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FCA ‘unsettled’ by post-RDR charging confusion

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Kerr: ‘The RDR has not worked in the way the FCA hoped it would’

The Financial Conduct Authority is “unsettled” by early post-RDR research indicating a lack of understanding from clients about advice charges, warns Ernst & Young director Malcolm Kerr.

One of the key aims of the RDR was to improve the transparency of advice charges to ensure consumers have a clearer picture of what they are paying for.

However, Money Marketing understands that early post-RDR consumer research conducted by the FCA has flagged up a lack of awareness among clients about what they are being charged for despite the reforms.

Speaking at the Money Marketing Retirement Planning Summit in Cork, Ireland last week, Kerr said: “In my own personal view the FCA is unsettled that the RDR has not actually worked in the way it hoped it would work. 

“I think it thought there was a transition process going on last year and that people were starting to build propositions that they could sell for a fee, and there would be a market for advice and that clients would be in no doubt they were paying for advice.

“The evidence that I have seen, and which I guess the FCA will have seen, suggests that is not actually the case. There are clients that are not fully aware that the money the insurer is paying to the adviser is coming right out of their own pockets.”

Yellowtail Financial Planning managing director Dennis Hall says: “To be frank, clients are more comfortable paying a charge which is a percentage of assets.

“When we have tried getting people to pay fees far fewer are comfortable with it. There is this utopia of fee-only that the regulator wants to get to but consumers just are not ready for that.

“We simply were not able to run a business on a pure fee basis. But I think a lot of advisers could do more to explain to people exactly what they are paying and why.”

An FCA spokesman says: “We are doing a full post-implementation review to establish how investors have responded to the changes.”

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Comments

There are 43 comments at the moment, we would love to hear your opinion too.

  1. Roman Duzinkewycz 27th June 2013 at 8:43 am

    Why don’t you ring Hector and have him explain it to you? Do E&Y realise they are paying you a fortune to state the bleeding obvious? This situation is beyond a joke I think and just demonstrates that this industry is, and only ever has been, about massive earnings for businesses and individuals in turn – that is the only thing people are concerned about. Treating Customers Fairly – you’re having a laugh aren’t you?

  2. But of course this unexpected and uniintended confusion and non-acceptance by the public was well forecast by most IFAs. Granted a few would not listen.
    Can we get all the decent IFAs that were needlessly pushed out of the industry back now?

  3. The problem is that clients are now bombarded with Charges figures. It is not only the adviser fees that they have to understand but a detailed breakdown of the fund charges, the platform charges, Which share classes are commission free and which are not, trail rebates etc.. Many clients have said to me that they found the old bundled system far easier to understand as it just stated one overall cost. Actually they are not really interested if one platform is charging 0.005% more than another over the course of a year.

    I am not all surprised at E & Y’s conclusions.

  4. E&Y have appointed themselves gurus and consultants to all things financial services and regulation. I would rather have this from the horse’s mouth than from some less than perfect set of dubious accountants who have been fined $2million for Audit errors, £500,000 for their role with Equitable life and a whopping $123 million for alleged tax fraud – all this in fairly recent times.

    Why does our industry continue to consult them, let alone pay their outrageous fees?

  5. So I wonder what their review will conclude? Are clients any better off? No. Are clients happy that they had choice removed on what suits them best on how to pay? No. Have there been so many unintended consequences of RDR to a clients detriment that these outweigh any perceived benefit? Yes, but will the regulator admit that they have got this thing catestrophically wrong and it was a huge expensive mistake? I doubt it. I just hope that that the new regulator has the guts to say they got it wrong. This is one time where they should do so and they can justifiably say “it wasnt us Guv”.
    Why they simply didnt just apply a max initial commission cap overnight (like the vast mjority of IFA’s were looking for so clients didnt get ripped off by some) is simply ridiculous. It would have stopped so much needlesss cost being incurred by the industry and clients. The huge reductions in firms in the market, the redundnacies which resulted in RDR, reduction in IFA numbers. Many many long standing good quality advisers that have left, consultancy charging ban. The 5% withdrawals on bonds would still be intact, sales of regular premium pension savings would not have plummeted, there would be no tax on rebates via platforms, no VAT implications etc – the list goes on and on. Can anyone honestly say that they (Advisers) and clients are better by a larger margin off than the detriment has caused? I would doubt it very very much.

