It's time for a holistic approach to costs and charges regulation

Over the years, we've seen layer after layer of disclosure rules implemented in an attempt to help consumers understand costs and charges. In 1995, the Securities and Investment Board introduced a move to explicitly disclose charges. More recently, RDR, MiFID II, PRIIPs and IDD have imposed an unprecedented level of regulatory change on platforms - much of it focused on disclosure.

But after considering the Financial Conduct Authority's (FCA's) Interim Report from the Investment Platforms Market study (PDF, 1.25MB), it appears the reams of information we painstakingly provide may not be helping customers to understand costs and charges.

The Interim Report showed that many customers simply aren't interested in understanding fees. Some stated outright that they use an adviser to avoid having to think about all that. But the fact remains that many customers don't grasp what they're paying, despite the effort and investment we've made to improve transparency and comply with regulations.

Inconsistent regulatory requirements add to the confusion

The industry's traditional piecemeal approach, with the market viewed as several mutually exclusive 'products', is rather disconnected from today's platform-based reality. It also creates an uneven playing field, where different standards are implemented on different 'products' at different times. For example:

  • Open architecture platforms with the widest range of customer options have to disclose more than vertically integrated models that restrict choice.
  • In January 2018, MiFID II introduced non-insured investment product disclosure, yet in October 2018 IDD introduced separate investment disclosure for insured investments.
  • MiFID disclosure is quarterly. Pension and IDD regulations are annual. Some investment 'products' require illustrations, whereas others, performing essentially the same function, don't.

Ever-expanding transparency may not be the answer

As a platform market, we've embraced transparency and moved away from opaque bundled fee arrangements. However, transparency itself can also be a challenge - ever-multiplying detail simply introduces even more confusing charges.

To me, MiFID crossed a line when it demanded disclosure of charges that the customer has no discretion over. I don't believe returning to a fully bundled model would be a good outcome, but neither is increasing detail. Indeed, the FCA's Interim Report did itself highlight the challenge of ever-increasing itemisation and expressed concern about the complexity of charges some customers face.

A different approach is needed

In recent years, the platform industry has devoted itself to keeping up with the latest regulations, which has limited the resources available to work on adding enhancements that could improve the experience for platform users. However, if the disclosure regulations currently in place were better aligned, the industry could spend more time innovating the user experience which could lead to more customer clarity.

I think we need to step back and think about what we can do to improve customer comprehension. We need a more holistic, customer-driven approach to regulation and disclosure of costs and charges. The FCA, platform providers, investment providers and advisers must join together and listen to customers. The only way to address this is collectively.

While the Interim Report from the Investment Platforms Market study (PDF, 1.25MB) is a good report card for the platform market, if we could sort out the disclosure regulations to help customers truly understand what they're paying for, it might be a great one.

David Tiller is Head of UK Propositions at Standard Life Aberdeen

David Tiller, Head of UK Propositions at Standard Life

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