The Retail Distribution Review (RDR) was announced as long ago as June 2006 promising to rectify all the evils of the retail investment market. After a convoluted gestation period, the final proposals became law at the end of 2012. The UK regulator had steadfastly promoted the benefits of a total ban on commission payments, the adoption of adviser charging and the use of the term ‘restricted’ for any type of advice that could not meet a new definition of ‘independent’. Their call for greater professionalism in the sector met with universal acclaim.
The Financial Conducted Authority (FCA) has now released the results of its first thematic review TR13/5: ‘Supervising retail investment advice: how firms are implementing the RDR’. Although based on a small sample, the regulator is generally pleased with progress. However, unsurprisingly, adviser firms and consumers are having difficulty in coming to terms with the meaning of ‘restricted’. Although a major issue, the FCA has no pre-set wording and continues to require individual firms to decide how they will best describe a service which is not independent and why. Of the other concerns, it appears that some advisers are still not disclosing their charging structures clearly in writing and ideally in cash terms. Investors should know the likely final cost early in the advice process. The FCA raises the risk of business models involving contingent charging or ‘no sale, no fee’. There may be too much pressure to sell? It found some advisers are claiming advice charges on single premium products by instalments despite the ban on this practice. Many were failing to describe adequately their ongoing service and its cost. Some may say these are teething problems but the FCA is launching a much wider review with the threat of enforcement fines to encourage full compliance.
The FCA published research in August which indicated an unforeseen rise in the number of retail investment advisers to 32,690 from 31,132 in December. The FCA believes the increase is attributable to advisers re-entering the market. This number is still substantially down from the 35,073 estimated for mid-2012. The latest figures do not, of course, identify the market sector targeted nor guarantee the well-being of many adviser firms operating in a sluggish economy still coming to terms with a commission-free world and increased professional indemnity insurance (PII) premiums.
Somewhere along the way the need of non-High Net Worth investors for face-to-face investment advice has been ignored. Deloitte had flagged that under the RDR reforms up to 5.5 million adults could stop using FAs or be unable to access advice. To the surprise of no one but the regulator, all the high street banks have withdrawn the investment advisers from their branches. As forecast, full advice has become the province of the High Net Worth (HNW) who inevitably have a greater propensity to pay upfront fees and who more readily recognise the value of ‘advice’. Indeed, many adviser firms in this area of the market are little affected by the RDR.
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Undoubtedly, financial capability remains in its infancy in the UK. The big danger is that faced with an upfront fee many will take no further action. The FCA is putting great faith in the Money Advisory Service for free online generic advice. Whilst earlier discussion papers dabbled with ‘primary advice’ for simplification purposes, the regulator had far from championed the cause. Ultimately, progress in this area is restrained by EU-inspired regulation (e.g. MiFID-1) demanding that in face-to-face investment advice the full rules governing suitability and appropriateness must always apply. Such a viewpoint recognises that those less sophisticated investors require the maximum protection. However, it remains disappointing that safeguards could not be built into any streamlined advice process as surely preferable to a non-advised sale? Basic advice remains available but only for the sale of stakeholder products and the new Sergeant regime for simplified products includes no investment products.
Most will conclude that the RDR can only boost the vast savings and protection gaps that already exist. The government must be praying that auto-enrolment does the trick with triggering pension savings although long term care is the monster waiting in the wings. Inevitably, some advisers may look for retail investments that are outside the scope of the RDR reforms to earn sales commission (e.g. gold) but the definition of a ‘retail investment product’ is sound.
It is interesting to note that whilst some Member States concur with the FCA, European legislators have not agreed to a total ban on commission with the MiFID-2 proposals. Regulators across the globe must also be mindful of the real prospect of double-charging as product charges will not automatically reduce to compensate for the introduction of advice fees. Indeed, empirical evidence suggests that contrary in response to more online sales. The Lloyds Banking Group recently announced that it saw orphan-investors, those who post-RDR have lost their IFA connection, as a major growth area for Scottish Widows with an online non-advised sales process.
On the plus side, the RDR reforms recognised the need for greater professionalism. Although consumer groups will say this is long overdue, a minimum QCF level 4 qualification for all advisers combined with a greater emphasis on ethical standards is a very good start. It may take a generation for the consumer to value ‘advice’ and to trust their investment adviser alongside their doctor or accountant but the goal is now clear.
The FCA will claim removing commission-bias is to the greater good but is it a price worth paying? They say that the jury is still out. However, the UK consumer is unwittingly being used as a test bed whilst also footing the bill. Unsurprisingly, the Treasury Select Committee will now spearhead a review commencing in April 2014 on the impact of the RDR. With much related EU regulation in the pipeline (eg PRIPS, MiFID-2, IMD-2) rectifying retail investment problems in the UK will be complicated. The regulator appears to have jumped the gun with the RDR and may yet rue its earlier decision not to delay implementation.
ROGER DAVIES, Principal Consultant, ea Consulting Group – www.eacg.co.uk