Rewriting the RDR: Advice review eyes lower qualifications and return to commission

An influential panel of experts appointed by the Government as part of the Financial Advice Market Review is considering radical reforms to regulation which would roll back key aspects of the RDR to boost access to advice, Money Marketing understands.

The FAMR, jointly led by the Treasury and the FCA, is assessing barriers to the provision of financial advice following the pensions overhaul introduced last April. In particular, the review is looking to tackle the advice gap for people with smaller pots to invest.

As part of the FAMR, the Government appointed an independent panel to develop reform proposals. The panel’s recommendations will be hugely influential in shaping the outcome of the review.

Sources close to the panel say a number of radical ideas have been seriously discussed during the three sessions held in the second half of last year. These include creating a new basic tier of advice with a lower qualification requirement for simple accumulation products, developing a new charging structure similar to commission and banning regulated advisers from selling unregulated products.

So do policymakers have the appetite to pursue changes which potentially undermine the RDR just three years after it was implemented? Can they really think the unthinkable to boost the UK advice market? And will consumers be better or worse off as a result?

Back to the future

One idea on the table – which is currently in its early stages – would reduce the qualification requirement for advisers selling basic products such as Isas.

A source close to the panel says: “The panel are looking at an initial tier of financial advice. You are looking perhaps at an adviser who already has a mortgage licence and a protection licence, for example, and is on the way to getting QCF Level 4, is in the supervisory framework but is offering advice on accumulation products. So just Isas and simple pension products.

“It is supervised but there would be a lower level of regulatory risk because these are essentially products and advice that cannot go wrong. It could be a set of four or five questions instead of full suitability reports and a full factfind.”

Details of how consumer protection would work in such a regime have yet to be ironed out, however.

The source says: “This sword of Damocles hanging over some of the regulated firms is what puts them off giving any form of guidance or advice for people with smaller pots.

“There would still be consumer protection and we need to see exactly how that would work. These talks are at an early stage but there does need to be some differentiation.”

A separate source says allowing firms to receive commission on simple accumulation product sales is also under consideration.

The source says: “The panel have discussed putting forward an alternative commercial model for advice that would allow a fee to be built into the product. So today you might pay 1 per cent and it is normally paid by selling units in funds but it has to be agreed as part of your service agreement with the adviser. What is being discussed is more like commission.

“So you could invest in an Isa or a pension and the adviser receives a fee on completion of the transaction direct from the provider.”

Panel members have also discussed the possibility of banning regulated advisers from selling  unregulated products.

No agreement has been reached on taking these proposals to the Government.

However, the very fact they are being discussed suggests the FAMR could fundamentally redraw the advice landscape yet again.

Market expansion

Apfa has previously called for the regulator to create a lower liability “simplified advice” model to allow advisers to serve the mass market.

Apfa director general Chris Hannant agrees such a model would need to be restricted to basic products.

He says: “You have got to focus on a specific range that will almost always be suitable, like a basic stocks and shares Isa with a fairly conservative investment offering underpinning it. That wouldn’t be for many people already taking advice, but it would expand the market.”

However, independent pensions expert Alan Higham warns the market may not be safe enough to adopt this model.

He says: “The question is can you get the retirement savings product to a place where it is always suitable? I don’t think we are quite there yet but it is not impossible to conceive of. It’s like buying ibuprofen and paracetamol from the supermarket without seeing a chemist. Stuff can go wrong, but it is within the consumer’s ability to manage that.

“If we can get to the situation where we have retirement savings products that meet certain minimum standards, then I don’t see why they couldn’t be sold by advisers with less extreme qualification requirements.”

Retrograde step

Both Hannant and Higham are lukewarm in their response to a potential return for commission-like charging structures.

While Hannant does not oppose commission in principle, he says consumers must be clear they are not receiving free advice.

He says: “We need a level playing field in terms of transparency when it comes to how things are being paid for. One thing we are worried about is people not going to advisers because execution-only appears to be a free option. So what I wouldn’t want to see is something that drives people to opt for something that was less comprehensive because of the appearance of it being free.

“That could potentially distort the market away from proper advice, with people taking a dumbed-down version because they are put off by fees.”

Higham adds: “We have something like this already called adviser charging. Provided that a product fee was explicitly agreed to, then that is fine.

“But I would be worried if we went back to the bad old days where anybody could charge a commission and be less than clear about doing it. That would be a retrograde step.”

Last March, Aviva scrapped plans to offer a phone-based guidance service over fears it would accidentally stray into advice. Head of financial research John Lawson questions how the Government could administrate a system of reduced requirements to provide advice. He says: “We would welcome some softening of the guidance rule because it might mean some providers can also give a bit more help down the bottom end.

“That sort of thing makes sense if it is just savings, but how many people are going to be in that category, and where do you draw the line?

“Isas are a relatively straightforward conversations for many of those young people, so I can imagine why you might allow advisers to do that at a lower level, but when you reach retirement it gets quite complicated, so that will be a tough judgement to make.”