  6. Majority of clients were happy with reasonasble levels of commisson being paid. If the commission was paid via an extra amc for a number of years they were happy. If they transferred away then a penalty to them was given which stopped churning and also made sure the ifa did a good job. Now an upfront fee/charge is taken and clients do not want to see an amount deducted or a cheque written.. One comment was that financial service should be put on the same level as solicitors and accountants but how often does one see either… not very often

  7. People still don’t buy into why they have to pay for advice. Although commission was not transparent people accepted you had to get paid somehow. Separate advice charges doesn’t discourage miss-selling. People really have a problem with a separate charge for advice, then play silly buggers playing one ifa off against another. One seriously agued that Santander only charged 1.1% why was he paying 3 initial +1In the end I just dumped the client. For £10K investment he is not worth the hassle. Is this what RDR was meant to achieve.

  8. Astonishing, just astonishing!

  9. Who’d of predicted it hey?

    Simon Trenear – I’m with you Sir. This new buzz word – ‘transparency’ – has led our clients down a road of certain confusion.

    Are things much simpler now? Are things clearer for clients? Who, ignoring the qualifications gravy train, is better off here?

  10. It is a shambles and E &Y are stating the obvious really.

    The quotations, key feature, fund performance, recommendation letters – they are all written with the regulations in mind for the regulator. Nothing to do with the end user. Yellowtail are right that the percentage is easier for clients to understand and for an IFA to explain. However as with any badly written regulation/legislation it is the unintended consequences that are the problems. VAT and client rebates is a good example but there are dozen more.

    Sorry but Pandora is out of the box and it as not going back in.

  11. Marty – you got it. A maximum commission agreement would have sorted out the rip off merchants. If the commission was insufficient for the work then the IFA could have charged a fee for that extra work. But it would have had to come directly from the customer. The fact that we can still take our “fee” as a charge against the investment must inevitably lead to bad practice. By the same token clients are happy for fees to be so deducted. If the present system is retained then clearer disclosure will be required.

  12. Julian Stevens 27th June 2013 at 9:55 am

    As part of each review of my clients’ portfolios that I’ve been undertaking for the past nine months or so, I’ve been explaining to them the consequence of making any changes and asking them to sign, date and return the relevant form to switch from commission to an equivalent adviser charge. The vast majority have done so without question, on the basis that they trust me and that if my charges and what they receive in return are going to remain unchanged, then it’s just another form. But they don’t really understand what if any difference the change will make and nor do they really care. All that really matters is continuity of our business relationship.

    I always said I saw no need to change a system with which the great majority of existing clients are happy.

    By all means stipulate adviser charging for new portfolios and those to which additional investments are added, but I never saw the logic in forcing intermediaries to switch their existing portfolios from commission to adviser charging simply as a result of undertaking a review (which, after all, is what the trail commission is supposed to be for) and recommending a change or two.

    From portfolios that intermediaries can’t be bothered to review, trail commission will continue to be paid so what will have been achieved?

    The FSA’s hardline stance on top-ups to legacy business such as Investment Bonds is equally unnecessary and disruptive, not least because most providers appear to be either unwilling or unable to accommodate it. So what will have been achieved beyond, to all intents and purposes, blocking such top-ups? Maybe that was the real agenda all along.

    It would have made so much more sense for the FSA to have taken a pragmatic approach and drawn a line in the sand at 31st December last year instead of imposing its new rules on everything already in place. Dictating new charging methods going forward is one thing but insisting that those methods must be applied to legacy books of business appears, as many predicted, to be causing far more upheaval and confusion than the benefits those changes appear to be achieving are ever worth.

    But that’s what happens when an unaccountable regulator gets the bit between its teeth and starts imposing layer after layer of embellishments and add-ons to what, in essence, wasn’t actually a bad set of proposals. An Independent Regulatory Oversight Committee would never have allowed all this to happen, and quite rightly so.

