Some time ago the FSA indicated it would be surveying the marketplace in the lead up to the RDR and monitoring any signs of firms seeking to circumvent the incoming rules. We want to ensure that no unintended consequences arise as a result of the changes that everyone in the industry has worked so hard to achieve. The last thing we would want to see is an uneven playing field where some firms offering retail investment advice have an unfair advantage over others.
But there is a real threat that this may be the result of some of the moves we have seen in the market. Some firms are looking for ways to circumvent the adviser charging rules by soliciting or providing payments or benefits that do not look like traditional commission, but are intended to achieve the same outcome: to secure distribution. These arrangements are not in the spirit of the RDR.
You will have noticed that the letter we sent to firms was addressed to some of the larger players in the market. As you will know, distribution agreements are common in this sphere – but the size and scope of some of these deals appears to be well beyond what we have ever seen before – sometimes three to four times the typical levels. It cannot be a coincidence that product providers and advisory firms are scrambling to put these arrangements in place now, three months before the RDR implementation deadline.
If we allowed these payments and benefits to continue, a few of the larger distributors would be able to undercut the adviser charges of the smaller distributors, simply because of the deals they have in place with product providers, winning business away from the smaller firms. And that would result in biased advice because some advisers would continue to recommend those products which provide them with the highest levels of payments or benefits.
Let me give you an example of this. Firm A is a large national distributor with offices across the UK and thousands of appointed representatives. It has an arrangement in place with a product provider and uses the money from this arrangement to push down its adviser charge – the cost of its advice. This means that Firm A can charge, say, £150 for a full financial assessment. In contrast, Firm B charges £400 for a full financial assessment because its adviser charge reflects all the costs it incurs, from I.T. to stationery. Firm A looks cheaper but its adviser charge does not reflect all of its costs because for example, the product provider is paying for the entirety of its I.T. systems.
Now in this situation where is the consumer going to go for advice – to Firm A that charges £150 or Firm B that charges £400? The consumer may be persuaded to go for the cheaper option, but could be on the receiving end of biased advice and limited choice. And they will not necessarily benefit from a cheaper service: the provider’s charges may actually end up being higher to compensate for the cost of the distribution agreement.
The 24 firms we have written to have had until 15 October to provide detailed information on any agreements they have in place or are currently negotiating. We plan to scrutinise this data and take action against firms whose deals and arrangements circumvent our rules. We want to ensure a level playing field where firms can compete upon the basis of the quality of advice they provide to their clients; not the deals they have in place with product providers. In a truly competitive marketplace, the firms which provide the best advice to their clients will be the winners – not those who benefit from backdoor payments.
Nick Poyntz-Wright is head of life insurance supervision at the FSA’s conduct business unit