RDR II is coming, and it doesn’t look pretty

So the government is going to tackle that thorny and perennial topic of financial advice, again.

HM Treasury, working with your friends and mine at the Financial Conduct Authority, have launched the Financial Advice Market Review.

FAMR clearly isn’t as catchy an acronym as the RDR, but it’s one which I’m confident we will all become intimately familiar with over the next twelve months.

If you’ve been busy catching up on your Paula Hawkins whilst lounging by the pool somewhere sunny, rather than reading the FAMR terms of reference, then RDR II effectively seeks to do three things.

It will examine the ‘advice gap’.

As most advisers are acutely aware, there is no such thing as an ‘advice gap’. Those that need, want and value advice can get it, in the main.

When the regulator and media talk about an ‘advice gap’, they really mean a ‘product sales gap’. This was widened (it always existed, probably) when the banks were forced out of the advice market by the need to be properly qualified and transparent about their remuneration practices. How horrid for them.

FAMR will also look at ways to ensure the regulatory and legislative environment allows and encourages firms to innovate and grow their business models to include affordable and accessible financial advice.

Put another way, FCA Project Innovate hasn’t worked as well as they wanted, so this is another stab at allowing firms to develop robo-advisers to plug that ‘product sales gap’ described above.

“How can we help our chums in the banking sector sell retail investment products to their customers again?” is, I imagine, a question about to be posed by a committee chairman somewhere in London or Edinburgh.

Finally, FAMR considers ways to encourage people to seek financial advice, addressing unnecessary barriers that currently deter them.

When I read that final objective, I got the sinking feeling the inevitable answer might involve a bigger remit and budget for the Money Advice Service. Perhaps they could splash some more cash on television advertising? Or another annoying commercial radio ad campaign?

That’s the cynic in me satisfied. Now for the opportunities.

FMAR presents an incredible opportunity for the advice community to do several things.

First, take a look at the response from the Institute of Financial Planning (IFP) to the announcement of this review. They got it spot on, in my opinion.

The IFP wants one outcome of this review to clearly differentiate between financial planning and transactional advice. Both are still being lumped in together, with the consequence that neither are being properly regulated.

This financial planner suggests that the Treasury and FCA continues something they started with the RDR. Rather than financial planning being effectively regulated (albeit is non-regulated in the technical sense) by the FCA, it should be the remit of the professional bodies to self-regulate planners. We already have the Statement of Professional Standing system in place. Why not simply extend it to create a cost effective, self-regulatory body which truly understands the distinction between planning/advice and product sales.

FMAR also presents an opportunity to overhaul the massively unfair, unjust and unruly Financial Services Compensation Scheme. A better delineation between advice and product sales could filter through into more appropriate funding of the FSCS; stop making the good guys pay for moronic product sales, make the polluter pay.

What the FMAR must do, in my opinion, is help consumers better understand this whole mess of a retail financial services sector. It really is a mess.

We understand it, in the main, because we live and breathe this stuff. Consumers do not. Even the better informed consumers still think of advisers like banks and insurance companies like Brazilian teak forest schemes.

Simplification is often an aim of government as a way to encourage saving. It’s time for some simplification here. Regulated advice, regulated products, everything else. You get FSCS protection on the regulated bits, paid by those firms that actually do those bits, you’re on your own if you end up in the rest.

That’s how to close the ‘advice gap’ and make advice more accessible to the masses; stop making simple regulatory structures unnecessarily complex.


5 thoughts on “RDR II is coming, and it doesn’t look pretty

    • Thanks, Steve.

  • I remember having the same discussion multiple times regarding RDR 1.

    As soon as regulators and people with vested interests (aka banks and insurance providers) get involved then my heart sinks.

    I agree that the cost of regulation will enable advice to be more accessible to the masses, however I think it is coming anyway through innovation as was the case in RDR 1. People are more informed and it is no surprise that the emerging number of professionals firms have thrived both pre RDR and post RDR. I don’t think this will change if we have another RDR. The days of ripping clients off has gone – look at the numerous distribution channels running through the back door!

    The regulator doesn’t need to focus on the advice gap, let the business people and entrepreneurs do that – they just need to focus on catching the bad guys and keeping them off the street. If they do this, we can get on and serve people the way they should be served by a profession.

    • Hi Adam, thanks for your comments. I suspect more affordable advice for the mass market will come about as a result of innovation. I worry though that innovation will not be able to outpace rising regulatory costs, to deliver this affordable advice within a reasonable timescale.

      There should definitely be a focus on proactively stopping the rip-off merchants and those creating future compensation costs for the rest of the sector. Do that and the FCA would see the advice gap bridged that much faster.

  • Does anyone doing their job properly and succesfully really have any time to concern themselves with the day to day meanderings of regulators and trade bodies. We have beeen running our business for nearly 40 profitable years and during that time regulators and associated politicians have come and gone as have a range of bodies wanting to bind us together to fight regulation but sadly I cannot remember many positive achievements from any of them .
    Cowboys are a fact of life whatever the industry and as regulation always follows problems rather than preceeding them scandals will go on occurring.
    Ours is a very simple job and if you never vary from having the needs of your clients uppermost in your mind you will not go far wrong. Of course we live in a litigeous society where caveat emptor has been banished so you need to plan for problems as they will surely occur if the lawyers have their way.
    The providers inabilty to adapt and run their own business models at a profit has given way to a commission free world in which you can decide your own future with a large degree of confidence albeit with the ongoing chest beatings of the latest regulator as they prepare for their own next career move .
    Use your energy to share your success with like minded individuals and ignore the predators and vested interests as they will surely soon have passed by.


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