How far should the regulator go to allay dealing bias concerns?

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The FCA has made it clear it has concerns over advice charges based on product sales, but advisers warn the regulator may face resistance if it looks to push firms towards specific fee models.

Recent noises from the regulator about adviser charging have caused disquiet among firms, with some suggesting further intervention could be a bigger threat than the RDR.

Last month, FCA chief executive Martin Wheatley suggested “dealing bias” still exists where firms get paid only when products are sold. He cited charging based on a percentage of assets invested as an example of his concerns.

A week later, the regulator’s thematic review on RDR implementation said it considers “contingent charging”, where advisers only get paid when they buy the recommended product, to be “a higher-risk approach than a time-cost charging model, due to the need to sell products to generate revenue”. 

Speaking to Fundweb sister title Money Marketing, following his appointment as FCA director of long-term savings and pensions, Nick Poyntz-Wright said the FCA does not intend to be prescriptive about fee models but is concerned about post-RDR charging structures which closely resemble previous levels of commission paid to firms.

Lansons regulatory consulting director Richard Hobbs says: “This is a problem of the regulator’s own making. The problem is, adviser charging is not an ideal solution. Charging someone an upfront fee based on hourly rates does eliminate various types of bias, but it also creates enormous potential inefficiency for the customer.”

Skipton Building Society’s investment advice arm, Skipton Financial Services, charges 4.5 per cent for initial advice on assets up to £150,000, and 0.75 per cent a year for on-going advice. A spokeswoman says: “We are one of an ever-decreasing pool of providers to continue to offer advice on the high street. No customer will be charged by Skipton Financial Services unless they choose to invest.”

Several banks and building societies have adopted contingent charging structures and Money Marketing understands these models were shared with the regulator ahead of the RDR. Many cite consumer research that found this to be the charging method consumers prefer.

Hobbs says: “The market has spoken. Paying twice, once for advice and then for implementing the recommendation, clearly has theor-etical advantages to do with bias, but it is not what customers want. The regulator has to live with this reality.”

Ernst & Young financial services director Malcolm Kerr says: “What happened with commission is the market started talking about it being the cost of advice, which it was not.

“It really has startled me that lots of advisers have got completely different cost bases, types of clients, volume of -clients and advice propositions, and they all seem to think the right price for those is 3 per cent plus a half.”

IFA Informed Choice previously charged an advice fee of up to £890, with implement-ation fees ranging from 0.5 to  2 per cent. But the firm recently decided the link to assets was wrong and now charges advice fees of £1,345 to £2,500, with implementation fees of between £495 and £895.

Informed Choice executive director Nick Bamford says firms that rely on the “speculat-ive nature of advice” risk not getting paid for advice and then subsequently missing out on fees for implementation and ongoing advice.

Kerr says: “The driver to charging a fee for recommendations and reports may be consumers thinking they can implement advice directly and more cheaply. 

“Firms are not going to want to be in a situation where they spend hours giving advice and constructing a portfolio, and that individual then goes to an online execution-only firm and does not pay the fee. That might change the fee structures as much as any regulatory impact.”

Bamford believes the charging issue is one the regulator will certainly return to. He says: “The RDR was just the start. It was a mere skirmish compared with the battles that lie ahead.”