Early indications that reforms of financial advice are working

Published: 16/12/2014     Last Modified: 16/12/2014

The first stage of the post-implementation review of the Retail Distribution Review (RDR), along with thematic work into the disclosure of ongoing services and charges, has found that financial advisers are offering investors an increasingly professional service tailored to their individual needs.

In December 2012, new rules (the RDR) were introduced to make the retail investment market work better for consumers. These raised the minimum level of adviser qualification, removed commission payments to advisers and platforms from product providers and aimed to improve the transparency of charges and services.

The post-implementation review comes two years after the new rules took force and provides an early look rather than a definitive picture of their impact. The FCA will be undertaking a series of next steps, in light of the review’s findings, in 2015. A further post-implementation review of the rules will be undertaken in 2017.

Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), said:

'The RDR aimed to create a truly professional financial advice sector; one that provides advice based solely on investors’ best interests. It is still early days but the indications are that the sector has responded positively to the reforms.  

'Importantly, we have seen a reduction in product bias, with a very noticeable decline in the sales of those products that before RDR came with higher commission.

'These are positive signs but we know there is more to do. For example, early next year we’ll be looking at how we might encourage better disclosure of information to consumers. And, in 2017 we’ll undertake a further review of how the RDR has worked. It is vital that we continue to keep these wide-ranging reforms under review.'

Europe Economics, which was commissioned by the FCA to undertake the post-implementation review, found that the RDR has reduced product bias. In particular, there has been a decline in the sale of products which had higher commissions pre-RDR and an increase in the sale of those which paid lower or no commission pre-RDR.  This is a sign that commission is no longer a driving factor in advisers' recommendations.

In addition to meeting the required standards, Europe Economics found that an increasing number of financial advisers were gaining further qualifications, demonstrating growing professionalism in the sector.

The impact of the RDR on price has been mixed. While product and platform costs have broadly fallen, adviser charges appear not to have decreased.

There is little evidence that the availability of advice has reduced significantly, with advisers still willing and able to take on more clients. Europe Economics found that while a small group of those with less to invest may find it more difficult to find an adviser, there were still those in the market willing to serve them.

Next steps following post-implementation review

The FCA is taking steps to encourage new advice models to emerge to serve those who have enough to invest but whose demand for advice is untapped. This includes publishing final guidance to the sector on sales that involve a personal recommendation, and those that do not, and Project Innovate, which the FCA has developed to support new ideas in financial services.  

The FCA is interested in hearing ideas for better ways to present information to consumers on the nature of advice services offered and advice charges - for example, by using insights from behavioural economics to improve consumers’ understanding. This will form part of the FCA’s wider work on how information to consumers is provided, due for publication in Q1 2015. 

Thematic review: Adviser charging and services

A thematic review published today shows material improvements in how firms disclose the cost of their advice, their scope of service, and the nature of their services to clients.  

The findings demonstrate that the sector has responded to two previous thematic reviews which found significant issues with the quality of the information given to those seeking advice. The improvements point to increasing professional standards and should mean those seeking advice are better placed to understand the nature of a firm’s services and how much they will cost.

However, the review did show that some further improvements are needed, particularly in the way that the cost, in cash terms, of ongoing services is disclosed.

As part of the thematic review, the FCA commissioned research into consumers who had bought financial advice. This found that the ongoing element of advice motivates many people to use an advisor in the first place, reassured that a trusted professional is taking care of their investments. The research suggests advisers can be more confident discussing their charges for ongoing services as clients value the peace of mind these services provide.

Despite the fact that most in the advisory sector have taken on-board the findings of two previous thematic reviews, which uncovered significant and widespread failings, one firm included in this round of supervisory work has been referred to Enforcement. It was felt that they had not sufficiently engaged with the changes required by the RDR.

Notes to editors

  1. Post Implementation Review of the Retail Distribution Review - Phase 1 - Summary.
  2. Retail Distribution Review Post Implementation Review, by Europe Economics.
  3. Advice Gap report, by Towers Watson.
  4. Thematic review: Retail investment advice: Adviser charging and services.
  5. NMG Consumer Research: Retail investment advice assessment of ongoing services - A research report.
  6. NMG Consumer Research: Impact of the Retail Distribution Review on consumer interaction with the retail investments market - A quantitative research report.
  7. Thematic Review: Supervising retail investment firms: being clear about adviser charges and services, April 2014.
  8. Thematic Review: Supervising retail investment advice: how firms are implementing the RDR, July 2013.
  9. Factsheet 007: Disclosing your firm’s charges and services.  
  10. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  11. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  12. Find out more information about the FCA.

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