Here is a project that has consumed years of people’s lives. Some of the finest minds in the industry collectively spent tens of thousands of hours looking at the key issues from every angle. They spawned millions of words in consultation papers, reviews, annexes, appendices and other documents, plus 900-odd responses, not to mention the endless newspaper articles, online blogs and conferences designed to tease out people’s opinions.
And for what? At the end of almost two years of consultation and repeated dithering between various options, now on the table and then withdrawn, allegedly because of European directives nobody at the FSA managed to spot before the interim review was published earlier this year, we are now being told that there will be two classes of “adviser”. One will be independent, the other will not be, with little differentiation in terms of prescribed status disclosure. There will also be another tier of guided sales, assuming sections of the industry really want it to happen.
In that respect, very little has changed from the current system, other than a requirement for IFAs and sales advisers to pass a few more exams than before. Is this what the FSA believes will create a vastly different regulatory landscape of such benefit to consumers that it was worth spending millions of pounds of everyone’s time on? Could a much simpler statement demanding a ratcheting up of qualifications not have achieved the same effect?
The FSA accepts belatedly that so-called customer-agreed remuneration would be no such thing, given the imbalance between clients and their advisers. However, it tells us that it cannot call a complete halt to the commission system, again because of European directives. Instead, it wants to see “adviser charging” where IFAs “set their own charges and make their clients fully aware of what services supplied to them will cost”.
Meanwhile, “providers cannot determine how much commission independent adviser firms receive or include adviser commission within their product prices but may, if they wish, offer facilities for customers to have their adviser firm’s charges deducted from investments”.
In other words, what we will see is a slightly more sophisticated variant of the current menu system where an adviser “discusses” potential charges with the client at outset for a certain amount of work. Of course, precise charges cannot be determined in advance. Inevitably, there may be complications in terms of what is ultimately involved but I cannot imagine many situations where a client will be unwilling to ensure the right remuneration is paid.
How will that money be collected? From the investment, as it is today. Will there be greater transparency in the way these deductions are displayed? We do not know because this is part of the nitty-gritty of the RDR proposals that has not been determined in great detail.
My gut instinct tells me that in the context of an unequal relationship between advisers and consumers, as acknowledged by the FSA in its rejection of CAR, it will be relatively easy for IFAs to manipulate clients into accepting whatever adviser charging structures they want to foist on them.
This leaves me with two conclusions – either the FSA is prepared to tolerate this bodge in much the same way as it went for the easy way out when it agreed to the menu system in 2002 or it sees its proposals as a halfway house to an eventual ban on any form of commission-based remuneration, whether in its current naked form or by proxy, which is what adviser charging is at the end of the day. The language it uses in the document suggests the latter may be the case but I would not bet on it.
There are other important issues discussed in the RDR. The plan for an independent professional standards board sounds interesting although one wonders whether the FSA is creating something similar to those accessed by accountants or lawyers when these were the product of organic development, not forced birth.
The money guidance project in the North of England will be worth watching but we will not know how effective it is until March 2010, with any national rollout not likely for at least a year after that.
We are left with the impression of a process that has occupied vast swathes of people’s time, generating a higher level of IFA passion and involvement than amy other regulatory proposal of the past 15 or 20 years.
What has come out of it is pretty thin gruel. Was it all worth it? I doubt it.
Nic Cicutti can be contacted at firstname.lastname@example.org