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 Unsurprisingly, the major banking groups have withdrawn their network sales forces catering for the mass market.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.
As a small planner in an isolated (no-mining) community, I and my clients will certainly feel the ‘low income group’ impact alluded to. However I do not believe the ‘unintended consequences’ of FoFA to be unintended at all. While Mr Shorten has power and has created an unfair playing field between IFA and Industry funds, it is clearly his intention to see all workers superannuation provided for within these funds. in return, they will receive no service (other than seldom read, and more seldom understood mail outs) from unseen persons predominantly based in Sydney or Melbourne and as a result, miss out on key strategic advice. They will also remain blissfully unaware they have fewer safety regulations on investments controlled by unions, (of no concern to Mr Shorten, whose Parliamentary superannuation will of course not be in these funds, but remain as protected as the crown jewels).
Further, I find it disgraceful banks and other online insurers are able to market ‘no-advice’ products which are not underwritten until time of claim and contain many ‘get out’ clauses; and charge double the premium offered by advisers of regular insurance companies with full underwriting at inception. Even then I must jump through innumerable compliance hurdles to justify these policies, and be seen as a greedy insurance salesman, when I get paid a fair commission for halving a clients costs and providing a superior product and service. (And if Mr Shorten has his way, I won’t even get that if when appropriate I save the client even more by offering through superannuation). Just who is ripping off who here?