Who is actually responsible for the RDR mass-market advice mess?

It was Sir Callum McCarthy’s infamous ‘Gleneagles speech in September 2006’ which laid the groundwork for the overhaul of the UK financial services retail distribution business model, something now referred to as the ‘RDR’.

Almost ten years on is a great time to reflect on the six pillars of Callum McCarthy’s RDR wisdom:

1.    • an industry that engages with consumers in a way that delivers more clarity for them on products and services;

2.    • a market which allows more consumers to have their needs and wants addressed;

3.    • remuneration arrangements that allow competitive forces to work in favour of consumers;

4.    • standards of professionalism that inspire consumer confidence and build trust;

5.    • an industry where firms are sufficiently viable to deliver on their longer-term commitments and where they treat their customers fairly;

6.    • a regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers.

In laying out his vision, Sir Callum reckoned the industry would require a “collective shift away from product and provider bias, toward an incentivised and regulated distribution system”.

What has been achieved then?

Only the professional standards aspect has been a success, and even then for the average consumer in the street, that really means nothing.

Job losses, strangely something not mentioned in the ‘6 pillars’?

That trend continues for IFA firms. According to the latest Equifax Touchstone adviser movements in the 2014 year were as follows: 5,979 moved firm, 6,777 became no longer authorised and 4,576 became authorised.

A net adviser loss of some 2,201, 2015 results will be out soon.

Fears that the industry would be completely decimated still remain especially when looking at the tens of thousands of job losses in ‘provider world’ post RDR

Panacea warned back in 2010 that the RDR, despite it’s many good points, could have the unintended consequence of “disenfranchising” the majority of consumers from access to financial advice.

There was no doubting that the RDR was a great commercial opportunity for a number of interested parties, some who capitalised on it greatly – large Wealth Management firms, consolidators and long established fee based only IFA firms.

But no opportunity was created it would seem for the mass-market consumer, the very people that RDR was meant to help!

It was clear from as early as 2009 that the regulator had chosen to ignore the very clear, wise advice given by many leading industry figures who have seen the effect of badly thought out regulatory changes of direction before, remember NASDIM, FIMBRA, PIA, FSA and even the OFT?

So when the wires started buzzing last week with Tracey’s ‘heads up’ on a navigational shift. The Treasury and FCA, she said, “want to look at is what is the best way of delivering advice and guidance across the market”. Then delivering the ‘killer blow of  “so I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the RDR” I headed to a dark room for an hour and undertook some deep breathing exercises.

Hector Sants stated at the FSA AGM in June 2010 that the RDR cost would be £430m!

In 2014 Mark Garnier MP said the new RDR rules, which he estimated had cost in the region of £3bn at that time, “had resulted in far fewer advisers servicing a more limited demographic of clients, with less incentive to innovate”.

Later that year it was reported that RDR costs were heading toward £6bn and it is no doubt now well in excess of that. In real terms that could represent  three new runways at Heathrow or one at Gatwick.

If Sants and the regulator were builders doing your house extension (or digging out a basement if you live in London) a few questions may be asked about the estimation process?

Panacea was among the over 290 parties to give oral evidence to the FAMR in November 2015.

Amazingly it quickly became clear that there was a considerable lack of understanding around many issues of IFA RDR concern. I think this is because there was a systemic failure to fully grasp how intermediated distribution works and why.

This failure to understand has been caused by a complete reluctance on the part of the regulator and the Treasury to ever listen. The whole RDR thing was bulldozed through, wheat and chaff together.

We advised the FAMR that commission was not a bad thing if fully disclosed and excesses managed. After all savings products are rarely bought by the mass market needing selling, something the ‘man from the Pru’ understood in the 1950’s and 60’s.

The Maximum Commission Agreement (MCA) during the 1980s was a perfect way to control bias by commission amount, that was until the Office of Fair Trading perversely objected. Using an unresolved conflict in government policy between investor protection and the belief in unrestricted competition they had it removed. That simple removal led to the huge commission override payments being made and the arrival of product or manufacturer bias and miss-selling, especially by the banks.

