Regulator looking at changes to fees
RDR failings may see return of commission
The regulator is considering reversing a ban on commission for selling investment products which it brought in three years ago to protect consumers from mis-selling scandals.
It was one of a number of measures brought in by the Retail Distribution Review (RDR), now subject to much debate over the merits of the changes that were introduced.
The thinking behind the ban was that the lure of commission led some unscrupulous advisers to promote products that were unsuitable for investors.
There was certainly cause for concern based on wide-spread selling of inappropriate endowments, pensions and pension transfers over the preceding twenty years.
In place of commission, advisers are required to charge fees which can be upfront and/or ongoing. These fees are agreed with the investor and, unlike commission, are highly visible. Why then would the Financial Conduct Authority (FCA) want to look at re-introducing commission?
Both before and since the advent of the RDR, advisers and providers of investment products have argued that the changes brought in were too draconian and would disadvantage smaller investors who could not afford the new fee levels.
This, it was argued, would lead to an “advice gap” for the majority of the investing public. Investors would have to fend for themselves and be responsible for their own investing mistakes. There is evidence that this gap exists; the new pension freedoms are an area where many sought advice and, according to Which?, were surprised to find advisers charging fees of up £3,750.
The FCA published a report from Towers Watson on its findings from an investigation into the advice gap in 2014.
Broadly, it concluded that while there were ample numbers of advisers for those who could afford them there was a gap in the market for advice for less affluent investors.
If this report is influencing the thinking of the regulator then it may be the reason that they are looking again at the question of commission and its possible reintroduction.
Commission would allow advice to be given without the investor having to pay separately for the advice since it would form part of the charges of the product.
What does this mean for consumers? Tracey McDermott, acting chief execuive of the FCA, has been at pains to reassure investors that there would not be a return to the poor practices of the pre-RDR regime.
Others may be more sceptical. The biggest beneficiaries of any changes would be the retail banks who have easy access to large numbers of potential investors. Their track record of mis-selling PPI, LIBOR fixing and a poor complaints record at the Financial Ombudsman Service (over 60% of complaints upheld were against banks) will not reassure the investing public.
Ms McDermott announced only last month that the regulator was not proceeding with an inquiry into the culture, behaviour and pay at the banks. One must hope that her faith in the banks to behave in the future is well-founded.