The Retail Distribution Review is often referred to as the key starting point for the regulation of commissions paid out of products. In fact it was just one milestone – albeit a major one – in a decades-long debate about how best to charge consumers for financial advice. And the debate continues under MiFID II. For the UK and the Netherlands, which already have a wider ban on “inducements”, this aspect of MiFID II is not a big deal. The FCA has had to extend the current adviser charging rules to wealth managers, but it said a few years ago that it intended to do that.
For the rest of the EU, the inducement ban in the MiFID II proposals was first thought by the industry to be insignificant – on the Continent, the most common distribution channels are banks and insurers rather than standalone independent advisers. However, the combination of the requirement that any inducements paid must “enhance the quality of the service to the client” and the obligation on distributors to offer or recommend the best product to their clients (which includes consideration of costs) is leading to a different result.
Distributors are concerned that even if they are not independent, the obligation to recommend the best product for their client may require them to go for the new commission-free share classes. So, the full bans in the UK and the Netherlands may in practice be mirrored in the rest of Europe.
The findings and recommendations in the FCA’s Asset Management Study now take the debate in another direction: the level of costs and charges, however they are taken. Again, this is a UK-only policy initiative and the FCA is unique among European regulators in having Competition Law powers. But the debate is already being picked up by ESMA and by the European Commission. The Commission is studying returns from funds against their costs and charges. It is not yet clear what will happen as a result of that work.
The nub of all these debates is the question of value for money. It’s set against a political and economic context of governments needing consumers to save more and to move from cash to investments. It’s often said that since the financial crisis, consumers no longer trust financial services and that trust needs to be restored. But what is it that would restore trust? One can introduce more and more so-called investor protection rules, but I suggest that what actually matters to consumers is what they get back after years of saving. If they find out late in the day that costs have significantly eaten into their returns, the opposite of trust ensues.
The findings of the FCA Study have shone a harsh spotlight from which there is no going back for the funds industry. And the Platform Study underlines that the whole supply chain is under scrutiny. It’s questionable whether this piecemeal approach to analysing the supply chain will fully pick up the interactions of costs and charges between the different parties. And it seems a little odd that it is only standalone fund investments that are being hauled over the coals and not other packaged investment products such as structured, unit-linked and with-profits products. It’s clear, however, that the spotlight on the industry is not going to be turned off any time soon.
The unanswered question is how to measure value for money, especially given it means different things to different clients. There’s no getting away from the fact that the quantum of costs and charges has a direct impact on returns and must be controlled. But it’s equally a fact that one cannot invest without incurring costs. If investors’ over-riding concern is what return they’ll get and how safe their investment is, a simplistic aggregated costs figure won’t fully answer that question.
Measuring value for money must take account of all aspects of a product, not just the costs. Proper product governance processes, good and meaningful disclosures, and effective governance are all important.