Responsibility is one of those words that politicians, government officials and regulators seem to shy away from.

But with 2016 just a few days old, perhaps this will be the year that somebody, somewhere in that rarified and isolated regulo-political ether holds their hands up saying:

  • yes I got it wrong
  • yes I was told it would not work
  • yes I did not listen

and because of that:

I will take responsibility and resign- no pay off, no garden leave, no knighthood and no ‘revolving door’ employment for at least two years.

Panacea’s input to the financial advice market review (FAMR)

In November, I was asked by Harriet Baldwin MP (who many may remember came to a Panacea ‘Meet the MP’s event” shortly after her election in 2010) to contribute to the HM Treasury Financial Advice Market Review (FAMR) due to the size, influence and knowledge of the Panacea community.

The Financial Advice Market Review, as you will be well aware, was launched in August 2015 to examine how financial advice could work better for consumers. It is co-chaired by Tracey McDermott and Charles Roxburgh, Director General of Financial Services at HM Treasury.

The meeting with HMT’s Tara Fernando and some treasury seconded FCA officials lasted some ninety minutes where a number of concerns with regard to the five specific FAMR reference sources were discussed for the benefit of the consultation.

There was a great willingness to listen.

It was very clear that there was a considerable lack of understanding around many issues of IFA concern. I think this is because there is a knowledge gap, possibly caused by a failure or desire to fully understand how intermediated distribution works and why. And to understand advice responsibility anomalies such as the current lack of longstop.

It is also clear that regulators do not understand that savings and protection products are sold to the mass market, not actively purchased.

The Treasury and the FCA appear to have no knowledge of the workings or long history of commission payments, the maximum commission agreement or its reason for removal.

You may find the following bullet points with some supporting links, that were the subject of some detailed conversation, to be of interest:

1. The extent and causes of the advice gap for those people who do not have significant wealth or income 

  • Heath Report an overview, access to the report and podcast
  • Commission v Fee the RDR/ GFK report
  • Fees and the post RDR world
  • UK advice & distribution model
  • The FCA was trumpeting the fact that adviser numbers had gone up since RDR and the industry should as a result rejoice.
  • From January 2012 to July 2013 23,406 registered individuals (RI’s) have left the industry and 9,573 have joined.
  • For 2014, 5,979 RI’s have moved firm, 6,799 are no longer authorised and 4,576 have become authorised. Some 17,332 changes in one year and a 2,223 net loss of RI’s. Hardly something to shout about.

2. The regulatory or other barriers firms may face in giving advice and how to overcome them

  • Cost, known’s and unknowns, FSCS funding is wrong, unpredictable and unfair.
  • PI cover, retrospection of regulation makes pricing impossible, a claim makes even getting it a herculean task (air bag analogy)
  • New blood, the aspiration of many to start a new advisory firm has been dampened to say the least. The costs are enormous.
  • FOS perceived bias FOS survey, a link to 2014 survey and to the 2011 survey
  • FOS has no affordable right of appeal, unlike ABTA for example
  • Longstop removal and some other notes on the subject. Regulators today are in many ways a ‘doppelganger’ of the trade unions of the 1970’s, creating unrealistic, restrictive working practices at high cost allowing little or no competition. And we all know how that ended.
  • Many small firms live in fear of the FCA and will not raise their heads above a paparapit to voice concerns for fear of retribution. Very worrying but perhaps ‘Sir Hector’s message was received and understood
  • The ‘Waterbed effect’. It’s effect is the natural but not necessarily intended potential to squeeze one part of a complicated and complex regulated business model (and the attendant regulatory processes) to cause a serious bulge elsewhere in the process.

3.  How to give firms the regulatory clarity and create the right environment for them to innovate  and grow

4. The opportunities and challenges presented by new and emerging technologies to provide cost-effective, efficient and user-friendly advice services,

  • Simplified advice, but what is it- needs defining
  • A solution: to licence a product as fit for purpose, with that purpose clearly defined, as part of the process is the single most effective consumer benefit a regulator could put in place. It is the CAA equivalent of being fit to fly, it is the Food Standards Agency equivalent of safe to eat, it is the VOSA equivalent of saying your car is safe to drive.

