A UK experience of financial reform

It was prompted by a need to improve clarity for people looking to invest, raise professional standards of financial advisers and reduce the conflict of interest which was found in advisers’ remuneration. 

Prior to the RDR, many financial advisers were charging via commission where they would earn a fee for products they sold which had led to a conflict of interest and several mis-selling scandals for products such as payment protection insurance (PPI). 

The biggest piece of regulation before the RDR had been the depolarisation of financial advice in 2005 which had meant advisers could be independent, single-tied to a company or multi-tied which meant they could offer products from a range of providers. 

But in June 2007, the Financial Services Authority outlined its guidelines for what it wanted from a new-style financial services industry which would be enacted January 2013, perhaps the biggest industry shake-up in years. These guidelines were to have: 

• standards of professionalism that inspire consumer confidence and build trust;
• an industry that engages with consumers in a clearer way about products and services;
• remuneration arrangements that allow competitive forces to work in favour of consumers;
• a market that allows more consumers to have their needs and wants addressed;
• an industry where firms are sufficiently able to deliver on their longer-term commitments and where they treat their customers fairly; and 
• a regulatory framework that can support the delivery of all these aspirations and does not inhibit future innovation where this benefits consumers.

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The requirements of this RDR were:

• higher minimum level of adviser qualification, at least Level 4 with the option to do Level 6;
• advisers had to decide if they were independent (need to consider all investment products) or restricted (only advise in certain areas such as pensions);
• removal of commission from providers;
• switch from commission to fees, requirement to have an upfront agreement on client fees to make them transparent;
• demonstrate different charging structures such as hourly for one-off clients or annual charges; and
• implementation of ‘clean’ share classes, those share classes which strip out commission charges.

However, not all of the initial guidelines were received positively by the industry. Like in Australia, many advisers were perturbed by having to undertake additional qualifications for work they already carried out on a daily basis. They also worried about implementing a charging structure, how it would affect their profitability and how it would received by their clients. 

For asset managers, the necessity to set up new clean share classes and move clients across to them was seen as an unnecessary burden. The share classes separated out the annual management charge (AMC) and annual expenses and lacked a platform rebate. It was estimated setting up a new share class could cost firms £20,000 ($35,506) for each one as well as the administrative burden of adding them to research houses and including them on company documents. 

From the consumer perspective, they were confused about having to pay for what they thought was ‘free’ advice and some with small pots (less than £50,000) were worried they would be dumped by their advisers as it was not cost-effective to service them. Instead they were led to a model portfolio/exchange traded fund (ETF) which fuelled demand for low-cost index or passive funds which has been a rapidly-growing market ever since. It also led to a rise of ‘simplified advice’ and robo-advisers such as Nutmeg. 

But some advisers, notably those who characterised themselves as ‘financial planners’, had already been operating under RDR-friendly systems for years and were qualified to Certified Financial Planner (CFP) standards so they felt it was a good thing and one which would bring up the bar for the industry.

Despite these concerns, the UK RDR did have a notable advantage over the Australian Royal Commission in that advisers were given around four years to get their head around the changes and achieve the necessary changes. This is in contrast to the less than two years that Australians receive, so there was far less stress and rush surrounding the process.

POST-IMPLEMENTATION

So what was the outcome of the review once it had been implemented? Following the implementation, the re-named Financial Conduct Authority (FCA), issued a report in 2014 entitled ‘RDR: Post-implementation review’ which found:

• reduced product bias from adviser recommendations;
• a decline in sale of high commission products and reduction in product bias;
• easier for advisers and consumers to compare platforms, reducing D2C platform charges and leading to more ‘shopping around’ between platforms by clients;
• product prices had fallen;
• ‘vast majority’ of advisers were qualified to new minimum standards with many going beyond the minimum and many becoming members of professional bodies;
• costs of complying with RDR were in line or lower than expectations;
• availability of advice did not reduce but some consumers concluded it did not offer ‘value for money’;
• improvements were needed on disclosure of costs to client, particularly regarding ongoing charges; and
• innovation in terms of product or client offering was limited.

Speaking at the time of the review, former FCA chief executive, Martin Wheatley, who departed the regulator in July 2015, said the results were ‘positive’ for the industry.

“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,” he said.

“These are positive signs but we know there is more to do.”

At the end of 2017, there were over 5,000 financial advice firms in the UK and 87 per cent of these classed themselves as ‘independent’ with the majority being loath to switch to a restricted model. Some 28 per cent of investors said they used a financial adviser to arrange their investments, the second-most popular method behind going directly to a provider. 

The largest UK financial advice firm was Tilney with nearly 400 financial advisers and 55 UK offices, leading them to look after more than £24 billion in assets under management. 

UNINTENDED CONSEQUENCES

However, it was not all smooth sailing in the intervening years with companies reporting several unexpected or unintended effects from the reforms. 

One of the biggest moves was the effect of the RDR on smaller clients with minimal pots who were unable to obtain financial advice and much has been written about the so-called ‘advice gap’. A study by the UK’s OpenMoney this year found the gulf between those able and unable to afford financial advice had widened significantly in the four years since the RDR.

While services such as robo-advisers Nutmeg and Wealthify had emerged, these ‘cannot replace the services provided by fully-regulated financial advisers’, according to OpenMoney, as they were based on online surveys rather than personalised advice. 

While one-third of survey respondents admitted they found managing their money ‘challenging’, they were simultaneously unwilling to pay the high fees attached to financial advice. The only circumstances when it would be considered were during life changes such as if an individual was buying a house or setting up a business. The average hourly rate for financial advice was £150 but could reach as high as £350. 

In light of this information and in order to do an updated review of the industry, the FCA issued a second call for evidence in May 2019. Upon receiving feedback, it found several topics remained up for debate on how they should be considered by the regulator and advisers. These four topics covered access to services, the regulatory perimeter, consumer engagement and innovation.

Advisers were most concerned that:

• clients with smaller amounts of money to invest had minimal access to appropriate financial advice; 
• they were unable to give information to clients as they were worried it would be perceived by the regulator as regulated advice;
• consumer education of financial planning issues could be improved to encourage engagement with advice and guidance services; and
• alternative routes of financial advice such as online or robo-advice were unpopular with consumers and more work was needed to incorporate technology to help consumers as well as streamlined advice processes for simpler products. 

In light of this, the FCA said it would conduct additional research to obtain information from consumers and firms on the aforementioned topics. 

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Millions of people look for help and support in making financial decisions every year and the aim of the RDR was to help the market develop the right advice or guidance service consumers need to make those decisions.

“Consumers and the market are changing rapidly, as technology, employment patterns and inter-generational challenges change the way consumers interact with financial services. As well as looking at how the market has evolved since the RDR, it is important our work looks ahead to see how we ensure that this important sector works well in the future. We want the market to deliver a range of good quality,