FSA rumoured to be considering new ‘decency test’ for Retail Distribution Review

The FSA is contemplating enforcing an industrywide figure for adviser and consultancy charging of around 3 per cent initial and 0.5 per cent ongoing, according to a source close to the regulator.


The source says deductions from premiums in the region of 3 per cent initial and 0.5 per cent trail are what the FSA sees as a fair market rate for advice in the post-RDR world, in a resurrection of the notion of a ’decency test’. While these figures relate to adviser charging in the individual market, the rates could also inform levels suitable in the group market too, says the source.

But some experts say they are perplexed at the suggestion, as such a rigid structure would be hard to enforce, given the way consultancy charging percentages could vary hugely depending on the work done and the size and shape of the premiums involved.

They also point out there is no mention of any FSA-sanctioned cap all in the RDR papers published to date.

Such a level would be considerably lower than the consultancy and adviser charging levels some providers are contemplating offering.

The source also says Solvency II presents a greater risk to reduction of distribution of group pension business than the abolition of commission.
The source says: “In the FSA the figures of 3 per cent initial and 0.5 per cent are what are being talked about as non-contentious. Although the FSA would say this is very different from commission, in practice there is not a lot of change.

“Solvency II is designed to make the system much better at recognising risk and penalising it with capital charges. The problems is new schemes put a strain on capital, and that might be one reason why some providers are arguing they may need to have higher levels of consultancy charge than the FSA might suggest are suitable.”

Alasdair Buchanan, group head of communications at Scottish Life says: “I have not heard figures like this at all and if you have a large case, 3.5 per cent could be excessive, but if it is small, it will not be enough for the amount of work done.

“There was a proposal for checks and balances in the form of a decency test, but that was dropped in the feedback from the FSA. This does not sound sensible to me, and nothing we have heard suggests this will happen. I think they will leave it to market forces to set the level of remuneration advisers take.”

Steve Folkard, head of pensions and savings policy at Axa says: “It seems strange to come out with a figure for such a broad field of situations. Suggesting any decency limit would be odd.

“The FSA has said however that they want providers to submit information as to how much consultancy charges and adviser charges are taken, so they will know what is going on in the market and will be able to respond accordingly.