AMENDMENTS to the Client-Relationship Model – Phase Two (CRM2) are gradually being implemented across Canada and there is growing concern about the impact that the disclosure of charges and annual reports on compensation could have on the industry.
However, whereas the final stage of the new rules in Canada will not to be phased in until July this year, the UK underwent a similar transformation four years ago. So what impact has its new approach had on financial advisors there?
A lot changed in the UK in 2012 with the Retail Distribution Review which introduced significant alterations to the way IFAs do business. It was a response to concerns about investment advice and introduced new professional standards for advisors and annual statements of professional standing on their practices.
Perhaps most significantly, however, it didn’t just mean full disclosure of commissions – it meant an end to them.
“One of its most significant rulings was to ban commissions outright,” said Laurence Baxter, head of policy and research for the Chartered Insurance Institute (CII). “Now, in the UK, IFAs must clearly agree charges with their customers before they are implemented. The idea was to make the industry more transparent and give consumers a better idea about what they are paying for.”
According to Baxter, statistics suggest that client numbers have fallen since the implementation of the new rules – and there are questions being asked as to whether the changes are to blame.
“There are concerns that customers did not understand that advice comes at a cost,” he said, “and that they are not seeking advice anymore because they can now see how much it costs.
“As a result, there is the new Financial Advice Market Review which is meant to investigate the issue. Are clients no longer seeking advice because fees are transparent? Or is this a supply-side issue, with advisors naturally leaving the market? This is what the review hopes to discover.”
The Retail Distribution Review (RDR) wasn’t the end to new legislation in the UK, however. Currently, the market is poised for the introduction of the Markets in Financial Instruments Directive (MiFID) II - a huge directive that represents a substantial modification of an existing directive that was introduced in 2007. It will be introduced in January 2017 and is set to cover all aspects of advice trading, B2B included, except for those with insurance elements.
“There are some things coming out of MiFID II that will be new for companies – product disclosure, charges, things like that,” said Maggie Craig, acting head of savings and investments for the Financial Conduct Authority (FCA).
“January 2017 feels like a long time away but it isn’t – the industry needs to start to engage and plan. I worked in the industry, I know how important systems are – but this is not just about systems. This is about senior management taking responsibility for the investment products that they manufacture or sell: because they need to know what that product does and who’s buying it.”
In general, MiFID II represents a significant upgrade to investor protection provisions, which are largely in line with what advisors in the UK already have to comply with under the RDR. For example, there will be strict rules on labelling - such as the definition of being an independent financial advisor. If you want to call yourself “independent” then you must showcase a fair proportion of the market. Otherwise you give “restricted advice”. There will be no exemptions, either.
“Some argued believing they should be exempt on the grounds of experience,” commented Baxter. “However, consumer groups argued against this - believing that 20yrs of experience doesn’t necessarily mean you are competent. It’s highly controversial.”
Similarly in Canada, there will be no exemptions with CRM2 – it’s up to firms to change their business model or raise their standards. If UK experiences are anything to go by, then the new rulings could have a significant impact on business – making it vital to be prepared.