Posted: 6th February 2014
A year on from the introduction of the Retail Distribution Review (RDR), has it been a success?
The banks have largely left the retail investment space. In addition, many firms have found that advice does not pay beneath a threshold of, say, £100,000 net investment. These two factors suggest that there is a mass market missing out on advice. Is this bad news? In the short term – yes. However, what RDR has left is an industry in more robust shape than before: firms with unsustainable business models have left the market; the fittest have survived, and indeed are said to now be prospering. Martin Wheatley has admitted, however, that RDR implementation was too slow.
Despite these issues, in the view of this author – perhaps controversially – the FCA can justifiably consider the RDR a success for the regulator, the market and customers.
The three planks of RDR
- Independent and restricted advice
- Raising professionalism (through higher qualifications)
- Adviser charging – where the customer pays the adviser for advice, and that charge is not linked to a product
The FCA conducted thematic work which found some firms held themselves out as ‘independent’ but failed to demonstrate that they actually were. In many ways, advisers being ‘independent’ as opposed to ‘whole of market’ is more onerous for the adviser; he/she needs to consider a wider range of products. Now the industry is meeting this challenge, as intended. With higher professionalism, advisers should be capable of providing more holistic advice. Advisers are better equipped with wider and deeper knowledge. Built on this foundation, customers should be getting better outcomes.
On adviser charging, the FCA thematic work found that the level of charges needs to be clearer to customers, particularly in cash terms. Also covered in FCA thematic work, advisers held themselves out as offering ‘restricted’ advice but failed to explain the restriction. There have been calls for FCA to review the ‘independent’ and ‘restricted’ labels, but now is surely a time for stability. Greater clarity around ‘independence’ and engagement with firms is required from the FCA to help firms achieve better customer outcomes.
What should firms do now?
To succeed in the post RDR world, firms must focus in FCA terms on ‘good customer outcomes’: put the customer at the heart of their decision making. In RDR terms this means:
- Clearly explaining the proposition to customers
– If independent, make sure the full range of retail investment products is considered. A ‘one size fits all’ proposition will not be appropriate
– If restricted, they must ensure they explain the nature of that restriction clearly to customers - Ensuring customers understand the cost of advice
- Ensuring customers clearly understand the nature of the ongoing service. Does the language make clear how it works in practice? Will the customer be surprised further down the line?
- Perhaps most importantly, business models need to be sustainable. That provides greater protection for customers
For those firms currently outside the retail investment space, such as bankassurers, this is a time to be innovative – putting together new propositions which are sustainable and which are good for customers. That may mean greater use of an internet-based solution. It certainly involves being more imaginative in putting together a quality advice solution which is affordable to the customer whilst at the same time is commercially viable for the firm. In the medium term, the gap left by the banks in particular will be filled with new propositions. The challenge is to ensure those new propositions are good for the customer.
A glass half full or half empty? Seen this way, it is half full. The market is now based on much stronger foundations and can build on those.
