Wheatley: Bad consumer outcomes will see RDR revisited

Martin Wheatley 480 profile

Financial Conduct Authority chief executive designate Martin Wheatley is working towards a “utopia” where consumers see the value of advice and warns the regulator will revisit the RDR if good consumer outcomes are not being achieved.

In his first trade publication interview since joining the FSA, Wheatley says the regulator is striving towards a diverse advice market where people are prepared to pay for an adviser’s expertise.

He says: “The utopia is people will see the value of financial advice, much as they see the value of going to the doctor or the dentist, and understand they are talking to someone who is qualified as a professional who they can trust is giving completely unbiased and unconflicted advice. That is what the RDR is about and that is where we want to get to.”

Wheatley acknowledges for some the transition to RDR has been “painful and difficult” and that the cost of becoming RDR ready, on top of complying with other regulatory requirements from both the FSA and Europe, is pushing up firms’ costs.

But he says: “At the end of the day, society and all investors are going to have a much greater need of financial advisers going forward, because frankly over the last 20 years the combination the employer and the state withdrawing from long-term financial provision means people do have to care for themselves and they need advice and the capability to do that.

“But it has got to be unbiased and unconflicted advice. That is the nirvana, that we have a number of business models, unconflicted advice, that individuals can choose the level of advice that suits them best, and that they value the fact they are getting something from a trained professional that is paid for.”

Wheatley says success of the RDR will depend on whether consumers are taking out the right products that are suitable for their needs. A survey of consumer outcomes has been carried out already by the FSA, and will be done again two years after the RDR is introduced. The regulator will also carry out a post RDR implementation review to assess expected and unexpected outcomes.

Wheatley says: “If we need to tweak the regime at that point then we will look again. We will not simply assume everything must have gone well. We will be quite critical about what has worked and what has not worked and then we will come back and talk to the industry about whether we need to make further changes.”

He steered clear of calling the review exercise “RDR part two”, saying “to be honest, RDR part one has been six years in the making and so painful”. But Wheatley says the FCA will want to be able to step in where it sees firms trying to sidestep the rules that have been put in place. He cites the Dear CEO letter the FSA sent to 24 insurers, networks, and IFAs about payments that work around the RDR commission ban as an example.

“The fact is RDR is a big change, the effects of it are not 100 per cent understood, so we do not know completely what the new business models will be. We have to be flexible enough to come back and revisit some of the rules if we see the wrong outcomes. We will also use our supervisory or enforcement tools to go in where we find people have circumvented the rules. We do not want an unlevel playing field where those IFAs who have diligently implemented what we have set out find themselves able to be undercut by someone who has managed to do a sweetheart deal somewhere else.”

Away from the RDR, Wheatley notes the recent consultation on reforming the funding model of the Financial Services Compensation Scheme, which closed this week. The FSA is proposing to increase the annual claims limit paid by investment advisers from £100m to £150m. It is also suggesting the creation of a retail pool for FCA firms which will have to meet claims where one class breaches its annual limit.

The industry has attacked the rejection of a product levy as a fairer way of funding the scheme and warned adviser costs are likely to increase alongside the threshold hike. The Investment Management Association has also objected to fund managers coming under the retail pool, arguing banks and insurers would escape liability for misselling as they would fall under a separate Prudential Regulation Authority scheme.

Wheatley says: “The industry unites against the particular proposal but does not unite behind a different proposal. What we have got is all different parts of the industry saying ‘no, that is not right’, but not coming forward and saying here is a model we collectively think works. Clearly the costs of some of the failures has been high and have spilled over into other sectors, with Keydata, and potentially with Arch cru, we have seen a significant cost to the industry and then seen that cost cascade through the current structure.”

He says the Government requires a safety net for investors that needs to be paid for. He says: “The model is the Government does not want that safety net to be the taxpayer, so the survivors in the industry effectively pick up the tab. The question then becomes, how do you share that out? There is no straightforward answer. Different parts of the industry have violently opposing views about how that should be distributed.”

Another consultation that has met with fierce industry opposition is the FSA’s proposed £110m Arch cru consumer redress scheme. Arguments against the scheme have included questions around where responsibility for investor losses truly lies.

Wheatley says if the scheme goes ahead, it will not be a “blanket scheme” where customers have to receive redress regardless of whether the sale was suitable. On the £54m payment scheme agreed in June 2011 between authorised corporate director Capita and depositaries HSBC and BNY Mellon, he says: “We took a very hard look at where liability might occur. The deal we struck is a very good one, and achieved some considerable value return. There is still however a shortfall, and the question is who bears that shortfall? We have now got a lot of input from the industry to work through to try and make a balanced decision.”

Minutes from an FSA board meeting in April show the board has said it must be presented with a “convincing case” for the scheme to be implemented. Wheatley says the decision “will not be taken lightly”.

Wheatley is aware many of the issues on the regulator’s agenda recently have not been related to advisers, and stem from the pre-financial crisis between 2005 and 2008.

He says: “I know IFAs often feel picked on by the FSA, but at the moment most of the problems we are dealing with are not part of the IFA sector. My message is expect us to be very forthright and clear with our views, and that is what I am trying to do. We will try not to hide behind process, or legal documents, or complex consultation. But when we say there is an issue please take it seriously.” He says the areas of focus of advisers should firstly be around ensuring suitability, followed by adequate record keeping.

As for his message to the wider industry, Wheatley says his focus will be on working to change the ethics and cultures of the financial services sector. He says: “This is not specifically aimed at IFAs but generally speaking, we have come through a period where investors have been seen as sales targets rather than long-term relationships. That is the real change we want to see the industry make.”