Advisory firms have successfully adapted to the Retail Distribution Review (RDR) but the cost of regulation remains a massive barrier to development, the Association of Professional Financial Advisers (APFA) has said.
The organisation released a report on the impact of the RDR ahead of the Financial Conduct Authority’s (FCA) post-implementation review.
It concluded while some progress had been made the watchdog must stop tinkering and avoid further regulatory change to reduce costs.
Director general Chris Hannant (pictured) said: “While there has been a small drop in adviser numbers, this report shows that the majority of firms have adapted successfully to the post-RDR world. However, there are still a number of advisers with serious concerns about whether they will be able to continue with their current business model given the significant costs of running an advice firm, and particularly the increasing cost of regulation.
“Further regulatory change, such as that planned for platforms and capital adequacy measures, will also have a major impact on firms’ financial sustainability.”
The report said there are now two distinct groups of people seeking advice on investments or pensions.
The first, who can afford to pay and are willing to do so, have benefited from RDR in that they now have access to a "more professional and more transparent service from better qualified advisers".
However, there is also a group of consumers for whom advice is not economic APFA said. It warned these people are increasingly reliant on using the internet to find information and invest direct and may not realise the reduced protection that entails.
Hannant added: “RDR has had a positive impact in some areas, for instance improving transparency and providing the catalyst for advisers to become better qualified. However, there are still a number of areas where it seems to be less successful.
“For instance, while there is more disclosure by advisers, it is not yet clear whether consumers really understand the different types of services and related costs and levels of protection available.
"In addition, the independent and restricted definitions do not seem to be working. We believe a simpler, more instinctive definition of independence along the lines being adopted by Europe would be useful.”
APFA is calling on the FCA to focus on two things to help adviser firms and ensure consumers get the best possible outcomes: not make any further regulatory changes beyond those already planned and reduce regulatory costs.
Hannant said: “New rules need time to bed down, and advisers need a period of stability to allow them to develop their business models in the light of their experience post RDR, ensure they are compliant with all existing regulatory requirements and prepare for the further rule changes already in the pipeline.
“Fees, levies and indirect costs such as regulatory reporting are a significant percentage of firms’ costs, especially for smaller firms where they can account for up to 20% of revenue.
“The regulator needs to be more focused on finding ways to reduce the burden on firms, rather than increasing it.”
APFA is urging the FCA to:
• make further changes to the RMAR reporting requirements;
• simplify the rule book;
• introduce a longstop to help reduce firms’ PI costs;
• reconsider its decision not to review how its costs are allocated, given advisers are currently paying a bigger share than either banks or insurance firms;
• significantly reduce the fees adviser firms have to pay for consumer credit authorisation; and
• reverse the increase in the FSCS threshold for investment intermediaries.
“The RDR has been successful in achieving a number of its objectives, but there is still more work to be done to get the balance right between consumer protection and a thriving, competitive and innovative marketplace that provides consumers with access to advice at a price they can pay,” the APFA boss said.