5. How to encourage a healthy demand side for financial advice, including addressing barriers which put consumers off seeking advice

  • Consumers should understand that advice comes at a price but that price and the method of how it is actually paid should be determined by the client and adviser firm together and not a regulator.
  • Is commission still a dirty word?
  • Maximum Commission Agreement (MCA) during the 1980s and perhaps earlier there was an apparent unresolved conflict in government policy between investor protection and the belief in unrestricted competition. OFT objected!
  • Pro bono working in IFA firms was the norm in a pre RDR world
  • It is not in a post RDR world
  • The circle game? FSA told consumers advice under RDR wouldn’t cost more. Right possibly, but fewer now have access to it

The review will close on the 22nd December 2015, you have just a few more days to contribute.

Here is a link.

RDR learnings

At the beginning of August, the ‘You could not make it up” season got well underway with HM Treasury and the FCA launching a review to examine how to plug the advice gap (their own regulatory actions had caused). Well, they missed that last bit out in the announcement.

Anyway, a week or so later we learn that US regulators are/were in discussion with the FCA with a view to learning from the UK’s experience of implementing the RDR reforms.

It would also seem that in 2010, the FSA and FINRA (who regulate US brokers remunerated by commission) entered into a memorandum of understanding to support more robust co-operation between the two regulators.

Really? I am not sure what the reverse of that statement around “America sneezes and the UK gets the flu” is?

But if ever there was a better example of messed up regulatory thinking and political miss-management around the “learnings” part, the lead up to RDR in the UK and the resulting advice gap we have today, this is it.

We hope that America listens and learns where our regulators did not.

Here is an adviser “must read” for 2015, we highlighted the well warned of failures that RDR would produce over 5 years ago.

May I rewind you to the 19th July 2010 for a ‘told you so’ history lesson on the route map to statements emerging last week surrounding the success of RDR.

And the US regulator is asking the FSA to share learnings? How can anyone learn if the knowledge giver does not listen?

My observations in 2010, parodying the late, great satirist Peter Cook, in ‘Derek and Clive’ conversational style with Hector Sants, Martin Wheatley or George Osbourn on the subject still stands “ is this any way to run a ******* ballroom?



Fees, its about the Money Money Money

Ms Jessie J may be a singer and not a regulator but she was correct singing, “It ain’t about the ch-ch-ching ch-ching, it ain’t about the bl-bling-bl-bling, it’s about the money money money.

A recent article in Money Marketing by Robert Reid stirred up a bit of a hornets nest making me reflect upon some of the wisdom imparted in July 2013, by the recently resigned FCA boss, Martin Wheatley.

He was quoted as saying:

“In some cases, firms are charging a percentage of product investment, and clearly it takes away product bias in the sense that we are no longer seeing firms recommending particular products because of the payment that comes to them, but it does not take away ‘dealing bias’, because if you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else.

There are some concerns about whether that is entirely compliant with the philosophy we have set out, and it is something we will come back to.” 

There was considerable anti-Wheatley adviser anger expressed within the Internet ‘ether’ but for once, speaking as a very staunch defender of advisers, I think they may have not focused on the real metrics behind his words and given the reaction to Robert Reids tome, I still think Martin Wheatley actually had a point and advisers should really take notice of them before it is too late as adviser charging of fees as percentages through the product could well manifest itself in a soon to be named miss-adviser charging crisis if Canary Wharf has it’s way.

Advisers should not be afraid of making profit or seeing great inflows of income, after all they have to fund the regulatory cash outflow somehow.

But adviser charging by percentages of funds under management rather than time taken was always going to be sailing a little close to the regulatory wind in a fee only world. And yes, this thought may not go down too well out there, but it is a fact.

Adviser intentions from Panacea winter 2012/13 research carried out with GfK indicated that some 72% of advisers would levy their charges via the product, and astonishingly, a significant number would not use providers who did not allow this facility- product bias?

