RDR thematic review – FCA finds some improvements

The Financial Conduct Authority (FCA) has said that it believes the Retail Distribution Review (RDR) has had a positive effect, and commented that

“advisers are offering investors an increasingly professional service tailored to their individual needs.”

The RDR came into force at the start of 2013. Financial advisers were required to obtain higher level qualifications, a new definition of independence was introduced, and commission payments were banned for investment advice.

With the new independence requirements and the commission ban came new requirements on how firms disclose the scope of their advice and the fees payable for their services. In April 2014, the FCA said that 73% of firms assessed as part of its thematic review into RDR implementation were failing to meet these disclosure rules in some way. Now, the latest thematic review has reported some progress in this respect, but the regulator says that further improvements are still required at some firms.

It mentions in particular the need to give cash examples of likely fee levels for ongoing services. For example, a firm giving advice on an £80,000 investment might take an initial fee, plus a fee of say, 0.5% per annum, for ongoing services. In these circumstances, customers must be made aware of what they will pay in cash terms, i.e. what 0.5% of £80,000 is.

35% of firms are still not doing this satisfactorily, according to the review. 57% of firms surveyed who charged hourly rates were said to be failing to provide an estimate of the number of hours each task might take.

Whilst the overall picture was one of improving standards, the FCA has decided to refer one unnamed firm to its Enforcement Division as a result of issues identified during the review. The firm is said to have “not sufficiently engaged with the changes required by the RDR.”

At the same time, the FCA published the results of a study by Europe Economics, which found that customers could now have greater confidence that the advice they were receiving was unbiased. The study said that where products paid high levels of commission pre-RDR, sales volumes had now decreased; and that conversely, where products previously paid little or no commission, advisers were now more likely to recommend them.

The study also provided little cheer for those who allege that the RDR has created an ‘advice gap’, where less well-off customers are unable to find advisers to service them. Europe Economics said that whilst some customers may find it more difficult to find an adviser, there were still plenty of advisers in the marketplace who were not turning away customers on the basis of their levels of income and/or assets.

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

“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.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.