  13. It has just dawned on me, and maybe it is only me but has the FCA not been extremely quiet on its defense of the RDR recently? Does anyone else think this? Maybe they are now taking stock and trying to find a workable way forward. On a separate note, even if the only thing ref adviser charging is concerned, it is no surprise that clients dont remember the fees. Most of them can hardly remember the benefits of the investment after a week. They remember that it seemed reasonable, the know they will have paid via the product in vast majority of cases and they trust the adviser. What else matters?

  14. Having to charge fees removes client choice – lack of choice is not a good thing, especially when offered a choice most clients opted for commission.

    The 5% on bond withdrawals being effected is not positive for clients.

    The loss of enhanced allocation is not positive for clients.

    The FSA did not think this through and I can only dream that one day a regulator will behave with common sense, understanding of what clients want, understanding of the products they regulate and how things actually work. It would be nice to feel that their fees actually add value to the inductry, but with their poor regulation of banks and now payday loan companies to name but a few failings, I fear this may forever be a dream.

  15. Julian Stevens I agree with you. It is counter intuitive that a contract set up prior to 2013 can receive trail until the adviser does their job of reviewing ir. There should have been a line drawn at that date.

    Liz you are right about the 5% withdrawals,though I’m don’t lament getting rid of messy allocation rates. At best they were smoke and mirrors (why not just levy a reduced charge on higher amounts?) At worst, they were a Ponzi scheme (in a growing fund, a reduced allocation for new contributions massaged the outcome for existing investors)

  16. Anyone who does not know the difference between the verb “to have” and the preposition “of” has no business being an IFA…

  17. I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.

    Leo Tolstoy

  18. Any you would think IFAs could sort out the difference between “affect” and “effect” before spouting…

  19. Or even the difference between “Any” and “And”…

  20. Watch out – the grammar police are about!

    You’d do well as a regulator Ken. Unnecessary input.

  21. michael brayne 27th June 2013 at 1:34 pm

    I believe the sale of a ISA should not create any more paperwork than say, the sale of a 12 bore shotgun and 50 cartridges.

  22. Grey Area | 27 Jun 2013 11:45 am

    Or even the difference between “Any” and “And”…

    Don’t you just love it when that happens?
    Those that live in glass house ‘n’ all that…..lol

  23. @ Michael
    me to but why is it easier to obtain the latter?

  24. I spent five years telling the FSA that the RDR was not needed and that in common with all other ‘fine-tuning’ and ‘market adjusting’, such as depolarisation, the unintended consequences would dwarf any expected improvements.

    It gives me little satisfaction to now confirm to them that they were wrong and that the forced £5bn cost (or whatever it now is) has also served to undermine stability and access to consumers.

    This is what happens when bureaucrats believe their theories capable of having a practical outcome.

  25. Dick Sprinkler 27th June 2013 at 3:42 pm

    Hans Christian Andersen could not write this !!!

  26. I wish you would sprinkle on E14, Dick

  27. Dick Sprinkler 27th June 2013 at 4:12 pm

    Consider it done Barney – not sure I can reach from here though !

  28. Are we seeing a variation/extension of Parkinson’s Law?

  29. I don’t know why I sit here with a smile on my face, because the whole RDR experiment is a farce. I think it is also telling, that out of the FSA staff who dreamt RDR up, who is actually left still holding the RDR banner ? Pain, Sants, Smith, Cole, Nicholl etc. etc. etc., ? my question is did they really have confidence in it at all ? they didn’t stick around long to see it through now did they,

  30. @ DH
    No, they left before the proverbial hit the fan.
    They could see it coming and realised it was time to jump ship.
    Now the “new” lot will claim “It wasn’t me guv”

  31. Where have all the pro RDR evangelists gone, we have not heard much from them lately.

  32. @Captain flint

    They are too busy running hard to stand still, or as they would call it…too busy filling their boots!

    Ive heard the numbers for the second quarter and it is not pretty but then we knew that would be the case!

  33. I’m chartered, have loads of letters after my name and speak at loads of conferences.

    I think fee-based is the very bets… but I’m leaving the industry next week to be a dustman.