Results from that very detailed GfK research conducted with over 400 advisers has indicated that post RDR, most advisers are charging fees to the fund.

A leaning toward an initial fee of 3% of funds invested and 1% for ongoing advice per annum across a wide array of segmented servicing models seems to be their stated norm although provider feedback would suggest a lower figure is more the reality, 1-1.5% as an initial fee and .25% to .5% ongoing.

Should we be surprised that the upper percentage of initial adviser fee quoted for a lump sum investment today is very similar to single premium pre RDR basic LAUTRO commission payment, around 3% I seem to recall?

If Frank Carson was an IFA he may say, “it’s the way I tell ‘em”.

But, let’s look at how the FCA may choose to look at this issue, advisers should take note, with the benefit of foresight on this occasion.

Based upon that GfK research, a proposed investment of £250,000 would see the advice fee set at £7,500. But what would the picture be if the FCA asked that the fee be justified based upon an hourly rate?

Of course time taken does not have any formula to accurately indicate an actual duration as every client is different, but given that the average (GfK survey confirmed hourly rate) charged by advisers was £167, the ‘math’ would imply that by comparison the advice on a time basis for a £250k invested amount equated to 44.9 hours.

I am not an adviser any more, but with so much technology resource available today, taking over a working week seems a lot of time to justify for one client? The FCA view may be similar?

For an investment of £100,000, the fee would be £3,000, and a time basis reflection of 17.96 hours. Yet the time taken to fact-find, research, report and execute a transaction or series of them may be less than for an investment of £250k.

Or more?

The FCA will take a view that the RDR was not about professionalism by way of qualifications providing the ability to see adviser payment by a rebrand of commission. It is about reflecting professionalism by charging in the same way as other ‘professions’ (if profession creation was one of the intended RDR outcomes) and that is by charging purely on units of time.

The actual calculation formula of fee payment, either direct from the client or from the fund is not too relevant.

But should it be based on time? And should it be linked to a transaction?

After all, the logical conclusion is no transaction after advice given equals no fee- as Wheatley implies, yet the time taken is almost the same, a service has been rendered and payment is due? Or is this a disguised advice cross subsidy?

So, how would advisers explain to the FCA that the following* is ‘TCF’ in a fee based, advice driven, post RDR world when charging advice to the fund?

Scenario 1: Advice charged to fund at 3% plus an ongoing 1% per annum, £7,500 (provider charges are on top):

Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.40m.

Scenario 2: Advice paid direct by the client on an ‘average’ hourly rate  £7,500 provider charges are on top:

Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.85m

*Research data provided by a leading life office 26th July 2013, assumptions are an extreme!

So over a 25-year term, the eventual real cost to the client of initial and ongoing advice for this single premium contribution when charged to the fund would be a staggering £450,000 less of course the impact of adviser charge hourly billings.

If the client was charged on time, the hourly rate would be??????? Well you work it out on your own hourly rate!

It would be interesting to see a comparison of time based charging v percentage when levied to the contract over the term of the contract.

But I believe that what Martin Wheatley was actually saying is that the FCA ‘thinkings’, unlike the FSA, would indicate that basing charging on percentages of FUM, both initial and recurring, is not right.

Where I did take issue with Mr. Wheatley is that in 2013, after many years of progress toward an RDR world (where the FSA, as was, agreed with the concept and amounts involved when charging a percentage of funds under management to the contract) he was sending strong signals that the FCA did not see it ‘appropriate’ that this previously agreed level and type of charging should continue. The suggestion being that advisers should prepare to hear that stable door slam soon despite very many adviser post RDR businesses being based on this charging methodology.

The more cynical conspiracy theorists among us may have very strong suspicions that the FCA was wanting to find yet another way to get rid of advisers by making it impossible for them to remain in business as the imposed income reducing possibilities of RDR cannot ever match the increasing and varied calls of cash from the regulator, FSCS and the FOS.

In fact the only way advisers can remain in business with such a proposed ‘chocking off’ of income flow is that there is a similar ratio reduction in regulatory fees, by that I mean those of the FCA, FOS and FSCS.

