RDR - What it means for consumers

1. Headlines

The Financial Services Authority (FSA) is undertaking a major review of the quality and standard of advice available to consumers in the financial services sector.

This Retail Distribution Review (RDR) focuses on the savings and investment (including pensions) markets, as this is an area where consumers need the most advice and the rise of mis-selling is higher.

The RDR could result in a radical re-alignment of the retail financial advice provision in the UK, and successive documents published by the regulator over the last year have suggested a new risk-based structure to suit the complexity of assistance sought by the customer.

2. Background

The FSA has been planning a detailed review of advice and distribution for some time alongside its ongoing work on introducing more principles-based regulation.

In Sep 2006, some of the FSA’s concerns about the nature of the retail investment business market were summarised succinctly by its chairman Callum McCarthy in his famous Gleneagles speech.

In June 2007, the regulator took forward the debate by publishing a discussion paper. By the due date of 31 Dec, responses were received by nearly 900 stakeholders (the highest number of submissions to any FSA paper thus far).

The regulator then published an Interim Feedback Statement on 29 April 2008, outlining its emerging thoughts and reaction to stakeholder submissions, and will produce a more detailed feedback report in the Autumn.

The CII/PFS has played a strong role in taking forward this debate, with a view to and introducing a step-change in professionalism in the retail distribution market.

This work has included:

• the publication of several discussion papers through Autumn 2007 and a final response to the FSA discussion paper. We proposed a package of professionalism on how professionalism can be improved. The most recent was published in November 2007;
• the commissioning of three member surveys to gauge the views of the industry. All suggest very strong support among members of the Personal Finance Society and CII Faculty of Life & Pensions. The most recent survey conducted in April 2008 confirmed member support for the package of professionalism; and
• the agreement of a joint statement of principles with three other leading professional bodies (known as The Edinburgh Declaration). It sets out high level points of agreement including the package of professionalism.

All papers can be found here.

3. Why is the FSA doing this?

As outlined in the Mr McCarthy’s Gleneagles speech above, the FSA is concerned that the provision of financial advice to consumers in the UK is “broke”. More specifically:

• the quality of financial advice and professional standards in the sector need to increase significantly;
• change is required both from the industry and the regulator;
• solutions proposed could increase the cost of full financial advice; and
• there needs to be an economical way to deliver simple advice on simple products to more consumers

The FSA's role is to act as a catalyst to and enable industry solutions that will ”improve market efficiency and lead to better outcomes for consumers”. The FSA is also looking at whether and how current regulation may present an unnecessary barrier to such market development, and published a discussion paper in 2007 suggesting ideas for reform.

The Interim Feedback Statement in April 2008 sets out three challenges to the industry to:

• change business models away from how much advisers are paid;
• develop and agree a common framework for professional standards; and
• present propositions for new sales services, and “challenging firms to make the case for FSA action to help implement their ideas in a way that delivers better outcomes for customers”.

4. What will this mean for consumers?

This is currently the first stage of a process that could lead to radical changes in the financial advice sector.

It is designed to put in place a risk-based and principles-based regulatory structure that engenders capable and confident consumers who can access information that is clear, simple and fair from firms that are soundly managed, adequately capitalised and treat their customers fairly.

Its results are also not confined to investment advice, as its findings could eventually 'read across' to other types of products such as insurance and certain types of mortgages such as equity release. It has already attracted considerable discussion and views have been expressed from a number of quarters. Many observers regard these proposals as an opportunity to improve market confidence through a targeted raising of expertise, transparency and overall standards.

Consumer groups have long expressed concerns about the quality of advice and are generally supportive of the FSA’s approach.

These include Which?, Age Concern and the Financial Services Consumer Panel (FSCP), all of whom have made statements on the RDR.

In response to the Interim Feedback Statement, FSCP welcomed the results, stating that it “has made strides in the right direction of achieving a better system for consumers.” The FSCP has continually stressed the need for people to be able to get independent advice which is not influenced by how much commission advisers earn, and is pleased this has been “reflected in the FSA's early thinking.”

Which? was similarly supportive, seeing the separation of advice and sales in the FSA's RDR Interim Report as a way of increasing clarity for consumers. They also welcome the requirement for advisers to be whole of market.

5. What's new?

This Interim Statement sets out the FSA’s emerging thinking on the RDR following responses from the industry and other stakeholders:

• Simpler Financial Advice landscape: consisting of advice, sales and money guidance. “Sales” is in-turn divided into “guided sales” whereby customers go through an information-providing process which leads to the sale of a product; and “execution only” which means the customer simply buys the product unassisted. Money guidance is further to the recommendations of the Thoresen Review of Generic Financial Advice that was completed in March 2008.
• Proposed Benchmark Qualification: the regulator notes significant agreement that there should be a benchmark qualification for financial advisers and this should be set at the Diploma level (or equivalent).
• Explore the package of professionalism: acknowledging the importance of skills, knowledge, expertise and ethical behaviour as key to quality of advice, the regulator welcomed The Edinburgh Declaration “and hopes these stimulate progress towards industry-wide agreement.” The FSA hopes to facilitate further discussions on this involving a wider groups such as corporates, to discuss amongst other things, the issue of mandatory professional body membership.
• Challenges to the industry: the paper sets out a three-fold challenge to the industry to (a) change business models away from how much advisers are paid; (b) develop and agree a common framework for professional standards; and (c) present propositions for new sales services, and “challenging firms to make the case for FSA action to help implement their ideas in a way that delivers better outcomes for customers”.

6. Next steps

The FSA will look in more detail at the implications of implementing these proposals. Considerations will include:

• Consumer and firm responses to proposals
• European and domestic legal issues
• Strengthening the incentives for firms to deliver consumer outcomes
• Whether firms would be sufficiently viable to operate in the new regulatory landscape and be able to deliver long-term commitments

The FSA will publish a detailed RDR Feedback Statement in October 2008 which will include:

• Full analysis of responses to the RDR discussion paper
• Update on market progress towards the three challenges outlined above;
• Comments on market features the FSA will be seeking to deliver through regulatory change
• How the FSA might make the change happen (ie. changes to rules) and how the industry could respond;
• A timetable for possible regulatory changes and transitional arrangements.