In the third and final instalment of a three-part series, we look at the unintended consequences resulting from the UK’s Retail Distribution Review and the lessons that may apply to the Future of Financial Advice reforms.
After a six-year consultation period, one might expect that the final Retail Distribution Review (RDR) reforms introduced in January 2013 would have been universally welcomed in the UK. Nothing could be farther from the truth.
Contention over commission
The primary bone of contention is the loss of commission payments. A purely fee-based service appears to discriminate against planners and low-income groups seeking advice. Unsurprisingly, the major banking groups have withdrawn their network sales forces catering for the mass market.
Tragically, face-to-face advice is solely becoming the province of the high-net-worth sector. Many planner firms with a less wealthy client base report having difficulty in adapting their business models to deliver economic returns.
Although the Financial Services Authority (FSA) believes that the removal of commission bias is to the greater good, there is now clear evidence of “double-charging” with no corresponding reduction in product charges.
Problems for planners
Traditionally, the UK market has been split between independent financial advisers (IFAs) and tied sellers with many high street banks owning an in-house product provider. The RDR has a new definition of “independent”, which now includes advice on all retail investment – not just packaged products. Keeping on top of market developments will be difficult and costly especially for smaller organisations.
The “restricted” offer is a term open to consumer misinterpretation and most will fail to appreciate that identical professional and advice standards apply to all planners in the industry. Aware of potential mass-market detriment, the FSA is putting much faith in a new online Money Advisory Service to provide free generic advice.
Infighting between independent and restricted planners is somewhat inevitable as each one struggles to create its own niche in this brave new world. The RDR was supposed to ensure a viable industry but many have doubts over its longer term survival in its current form.
The FSA has been keen to extend the RDR reforms to other areas that might undermine the new rules and platforms are, of course, in this category. However, it has been less successful in defining retail investment products, an area in which commodities remain unregulated (for example, gold) and commission is still paid.
The creation of a more professional industry has been acknowledged as long overdue. No grandfathering was permitted and the requirement for a new harder qualification has resulted in an estimated 15-per-cent loss of planners. Many have retired as legacy commission can continue to be paid.
With FoFA, regulators should beware the law of unintended consequences.
Roger Davies is a UK-based consultant with EA Consulting Group. To read the first two parts to the series, click below.
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