Nonetheless, it is a stance that will likely be backed by some providers. Responding jointly to the consultation, Old Mutual Wealth and Intrinsic called on the Government to introduce a new “foundation tier” of regulated advice, while Aegon also wants to be able to provide new levels of support between the current definitions of guidance and advice.

Aegon regulatory strategy director Steven Cameron says: “We hope the FAMR will introduce a new cost-effective model between full and ‘no’ advice which both advisers and providers may deliver.

“Public financial guidance also sits in that middle ground but if the private sector can deliver more here, the Government should consider reducing the scope of what the likes of MAS and Pension Wise offer.”

However, LV= warns policymakers against softening requirements for the provision of advice.

Money Marketing first revealed the provider would launch its own fully regulated online advice service last May, and life and pensions managing director Richard Rowney says: “The way of giving affordable advice to people is not to lower the standards.

“If you lower the standards for advice, it will be like going and getting your car serviced and not being able to guarantee that it’s going to have the brakes working.”

“We believe we can provide full, regulated advice for £200 so our viewpoint is we should get rid of any complexity around simplified and focused advice.

“We should be making it really simple so they are either getting information or guidance, or full regulated advice.”

Adviser views

Dennis Hall, managing director, Yellowtail Financial Planning

A lot of people have suggested maybe QCF Level 3 is adequate for a large proportion of the population, and I would not disagree with that. We have got to somehow make it simpler for people to offer, but if you are waiting for a lot of people to reach Level 4, you are probably going to be waiting a long time to get a big enough sales team out there to make the kind of difference we need.

Tim Page, director, Russell Page

The problems in the market are more fundamental than can be addressed with a new level for advice – we need to really reduce the cost of delivering advice to the customer. The cost of hiring a junior adviser might be less, but in the greater scheme of things, when you add up all the things associated with that, the gains would be too marginal to justify this kind of change, and it would just add more confusion into
the marketplace.


3 August 2015

The Treasury and FCA unveil the Financial Advice Market Review, alongside a separate investigation of state-backed financial guidance.

12 October 2015

Consultation documents for the FAMR are published, revealing a focus on what kind of support consumers want access to, whether any advice gaps exist, how they can be closed, and what role technology such as robo-advice could play.

15 October 2015

The Treasury reveals the members of a 15-strong expert panel recruited to advise the Government and the FCA on the FAMR.

22 December 2015

The consultation on the review closes.

16 March 2016

The FAMR is due to produce final proposals for reform to the market ahead of this date, when Chancellor George Osborne will reveal his 2016 Budget.

Who is on the expert panel?


Scottish Widows chairman Nick Prettejohn

Panel members:

Aviva UK & Ireland life chief executive Andy Briggs

FCA Smaller Business Practitioner Panel member Robin Keyte

Financial Services Consumer Panel chair Sue Lewis

Defaqto wealth insight consultant Gill Cardy

Which? director of campaigns and communications Alex Neill

Old Mutual Wealth chief distribution officer Richard Freeman

Citizens Advice chief executive Gillian Guy

Nutmeg chief executive Nick Hungerford

Hargreaves Lansdown chief executive Ian Gorham

Barclays retail and business banking chief executive Ashok Vaswani

Nationwide retail director Chris Rhodes

Fidelity head of investment trusts Nicky McCabe

LV= managing director of life and pensions Richard Rowney

Age UK chief executive Tom Wright

Legal & General managing director of mature savings Jackie Noakes

Expert view

Predicting the future of regulation, particularly in the ever-changing financial services sector, has often seen pessimistic predictions and the likelihood of further impact and cost. However, following a more positive and progressive year for the advice profession, 2016 could see some overdue reform and evolution of regulation itself.

A significant catalyst in the metamorphosis from an industry to a profession was of course the RDR and by April we will know the initial findings of the Financial Advice Market Review, which are expected to be announced by the Chancellor in his Budget speech –although further consultation is likely prior to this.

The FCA’s senior team has acknowledged the need to adopt a different approach and there are indicators we will see the introduction of some much needed regulatory reforms to support that evolution and to create a more stable and sustainable landscape from which to increase access to regulated advice and services.

Undoubtedly the biggest single issue advisers want to see tackled is what many view as unfair and unsustainable regulatory costs. Alternative funding solutions must be found for the FSCS in particular, whether that be some form of product/investment levy or a pooled insurance principle to eliminate the unsuspecting and sometimes crippling additional costs. The FCA’s business plan for 2016 already looks full and it has a number of key consultations in progress. It will also need to consider EU policy and negotiate any amendments to ensure they are fit for the UK markets.

Including the potential significance of the FAMR, we are likely to see even more consultations introduced in 2016 as a result.

Fair, balanced and proportionate regulation does feel like it is on its way, but this will not be at the cost of watering down standards or appropriate consumer protections. Supply and regulation of financial services has to work well for consumers and both have an opportunity to evolve more collaboratively during the course of 2016.

Keith Richards is chief executive of the Personal Finance Society