A ban on third-party commissions is improving outcomes for retail investors in the UK, according to a report released Tuesday by British regulators.
The Financial Conduct Authority (FCA) published the results of a post-implementation review of the impact of its reforms known as the Retail Distribution Review (RDR), which, among other things, eliminated embedded commissions and require that advisors negotiate their fees with clients upfront. The FCA says that review found that, since those reforms were adopted, advisors “are offering investors an increasingly professional service tailored to their individual needs.”
The study, which was carried out for the FCA by Europe Economics, 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 advisors’ recommendations,” it says.
The review also found that the impact of the RDR on price has been mixed. “While product and platform costs have broadly fallen, advisor charges appear not to have decreased,” it says.
Additionally, the review found that one of the industry’s primary arguments against the reforms — that they would reduce the availability of advice — is not being borne out. “There is little evidence that the availability of advice has reduced significantly, with advisors still willing and able to take on more clients,” it says. The FCA reports that Europe Economics found that while it may be more difficult for less affluent clients to find an advisor, “there were still those in the market willing to serve them.”
Finally, Europe Economics also found that an increasing number of advisors are boosting their qualifications, which the FCA says, is “demonstrating growing professionalism in the sector.”
The RDR reforms took effect two years ago, so the FCA calls the results of this review “an early look rather than a definitive picture of their impact.” The regulator says that it will be undertaking further steps, in light of the review’s findings, in 2015, including looking for ways to improve transparency. And, another post-implementation review is planned for 2017.
“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,” said Martin Wheatley, chief executive of the FCA.
“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. For example, early next year we’ll be looking at how we might encourage better disclosure of information to consumers.”
Commenting on the results of the review, Sue Lewis, who chairs the Financial Services Consumer Panel (FSCP) in the UK, said, “The FCA’s findings are encouraging. They show the RDR is on course to generate positive long-term changes in the market for financial advice, such as increased competition and more understanding of the value and take up of advice.”
However, she added that it remains concerned about cost transparency. “There are two issues. As the FCA has repeatedly found, it is still difficult for consumers to get a straightforward quote for the cost of financial advice in some circumstances, and it is not always clear to consumers what service they are getting for recurring charges. This is improving but more needs to be done,” she said.
“The more serious problem is in the underlying investment market. Advisers cannot do their job properly if they cannot tell their customers the true costs of investments because these costs are hidden, or unknown. Without transparency and the means to compare the costs of different investments, a competitive market cannot exist,” she added.