In the second installment of a three-part series, we look at how the UK moved to regulate their financial services industries post-GFC and how the Future of Financial Advice (FoFA) reforms compares to the Retail Distribution Review (RDR).
The UK announced a Retail Distribution Review (RDR) as long ago as June 2006. After a convoluted gestation, a series of reforms were finally introduced on January 1 this year.
The RDR is specifically concerned with retail investments although there were two linked reviews. The Mortgage Market Review has resulted in the withdrawal of the non-advised sales process from April 2014, but the Insurance Review simply reaffirmed the status quo, accepting that most insurance policies are bought on price not on the quality of the advice.
The UK must always conform to European Union financial legislation focused on “single market” harmonisation and the scope to introduce national variation is limited.
From the outset, the UK’s Financial Services Authority (FSC) proudly claimed that “we aim to help consumers to achieve a fair deal from the financial services industry and have confidence in the products they buy and in the advice they take”.
Compare and contrast
In the final reforms, there are many similarities with Future of Financial Advice (FoFA) especially concerning planners acting in the best interests of their clients. In contrast to FoFA, evidence of commission bias has led to a total ban on commission payments for advised sales.
In the UK, planner firms must offer either an independent (whole of market) or restricted (everything else) fee-based service. No mainstream simplified advice process is available and although advice can be tailored (focused advice), it must always fully conform to European standards on suitability and appropriateness.
Under RDR, there is an overarching principle that the customer is treated fairly and distributors can be fined for market abuses. Commission is still payable on non-advised sales (for example, online). Soft commission is only permitted where it directly benefits customer service.
The RDR reforms are being extended to platforms and, as with FoFA, seek to remove the product providers’ ability to set remuneration such as commission and volume benefits.
While FoFA has requirements to enhance planner capability, the UK has been far more concerned with improving the professionalism of the sector and rebuilding consumer trust in light of several misselling scandals (for example, mortgage endowments and precipice bonds).
All planners must now have a minimum Qualifications and Credit Framework level-four qualification (the equivalent of completing year one in a British university) and belong to an accredited professional body. It is hoped that consumers will eventually see planners as true professionals.
In the next article, we will look at the impact of the RDR and the lessons for Australia.
Roger Davies is a UK-based consultant with EA Consulting Group. To read part one, click here.
