As the UK advice market’s drive towards professionalism continues, advisers are questioning whether a new fiduciary standard would improve conduct and the reputation of the sector.
Currently, advisers in the UK are bound by the FCA’s conduct of business rules but have no formal legal duty to act in the best interest of clients at all times.
However, other jurisdictions are moving in that direction. Two Canadian provinces backed proposals to introduce a national standard in 2016, but this has not been imposed because of the provincial system operated under regulatory group the Canadian Securities Administrators.
The American financial advice market’s journey towards a fiduciary framework is nearly at an end. After facing multiple push-backs and questions over whether the duty would actually increase the standard of financial advice, America’s example has been a learning curve for other Western markets. Following an impartial code of standards that will be mandatory from 9 June this year, a full fiduciary rule will come into force from 1 July 2019.
The Australian Securities and Investments Commission’s legally-binding Best Interests Duty fiduciary rule has been in place since 2013, introduced under the Future of Financial Advice Reforms – Australia’s equivalent to RDR. It mandates that advisers always act objectively within their clients’ best interest – a model the US will follow.
Money Marketing spoke with advisers and consultants to see whether the principle of treating customers fairly in the UK market is strong enough to ensure best practice, and whether there is more to standards than simply introducing a new law.
The cost of the claim
Whether a fiduciary rule would force smaller practices to consolidate or close due to the high compliance and operational costs of proving they have met the standard is a major consideration for some. Deloitte estimates the annual cost of complying with fiduciary obligations in the US market to be $5.9m (£4.2m) for each advice firm with more than $1bn in assets.
A consultant speaking to Money Marketing says that the cost would be a deterring factor to many smaller advisers in the UK who are already struggling with the pressure of costs related to system upgrades required to remain compliant.
A fiduciary rule could also include tighter restrictions on how advisers charge. They say: “Conflict is different from bias, and there’s an element of bias in all charging structures that UK advisers have.
“However, as the margins get pushed down on investment product revenue for advisers and they seek to move to become more holistic in what they are doing, there should likely be a natural osmosis towards better conduct.”
The consultant says that many of the bad apples of the advice industry have been rooted out through RDR, and that the majority of advisers are acting in a quasi-fiduciary capacity already.
The scope of the rule
There remains a lack of understanding around what a proper fiduciary standard for financial advisers would look like. The consultant says: “In many ways, the UK is far ahead of other countries. We haven’t got it right, though. There are a lot of definitions of what fiduciary means, even though it’s a term of law.
“We would need to be very clear about what it meant here to even come up with a rule. You just can’t be a fiduciary if you’re promoting something that’s yours.”
Thameside Financial Planning director Tom Kean argues that the UK market has no need for a fiduciary rule, agreeing that the half-decade since RDR has shown that advisers are primarily honest and can be trusted.
He says: “The effect of the fiduciary rule and what we already do is the same and I don’t think it would change anything in day-to-day conduct – it’s just not a concern.”
Adviser View: Steve Buttercase, financial adviser, Verve Investment Planning
For advisers who have already worked to assume their professional status, I’m not sure whether introducing a fiduciary rule wouldn’t just make things more difficult for clients. The danger with this for advisers is the shift of focus on constantly needing to protect themselves and, ultimately, the clients lose out in that scenario. Having said that, it’s in keeping with our professional duties and our professional status, so I would understand if a fiduciary rule was introduced.
The price of failure
If a fiduciary rule was introduced, however, advisers are clear that it should stipulate punishment for those failing to comply.
Aspect8 financial planner Claire Walsh says that even though advisers face charges and disqualification in the UK market in similar ways to markets that do have fiduciary rules, more than a slap on the wrist is needed.
She says: “The issue isn’t just about more penalties for doing the wrong thing. The Australian fiduciary situation where people have to stop and think that they might go to prison could clean some things up a bit here. But the good guys behave well in the UK, and bad people will always try to skirt round the edges no matter what the rules are.”
