Out-Law News 3 min. read
12 Jan 2016, 3:10 pm
Speaking in an interview for the BBC's Radio 4 Money Box programme, Tracey McDermott said that the FCA will not "reverse the Retail Distribution Review" (RDR) but could loosen existing rules stemming from the RDR so that "there may be some element of commission" payments in the UK investments market in future.
A change to rules on commission payments is one of the potential outcomes of the FCA's ongoing review of the financial advice market (FAMR), McDermott said. She said that there had been 290 responses to a consultation the FCA and the Treasury jointly held as part of the review.
"We do not want to go back to a world where we had the problems of the pre-Retail Distribution Review," McDermott said. "What we do want to look at is actually what is the best way of delivering advice and guidance across the market, so I wouldn't rule out that there may be some element of commission but we are not going to reverse the Retail Distribution Review."
Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said: "The RDR was a particularly long, painful and costly experience for the retail investment savings industry and was aimed at eliminating bias in the advice market supposedly caused by temptingly high commission payments paid by product providers to salesmen. No one who knew what drove the RDR reforms is going to revel in reversing the current adviser charging system in favour of reintroducing commission payments."
"However memories are short and if that might be necessary to have a better functioning market, then allowing commission payments may be one way of improving the way the advice market might work in the future but I don’t buy it myself. How this could be done without causing the problems of the past to re-emerge beats me and it would be a monumental feat as well as fly in the face of the European approach which is looking to eliminate commission and inducements and, in some countries, goes even deeper and includes commission bans on a wider range of products," he said.
Geiringer said it would be interesting to see how the FCA can "reverse the Financial Services Authority's (FSA’s) thinking over the last decade" and find "a sustainable justification and rationale" to reintroduce commission.
"Somehow, I just don’t see how they can in reality," he said. "The world has moved on."
Under reforms that followed the RDR, financial advisers can only receive payment for the personal recommendations they make about investments from clients. The predecessor to the FCA, the FSA, introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. Commission payments had risked advisers not always providing personalised recommendations that best suited clients, the FSA had said.
The RDR rules require advisers to inform clients of whether they are providing advice on an 'independent' or 'restricted' basis. This declaration must be provided to clients in writing in good time before they provide advice services.
Generally, independent financial advisers (IFAs) must consider all available products and providers in the market before making a personal unbiased and unrestricted recommendation to clients on what to invest in. Restricted advisers can legitimately offer advice based on a smaller list of products or providers, even if taken from a single source, providing they are up front about this with clients.
Both IFA and restricted advisers are bound by the adviser charging rules other than in cases where restricted advisers can be said to be offering "basic advice", a simplified form of financial advice generally using pre-scripted questions to determine whether a financial product will suitable for a customer. In those circumstances restricted advisers can legitimately obtain fees, commission or other benefits from product providers or others.
However, there have been concerns that the RDR reforms have caused an 'advice gap'. This is a term specifically recognised in the FAMR terms of reference and which broadly refers to the demand there is for financial advice but also the barriers that are preventing people from obtaining that advice, such as cost.