As part of an ongoing effort to expand the availability of financial advice, the U.K.’s Financial Conduct Authority (FCA) is consulting on ways to make it easier for firms to provide simple, but bespoke forms of advice — including a consultation on the future of trailer fees.
In 2012, the FCA banned the payment of trailers on advised sales of retail investments. However, it grandfathered in existing trailer arrangements — and while the share of firms’ revenue that was generated from trailers dropped sharply from 80% before the ban, the regulator reports that trailers are still producing about 12% of firms’ annual revenues (about £674 million).
Now, as part of its review of the rules around advice, the FCA is considering whether further steps are needed to facilitate industry innovation — including possible changes targeting legacy trailer arrangements, such as requiring firms to end the grandfathered arrangements, or requiring greater transparency to investors.
Among other things, it’s seeking feedback on the impact of existing trailer fee arrangements on investors’ outcomes and the incentives facing industry firms.
In particular, the FCA indicated that it’s concerned that the continued payment of trailers “may be an obstacle to the modernization of advice services and to consumers receiving value for money.”
To that end, it’s seeking insight into why investors haven’t switched away from products that require them to pay trailers since the ban took effect 14 years ago. It noted that the ongoing payment of trailers poses a potential conflict of interest for industry firms, that many investors may not know that they’re still paying these charges, and that there’s little incentive for firms to alert them.
“… we want to better understand the impact paying legacy trail commissions has on consumers — both the benefits and potential for harm. We also want to explore the implications for firms of phasing out commission,” including whether this would lead to a further decline in the availability of advice, the FCA said in a consultation paper.
Expanding access to advice is the overarching goal of the regulator’s consultation.
To that end, alongside the review of the future of trailers, the paper proposes various changes designed to make it easier for firms to provide simplified, but not generic advice — including proposals to simplify and streamline the suitability rules, to clarify the flexibility in the existing rules and to make communications requirements more concise, consumer-focused and proportionate. It’s also proposing to shift from a required annual suitability review to gearing these reviews to investors’ needs.
The paper noted that regulators aren’t proposing any changes to the proficiency requirements for advisors or to industry compensation arrangements, apart from the review of legacy trailers.
Additionally, starting next month, new rules will take effect that aim to enable firms to provide “targeted support” — a new regime that will facilitate the provision of generic advice and products to investors with similar needs. Wednesday’s consultation is intended to complement those reforms by also facilitating access to more bespoke advice that falls between full-service advice and targeted support.
“A market that provides good quality, lower cost simplified advice alongside comprehensive financial advice and targeted support will better support people making decisions about their financial lives,” said Sarah Pritchard, deputy chief executive of the FCA, in a release.
“We want to see more people getting supported, who aren’t currently, and a market that innovates and offers tailored services to meet differing consumer needs,” she added.
The deadline for providing feedback on the consultation is May 22, and the FCA said it aims to finalize policy in this area in the fourth quarter.