    I need regular income

  34. Can an IFA explain to me why, on the basis of 3% initial + 1% p.a it costs 3 times as much to put together a £600,000 portfolio of investment funds v £200,000 portfolio. £18,000 initial v £6,000 initial – totally outrageous !. The only answer is to charge a commercial hourly rate as per accountants & solicitors

  35. @ Phil
    3 times as much liability perhaps? when you consider that liability lasts a lifetime and beyond the possibility of run off cover, which may only be given for a set number of years, this may explain the higher charge.
    Even if an hourly rate were the norm, this would have to be factored in somewhere.

  36. To answer Phil’s question, there is no correlation between the cost of advice and the amount invested. Advising someone with a large portfolio is perhaps more complex and riskier for a firm but using your example not 3 times greater. The bottom line is that the more you have the more someone wants of it be it IFAs, agents, HMRC, council and the percentage figure is a way of doing this. Some people are happy with that arrangement, in some cases it keeps it simple but I think a more pertinent question is why should anyone take any percentage of someone’s investment?
    We advised a client on his assets of circa £1m. Our fee worked out at not much more than 0.1% including setting up all the necessary trusts etc. That is what it cost us because his circumstances were very simple. I would add that based on our current hourly rates it would be more but the point is made.

  37. The crux of this article is the concern that clients do not know how much they are paying and what they are paying for. If this is the case, then two things have occurred 1) The adviser hasn’t explained it clearly enough to the client and 2) The client doesn’t understand and, for some reason that I cannot fathom, has decided to proceed without understanding.

    To me that is a failure of both parties, not just the adviser. That does not mean that the RDR, in itself, is a failure though.

  38. One of the interesting things about the RDR is that our clients know what they are being charged and more importantly we know what they are being charged for. I cannot speak for other firms. One issue we have noted since the start of the year when we finally got our MI sorted is that our FSCS levy returns have been remarkably generous to the FSCS. We had always made a calculation based on historical split of product commission and used that to apportion our client fees to the two main categories – Life & Pensions and Investment. We had always assumed that over 70% of our business was investment but of course that was what paid for advice. In actual fact we know it is nearer 50:50. Therefore our FSCS Fee data should have been totally different although we could only prove it by having proper MI in place and a realistic fee proposition which the RDR forced us into.
    The consequences of this? Well this year we will probably pay £3,000 too much in levies and over the last two years we will have paid a 5 figure sum too much.
    Anyone know how to get your money back?

  39. Sam Caunt | 28 Jun 2013 2:49 pm

    “The consequences of this? Well this year we will probably pay £3,000 too much in levies and over the last two years we will have paid a 5 figure sum too much.”

    Seriously, I’d be very worried if you firm was my financial adviser based on what you’ve posted above. You do know where assumptions lead don’t you?

  40. James Hurdman | 28 Jun 2013 2:29 pm

    The crux of this article is the concern that clients do not know how much they are paying and what they are paying for. If this is the case, then two things have occurred 1) The adviser hasn’t explained it clearly enough to the client and 2) The client doesn’t understand and, for some reason that I cannot fathom, has decided to proceed without understanding.

    To me that is a failure of both parties, not just the adviser. That does not mean that the RDR, in itself, is a failure though.

    You mean that of age, consenting adult who obviously couldn’t read or question what charges they would be paying. Of course the correspondence sent to them showing fees, charges, APR, commission etc., etc. by the provider and adviser was also written in invisible ink.

    Seriously, would you buy a new suit if it didn’t have a price tag or someone gave you an idea of the cost involved? Buyers beware.

  41. James – without time sheets we could not disprove what the FCA told us to do. I would also suggest you do not know the difference between advice and product selling which is the problem the FCA has.

  42. Do you ever find yourselve wondering ” how many thieves, liars and cheats do I actualy come across each day” and I’m not talking about my fellow Financial advisers. Cash for questions, lobbyists MP’s and other high ranking Govt officials just cant keep their snouts out of the trough. Thats what we’re all really up against. So dont be surprised when decisions are made that baffle you when common sense suggests the opposite view.

  43. Sam Caunt | 28 Jun 2013 7:11 pm

    James – without time sheets we could not disprove what the FCA told us to do. I would also suggest you do not know the difference between advice and product selling which is the problem the FCA has.

    Time sheets…? Did you not mean ‘Management Information’? As I said; I’d be pretty worried if I was relying on you for financial advice. What other mistakes have you made and who did it cost?

    As for product selling…..you lost me 😉

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