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Consumers confused about difference between "independent" and "restricted" advice, says FCA, as first post-RDR review published

Consumers are still struggling to understand the meanings of the regulatory labels applied to different types of financial advice, such as "independent" and "restricted", two years after the introduction of new transparency rules, the Financial Conduct Authority (FCA) has said.

The regulator will consult in the new year on "better ways to present information to consumers on the nature of advice services", it said. The recommendation emerged from the first of three planned post-implementation reviews into the Retail Distribution Review (RDR), which introduced major changes designed to make the retail investment market work better for consumers at the end of 2012.

Overall, research commissioned by the FCA concluded that the RDR had improved the service offered to consumers by financial advisers and reduced the level of product bias, and that new rules on adviser charging had reduced the cost of products and platforms. Additional research also showed that fears of an 'advice gap', restricting the availability of lower value advice products to those with less complex demands, had largely been unfounded.

However, the FCA said that the cost of advice itself had not appeared to have decreased, and that in some cases it had even increased despite a "surprisingly high number" of firms incurring little or no additional costs as a result of the changes.

FCA chief executive Martin Wheatley said that "early indications" were that the sector had responded positively to the reforms.

"The RDR aimed to create a truly professional financial advice sector; one that provides advice based solely on investors' best interests," he said. "Importantly, we have seen a reduction in product bias, with a very noticeable decline in the sales of those products that before the RDR came with higher commission."

"There 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," he said.

An additional report published by the FCA as part of its thematic review of adviser charging showed that the way in which firms disclose the cost of their advice and the scope and nature of their services to clients had improved since two previous reviews of the sector. However, it found that a "significant proportion" of firms were still not making the cost of their ongoing services clear enough in cash terms, or were not providing an approximation of how long services could take when quoting hourly rates. It is now taking enforcement action against one unnamed firm that had not "sufficiently engaged with the changes required" by the RDR, according to the report.

Previous regulator the Financial Services Authority (FSA) began the RDR in 2006, with the majority of the rules due for implementation by the end of 2012. The programme was designed to make the retail investment market more transparent and work better for consumers. It introduced a new minimum level of adviser qualifications, improved the transparency of charges and services and banned advisers and platforms from receiving commission payments from product providers in the majority of cases.

The RDR also required firms to label themselves either as "independent" financial advisers or as offering "restricted" advice. Advisers are prohibited from referring to themselves as "independent" unless the personal recommendations they make to clients on retail investment products are "based on a comprehensive and fair analysis of the relevant market" and are "unbiased and unrestricted".

The FCA is now, however, concerned that these labels "are not resulting in improved consumer understanding". It intends to consult on better ways of presenting this information to consumers as part of a wider programme of work on the provision of consumer information which is due to be published in the first quarter of 2015.

"This could include, for example, developing a proposal put forward by the Smaller Business Practitioner Panel to introduce a simple label that better sets the consumers' expectations by explaining the scope of the firm's advice," the FCA said in its report. "This work will also take on board the implementation of the Markets in Financial Instruments Directive II (MiFID II) changes on advice labelling."

The FCA will also seek ideas for how to better present information on advice charges as part of this work, which could include "using insights from behavioural economics to improve consumers' understanding of the cost of advice", it said.

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