Taxation of Pensions Bill

Written evidence submitted by the Financial Conduct Authority (TP 16)

Charges for Retail Investment Advice

We have been asked by H M Treasury to write to the Committee to outline the current situation with regard to charges for financial advice relating to retail investment products. In particular, the Committee is interested in the transparency, and the level of charges for investment advice.

The Committee will be aware that the rules around advisers’ remuneration (as well as their qualifications and how they described their services) changed at the end of 2012, following the Retail Distribution Review (RDR). The RDR was a once in a generation change to the way investment intermediaries charge for their services and followed a long period of research and consultation. It may be helpful to note that these changes related to advice on all retail investment products, not just products relating to retirement income.

With respect to advice charges and their transparency, one of the objectives of the RDR was to make clear to consumers that advice had a cost, and what that cost was. Prior to this change, advisers had typically been remunerated by commission from product providers. This was both opaque and had the potential to bias the recommendations made to the consumer. Our research showed that, despite commission disclosure requirements, most consumers thought advice was free when in fact commission implied a cost, and often a substantial cost, which would have an impact on the performance of their investment.

Thus, prior to the introduction of the RDR, it is fair to say that the cost of advice was far from transparent to the consumer and varied depending not on the level and quality of service but on the amount of commission the product provider offered for selling that particular product. The RDR sought to improve price transparency and help consumers make decisions for themselves about the cost of advice in relation to its quality and its value to the consumer.

The RDR rules have banned commission from product providers in relation to advice on retail investment products. Instead, advisers have to tell customers very explicitly what their charges are for the service they are providing. They have to explain to the consumer both the cost and how it will be paid for both initial advice and any on-going service, should the consumer choose to take this. We do not mandate what form those charges could take – for example, they could be a charge per hour, a percentage of funds under advisement or some combination, – nor do we mandate what level these prices should be or set a maximum. But our rules do require that the cost of advice should be clear, transparent and comprehensible to the consumer.

The rules came into effect at the end of 2012 and we gave a commitment to carry out a post implementation review (PIR), examining the outcomes from the rule changes against our expectations using the baseline set of measures we published in 2011. We will publish the PIR in December.

We have also undertaken thematic work to understand how well firms are complying with our rules in this area and published the first results earlier this year. The results were disappointing [1] and it was clear that more work had to be done in firms to ensure they complied with our rules and provided consumers with clear information on charges. We have subsequently carried out a further round of thematic work, to assess how much things have improved in this area, and carried out research to assess consumer understanding and experience in relation to adviser charging and other rule changes. This information is currently being finalised and will not be available until later next month, when we publish the results of the first stage PIR.

For this reason, it is difficult to provide a precise answer at this stage to the Committee’s question about the clarity and level of charges for advice. However, it would be misleading to think that there is one simple price for advice: our understanding is that firms will often offer different levels of services for different prices, depending on the needs of the consumer. We will write to the Committee again once we have published the PIR, if that would be helpful. We are aware that the Money Advice Service has plans to publish a directory of advice costs on advisers that give retirement advice and volunteer to be involved. We will have a link to this on our website. [2]

We would also like to note that the market for advice is one which is dynamic and therefore is always changing, for instance in relation to the models of advice, what it comprises, and how it is delivered. Earlier this year we published a Guidance Consultation on the boundaries of advice and on how firms could provide automated advice, say through a website. Where consumer needs are more straightforward a simplified process which is delivered electronically, without face-to-face engagement, could be a very cost-effective solution. We therefore expect to see a range of advice models developed within those guidelines to meet the "at retirement" needs, which could be either simplified or focussed advice at a lower cost than the full advice service.

There will be a range of services to support consumer decision making at retirement.  The pensions guidance service should be viewed as part of this spectrum which ranges from the information provided by the pension provider to full regulated financial advice and should help consumers interact with other services, such as regulated financial advisers.  For many the appropriate route will still be to take regulated financial advice.

November 2014