After all, consumers could see much lower advice costs if firms did not have to ensure they are treading dangerous and deep fiscal water just to see survival in the face of the huge costs that regulation forces upon them.

And where is the consumer in all this? Research continues to show that there is a significant reality gap between what advisers think consumers will pay for advice and what consumers would actually pay.

Not a good ‘outcome’ as they say, if advice for all, but at a cost, was the intention.

We’re in the money, are you paid enough?

You may have seen that BWD have recently released their Salary and Benefit Census and I am delighted to offer you a complimentary personal copy of the 2014/2015 report to download. 

It will be of interest to Financial Advisers, Planners, Paraplanners, Broker Consultants, Employee Benefit Consultants, Administrators and Compliance Specialists.

Now in its third year, it is established as a definitive reference source for salaries and benefits in UK financial services. The three sample points span pre and post RDR and so act as a valuable analysis of the impact of this pivotal piece of regulation, whilst also showing how the sector is reshaping itself for the future.

I hope you find the report useful. Our thanks go to BWD for making this available.

Any comments or questions you may have, please contact James Walker at BWD Search and Selection by e mail: james@bwd-search.co.uk

Setting the record straight, with John Warburton, Executive Director, Distribution, Prudential

We face a ‘new paradigm’ for financial planning and retirement provision, according to Prudential’s executive director, distribution, John Warburton, who believes George Osborne’s Budget announcements very much suit the insurance giant over the medium to long term.

“Our priority this year is to continue developing our product propositions even further in response to those [Budget] changes so that we can give advisers a wider range of flexible solutions that suit the post-April 2015 world.

“You shouldn’t see any major change in strategy or direction from Prudential to that which had already led to our strong performance – focusing on providing risk-managed solutions that give customers choice when it comes to them drawing their income for retirement.”

Warburton says the group has done this by focusing on its core assets – the Prudential brand, its financial strength and a multi-asset investment capability that holds risk management at its core.

“We have always based our product range around providing guarantees and longevity risk management. The new freedom and flexibility that the Budget introduced means our approach has never been more appropriate,” he adds.

Warburton foresees an escalating level of product innovation across the industry – due in part to the Budget but also in response to a growing demand for more flexible financial planning and at-retirement solutions.

He says the advent of the New ISA (or Nisa) together with drawdown products will become more attractive as demand from consumers and advisers grows, while the need for alternatives to annuities will drive innovation – both from Prudential and the broader industry.

Advisers can feel reassured they will receive the same level of dedicated support when navigating the inevitable industry changes that the Budget will spur, as they received during their RDR journey.

“We felt we were particularly successful at supporting advisers around the RDR and the feedback we have had echoes this. We invested a lot of time and effort in supporting them through that level of change and we would expect to deploy the same level of resources in this instance, leveraging our capabilities to help advisers.”

He says the extensive programme of training and information – available largely through its adviser extranet www.pruadviser.co.uk – ensures that from a technical perspective and through its scenario-based modelling tools, advisers should be suitably armed to face the changing distribution landscape. This is also underpinned by Prudential’s account management, business development and business consultancy services that are available to financial advisers.

Warburton stands by the company’s decision not to invest in its own fund platform, failing to see a viable business case at this point. Rather, he urges advisers to ‘watch this space’ for wider availability of Pru’s multi-asset investment propositions, as they are listed on more third party platforms over the second half of the year.

Warburton says the new world should be viewed as a broader opportunity set for an adviser rather than posing a threat.

“We are very bullish about the adviser market in general, witnessing a transfer of responsibility from the state and employers to the individual taking on a greater responsibility for their own long-term financial needs, and taking on more risk to their own personal balance sheets,” he adds.

Even against a backdrop of increased direct-to-consumer activity and a potentially more complex distribution landscape for advisers to wade through, Warburton feels strongly that a greater financial awareness will only help grow “the overall size of the advice market”.

“Our expectation is that, as levels of consumer understanding of the challenges they face rise, and their interest and awareness is piqued, what will really be needed and valued is full professional financial planning.”

