can we have our money back, please? Oh, and while your at it, a single pension product would be good per’simplification’. Who are these people?

  4. Commission anyone?

  5. One piece of madness less, well that’s a start.

    What wild-eyed creature ever devised this piece of nonsense in the first place? Step forward please.

    Every industry operates cross-subsidies. Every supermarket offers loss-leader products hoping to entice the customer to buy other goods. How is this a problem?

  6. The FAMR report is trying to undo the unintended consequences of RDR which disenfranchised those people who could not afford to pay for advice, but were previously absorbed within a firm’ s total turnover, in some cases becoming profitable clients later on.

    The current ” advice gap ” is of the Regulators’ own making, no doubt they are under political pressure to backtrack and the answer is to look to the adviser community for the solution, whilst no doubt increasing their fees to cover the cost of these wild goose chases.

  7. ER I might have missed something. The providers are under the cosh to reduce charges. So they will be losing money there (or should I say making less). Then what remains goes to subsidise those who want to invest tuppence ha’penny. That’s what I call a great business model!

  8. This is a pure giveaway to providers (e.g. SJP) and actually disadvantages IFAs by taking away a key part of the level playing field. Basically this is suggesting that providers should be allowed to reduce advice costs by shifting them to a product. This means that IFAs will look more expensive in comparison. It also means that emphasis shifts towards selling product rather than advice.

    RDR was sold on the principles it espoused but it appears that where these causes issues (i.e. cuts out the smaller investor) it can be flexed…

    • I agree with you Grey area, no pain, all pain…. we warned them of the debacle they made and now they want to reverse it once again at OUR cost. You made your bed, you better lie in it comes to mind. This is too early to start reversing what I and many other told them NOT to do, they said it would be pain for 5 years and would then gradually start getting better which it is. Some of us said the pain wasn’t worth taking, but were forced to swallow their pill, now they want is to use it as a pessary! And we all know where they go!

  9. Sir Hector Sants. Another monkey who benefited from the honours system, at the expense of others, with stupid ideas.

  10. As well as Sants, I suppose we shouldn’t forget those IFAs that also supported the RDR.

    They know who they are.

  11. RDR (Christ I cant believe I,m going back on this) was more about natural selection (massive cull) and restriction of trade.

    The power, believed a padded cell for the remaining, was the only solution, and seeing as it was unaccountable to anyone, and its immunity was sacrosanct failure was not a fear, getting it right didn’t really matter either.

    For our part ” we told you so” is never so true.

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