Under the heading, “Risks to fair customer outcomes”, the RDR white paper discusses the problems resulting from the varying levels of customer sophistication.
The inherent asymmetry of information and bargaining power between ordinary financial customers on the one hand, and product suppliers and intermediaries on the other, exposes financial customers to particular risks of exploitation and miss-selling. Although customers with low levels of financial literacy are most vulnerable to such exploitation, information asymmetry remains a risk to fair outcomes even in more sophisticated customer segments.
- Mass market / low income customers
Demand-side features of the low-income market, including poor financial literacy and the inability to pay for the full cost of advice, combined with supply-side constraints such as the cost of sustaining a full advice model in this market, means that low-income customers are particularly vulnerable to miss-selling. An appropriate regulatory framework for this market requires careful balancing of consumer protection and financial inclusion objectives. To mitigate the risks of unfair sales practices and/or inaccessible advice in this market, distribution related regulation needs to be supported by appropriate safeguards in the form of more interventionist product regulation.
The more basic the advice provided, the more responsibility there will be on product suppliers and intermediaries to ensure that the distribution model and level of advice provided is appropriate to the risk/complexity of the product.
- Mid-market customers
Although relatively less vulnerable to miss-selling risks than the mass market segment, mid-market customers remain significantly less knowledgeable than product suppliers and intermediaries in relation to financial products and services. Such customers are also unwilling or unable to pay up-front direct fees for advice, exposing them to the risks of commission-led product and adviser bias. Advisers operating in this market are also of widely varying quality.
- High net worth customers
Even wealthy customers are not always aware of the ability to negotiate the cost of advice. These customers also typically invest in products and use distribution channels (such as platforms, “white label” products, products with complex underlying instruments) that may be subject to opaque fee structures. Again, the quality of advice in this market varies. Despite the qualification standards introduced by the FAIS framework, which require higher qualifications in relation to more complex types of products, the complexity of some specific products create the risk that advisers may not have the specific product knowledge to provide appropriate advice.
In the mid- and high net-worth markets, the RDR proposals aim to define, amongst others, up-front and ongoing product advice services, with appropriate fees.
Under the heading, “The way forward”, the management summary foresees that “These RDR proposals seek to give consumers confidence in the retail financial services market and trust that product suppliers and advisers will treat them fairly. The inherent information asymmetry risks in the sector will be mitigated by placing financial customers in a position to understand more clearly what kind of advice or services they are getting, how much it will cost and how it will be paid for and to provide them with confidence that their adviser is sufficiently qualified to provide suitable advice and is acting in their best interests.”
“We also expect that these proposals will help to reduce the negative perceptions associated with the advice process and encourage people to seek financial advice.”
Consumer education will be of utmost importance in facilitating the desired paradigm shift amongst the public.
The draft Market Conduct Policy Framework states:
“Consumer financial education is a shared responsibility among many stakeholders who all have a powerful and legitimate role to play: government, schools, financial institutions, industry associations, employers, trade unions, community organisations, and NGOs. A centrally coordinated committee – the National Consumer Financial Education Committee – is required to secure the active involvement of all such stakeholders and reduce fragmentation in different approaches.”
No matter how much changes within the industry, if consumers are not sold on the benefits, very little will change in so far as the confidence and trust, envisaged above, is concerned.