The Australian Securities and Investments Commission took its first action against an Australian business for breaches in June 2016, three years after its Best Interests Duty was enforced. Four months after proceedings were filed against the Melbourne-based firm, a civil penalty was imposed, incurring an AUD $1m (£544,000) penalty, as well as an order to pay out $50,000 to ASIC and another $50,000 towards the investigation.
Using the British Steel Pension Scheme situation as an example, Walsh criticises the fact that some of the firms involved “have done similar things before and the worst they will get is a fine or perhaps get their license suspended.”
Susan Hill Financial Planning director Susan Hill says: “BSPS advisers have shown greed and seen a sales opportunity and have gone out and taken it without putting the client first. You don’t make these mistakes and fall into these traps if you really are ethical, which shows it’s a grassroots thing.”
Kean, however, says the introduction of a fiduciary rule would fail to fundamentally change the way advisers act.
He says: “Fiduciary is a word that just is bandied around and introducing a rule would not change anything in terms of how I can do things.
“It’s hard to even know how it would alter what we do or don’t already do here. Clients overseas talk about fiduciary duty over there, but I’m not sure how it fits into our market.”
Walsh says that while advisers are aware of the risks of not acting in the principal interest of clients, a rule could help increase awareness and better conduct.
Adviser View: Mark Meldon, financial adviser, Meldon & Co:
There should be a fiduciary rule and I’m really keen on that concept. I also like how in the US market there is an investment policy agreement with a client that you draw up so you all know what you’re going to do. After family and friends, clients should come first and the majority of IFAs hopefully do think that way already. That being said, I do think there should be a fiduciary duty, and that would probably get rid of some of the nonsense that’s out there in the industry at the moment.
No second chances
In a worst-case scenario where the regulator oversees the closure of a firm, Walsh says poor suitability means advisers’ clients are the ones losing out, which would breach a fiduciary rule.
Hill adds that a fiduciary standard will put off would-be advisers from entering the industry. Lax standards for dealing with ‘phoenix’ firms, where offending advisers are allowed back into the industry, is putting the regulator in a bad light, she argues.
Hill says: “Advisers will make their company bankrupt so they don’t have to take responsibility for compensation to their clients, and then just set up again. It’s not ethical for the FCA to authorise these companies to do that, nor anyone who was in the management who was caught.
“We need to start weeding people out and also highlighting the people that are doing really well so we can encourage young people into the profession.”
However, Hill agrees that a fiduciary rule would only serve to reinforce what advisers should already be implementing into day-to-day work in the wake of the RDR.
She says: “What we do need is better leadership to show us what good behaviour is, and the more good things good advisers do, the more bad advisers will realise they are on the wrong side of the fence.”
Fiduciary will be the new best practice
We don’t need to wait for regulation to get to a fiduciary standard of advice. Fiduciary advice is emerging as a significant section of the market as a way some advisers choose to differentiate their value proposition. We all know that regulation sets a minimum standard rather than prescribing the highest possible standard, which is what fiduciary is to advice.
The new Mifid disclosure rules about fees, performance and volatility are an example of the minimum standard. However, the new rules, in many cases, simply don’t do what they are intended to do. Rather than inform clients, they are more likely to frighten them. These failures highlight the many problems associated with creating detailed, prescriptive regulation.
The problem facing regulators is how to create rules that set basic benchmarks while still allowing a wide variety of advice businesses to flourish in the marketplace. For instance, some people simply do not require fiduciary levels of advice – and may even lose access to advice if fiduciary were to be imposed as the only standard.
Nonetheless, sections of the market are embracing fiduciary standards as a way to set themselves apart from the ‘bare minimum’ competition. They have a commitment to giving good advice, with investment recommendations that are suitable for the client. For these advisers, fiduciary standards are an important competitive advantage.
In time, we see fiduciary emerging as the ‘best practice’ model – driven by the consumer, rather than regulation. To be able to say ‘we don’t’ would seem to be the only effective answer to your customer asking ‘when it’s my money, why do you get to put your interests ahead of mine?’
Paul Resnik is co-founder of Finametrica