Three months after changes to rules on commission came in effect under the requirements of the Retail Distribution Review (RDR), unintended consequences are starting to surface and large groups of people could be left without financial advice. This was the conclusion of a recent roundtable hosted by Capita’s consulting business and attended by senior financial services professionals.
As of 31 December 2012, product providers are no longer able to offer commission on their products while advisers cannot receive commission from product providers for advice given to customers. Particular concerns are arising for those individuals with relatively small pension pots that may not get the advice they need as financial advisers concentrate their efforts on supporting clients willing to pay for their advice.
Steve Wright, financial services market director, Capita’s consulting business, commented: “People with small pension pots of, say, below £50k are particularly likely to be left to self serve. This could have damaging consequences for people as they fall victim to ‘default drift’ – firstly as they invest in their pension and then with the options available to them when they come to retire. For example, rather than taking the default insurer annuity, most people would benefit from reviewing the wider market at retirement - if they knew how to. On the plus side, there are many good-value sources of information available and pension auto-enrolment provides an obvious touch point at which employers could signpost how to access these sources.”
Capita’s consulting business represents a diverse group of clients, which naturally responded to RDR differently. Responses ranged from minimal compliance for cost purposes or strategies to protect their closed-book business through to those that sought to gain advantage and leverage the opportunity RDR presented.
Steve Wright continued: “Finalising RDR design was a challenge for our customers as they decided how they wanted to implement RDR. It was definitely not a case of ‘one size fits’. However, all of our clients successfully went live on time and we are now working with them to understand how their customers will react in a post-RDR world.
“Anecdotal evidence suggests there’s been an increase in volume of interaction by insurers with end customers. Reasons for this vary – perhaps the customer has chosen not to pay for advice or the IFA has ceased trading. Insurers need to weigh up whether this is an opportunity or a risk for them and how they can manage dealing directly with some customers without alienating intermediaries. We’ll be scrutinising data over the next few months to see whether this trend gathers pace.”
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