Sam Shaw, Freelance Journalist

Simplified advice or simplified solutions

Kelly Johnson, lead engineer at the famous Lockheed Skunk Works, coined the acronym KISS.

Whilst today it translates as ‘Keep it simple stupid’, the principle was best illustrated by the story of Johnson handing a team of design engineers a handful of tools, with the challenge that the sophisticated jet aircraft they were designing must be repairable by an average mechanic in the field under combat conditions with only these tools.

Hence, the ‘stupid’ refers to the relationship between the way things break and the sophistication available to fix them when it happens.

As a country, UKplc has moved away from the manufacture of goods and products heading instead toward the manufacture and provision of intangible goods and services.

Financial services is often collectively referred to as an industry. Distribution was seldom linked to a profession, until the RDR arrived, and the industry is made up of many different “manufacturers” (providers) and distributers large and small.

Often very similar, intangible products have been designed to address a vast array of perceived financial needs or problem solving solutions for both personal and corporate consumption.

But in the brave new world of post apocalyptic RDR, the delivery of consumer friendly, understandable, simplified advice (to those consumers disenfranchised by adviser segmentation as being not cost effective to service) that could lead to a transactional outcome online is being thwarted by the very thing that should make it simple.


It is a fact that any ‘industry’ that “designs and manufactures” products have done so because it has identified a consumer need, or at least thinks it has. In doing so it then needs to create awareness of what it has made – and to find a way of getting it distributed. That still often means finding a sales force or in our more technologically enlightened times an easy way for somebody to buy it.


Indeed, obviously simple and there are so many ways to achieve the awareness and understanding with technology to enable the ‘shop’ button to be hit.

Video linked to free internet research opportunity and understandings can have a big impact in gaining better informed, engaged and protected consumers.

There are some 340,000 years of video watched globally online every day. 68% share their viewings and for firms that have video embedded on their site relating to a product or service, 88% of visitors spend more time on their site.

Consumers who watch a product video are 85% more likely to buy it. The phrase ‘what goes on in Vegas stays in Vegas, but what goes on in YouTube stays on Google forever’ is a great reminder that a compliance trail is nicely dealt with at the same time, no more ‘he said, she said’.

Simplified advice is possible, maybe a starting point would be inventing a different descriptive such as “Simplified Outcomes” or ‘Simplified Solutions’?

And to make this work, a set of plain English protocols should be put in place that simplifies the regulation and responsibility for “Simplified Outcomes” or ‘Simplified Solutions’, placing a consumer looking for low cost financial ‘understandings’ in an informed space, able quickly and easily to make a good decision and purchase while at the same time ensuring understanding they have an element of responsibility for their choices.

Steve Jobs said “We made the ‘buttons’ on the screen look so good you’ll want to lick them”.

As an industry, that should be our target, to get attention, to create confidence in the end user.

How can this be achieved though when the existing lines between advice, product and who is responsible are blurred when it suits?

Well, as a start, all manufacturers of financial services products should be required to have the product they “manufacture” certified or licensed as fit for “Simplified Outcomes” or ‘Simplified Solutions’ delivery in a clearly defined set of tick boxed financial planning circumstances and licenced accordingly- by the regulator.


The outcome of this would be that those not able to afford fees will know that “Simplified Outcomes” or ‘Simplified Solutions’ to satisfy their needs can be wrapped up in a recommended packaged product that has been deemed fit for that purpose by the regulator.

The word ‘advice’ must be removed from the process to make this work.

The regulator would carry responsibility for what it is regulating in the “Simplified Outcomes” or ‘Simplified Solutions’ space, creating the simplicity bit, unlike today. We would then see an end to the possibility of inappropriate or faulty products being sold or bought for the wrong reasons to the wrong people.

After all it seems crazy that in today’s regulatory world (where cars cannot get on the road, planes cannot fly, drugs cannot be consumed without a regulatory body certification that they are safe to drive, fly, inject) regulated products, funds and schemes are not licensed as fit for a particular, even specific purpose and instead often deemed unfit for purpose after the event because of perceived miss-selling, miss-understanding or miss-buying.

Can the FCA embrace KISS, well let’s see?