“The rain wets the leopards’ spots but does not wash them off.” This Chinese translation of an age-old proverb may become a warning shot for the incoming FCA as they lead their self-proclaimed charge of interventionist regulation. With plenty of uncertainty still surrounding the long-term effects of the RDR implementation what we know for sure is its certainly raining regulation at present with a high number of threshold-focused directives shortly arriving.
For most of us involved in retail financial services, we have the RDR, FATCA, MAR & MAD, MiFID II and Solvency II amongst others to contend with and we now stand at the relative calm before the distribution turbulence that will surely follow.
This turbulence brings all sorts of issues and complications that need careful deliberation and strategy to ensure we’re well positioned to charter the stormy seas and bring sustainable success to our businesses.
With RDR in particular we seem to have plenty of continued unintended consequences that need our attention, VAT and adviser charging with HMRCs ‘gateway to intent’ for intermediation provided guidance on whether firms charge or indeed register for VAT or not. Yet with the recent European Court of Justice recommendation that all DFM services pay VAT, this has set alarm bells ringing. The issue here, where advice is concerned, is to ensure clarity and evidence in all client communication particularly for suitability letters that reflect the client objections in full.
Adviser charge facilitation provides a headache that may blow up in the face of product providers. The debate that once the product boundary is broken as fees are paid form the underlying product, brings plenty of tax consequences so eloquently laid out by Rob Reid and Les Cantlay in recent press articles.
But where I see an iceberg that can sink a liner is in the commission mind-set many market participants continue to adopt. If we take adviser charging facilitation as it stands and apply the validation and decency limits that the regulators require, we currently have a Mexican standoff where product providers seem to think they still control the AC and a minority of advisers think switching may be the answer to fee generation. Add to this the debate around the nature of remuneration between platforms and distribution firms, we then have a perfect storm.
What we seem to be missing is the fact that the RDR is almost MiFID article 26 gold plated, where any changes to remuneration, charges and product need to ensure the client experience is enhanced and inducements are banned. This means that product providers must offer comprehensive flexibility on adviser and consultancy charging and verify and validate all fees paid.
The very fact that Hector Sants is on record stipulating that the UK regulator will become a “tick box’ implementer of EU regulations and Martin Wheatley seems to be championing the ‘irrational investor’, supports the view that MiFID and its cousin no 2 will cement the case for placing client protection and fair and transparent charging first.
We then need to move on from a mind-set that promotes opaque practice and blindsides the issues that will surely cause a huge headache not only for clients but also for the industry. We can do this by focusing on the attributes behavioural economics brings, and counter-intuit strategy by employing 3rd party dispassionate views, involving focus groups to gather the evidence and provide meaningful debate and making it personal by understanding the long term implications of continued practice.
There are plenty of firms out there at present who have commendably sought answers to the challenges faced and with this brings innovative thinking and enterprising solutions which can build a robust and adaptive business model. An example of this is in the technological advancements being made to support fee based systems and platform re-registration. Yet we are in danger of entering 2013 and beyond with a ‘commission-hangover’ that will cause damage and dismay to the industry and client relationships.
The regulation rain is coming, we may not be able to wash away any commission mind-set instantaneously but with strategies that engage behaviour, emotion and cultural change, we have an opportunity to understand, explore and apply organisational change that allows us to comply and compete.
