What you need to know

What is the RDR Review?

The Financial Services Authority (FSA) launched the Retail Distribution Review in 2006 in response to perceived problems in the market for the distribution of retail investment products. The review involves the FSA, industry and consumer representatives.

Key themes for the review are:

• Introducing higher standards of behaviour and competence: including tighter examinations and an enhanced role for professional bodies such as the Chartered Insurance Institute.
• Creating new classes of financial advice to suit the products and services sought: the new market would be segmented and regulated into several tiers; finally
• Changing the way advisers are remunerated: the report suggests unbundling the cost of advice and disclosing it up front in a more transparent fee-based system.

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.

FSA underlying views and key challenges to the industry

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”.

The FSA’s overall views underpinning the RDR are as follows:

• 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 FSA’s views of the financial advice landscape

Some of these underlying views are to be addressed by creating a new clearly-labelled segmentation of the distribution market matched with appropriate regulation. The FSA envisages that the sale of investment products to consumers be divided into several tiers of regulated advice and non-advised sales, ranging from detailed full financial advice to what is now called “money guidance”.

Much of the complexity has been around defining “advice” from “sales”; and for advice, defining the concept of “independence”. Originally, the FSA had envisaged a multi-tiered approach of investment product distribution with different standards of professionalism applied across each tier. In April 2008, the FSA took on board the various responses from stakeholders and revised its approach, in the interests of creating a “simple and clear separation of market services” between advice and non-advice.

• In the regulated market, there is a more straightforward distinction between “advice” and “sales”;
• “General Financial Advice” and “Professional Financial Planning” have been merged to create one “Financial Advice” tier;
• The space formerly occupied by Primary Advice was filled by a new tier labelled “Guided Sales”. Although the FSA is mindful not to dilute the advice brand, these changes could effectively herald a reintroduction of the “polarised” advice regime; finally
• The regulator also recognises “Execution Only,” which is any type of non-assisted purchase whereby the customer knows what they wish to buy and does so.

The concept of “Money Guidance” reflects the final report of the Thoresen Review, which coined the term to replace the potentially confusing concept of “Generic Financial Advice”. It describes unregulated assistance to help consumers become more aware of and to address their money matters, including their savings and protection needs. It will be important that the savings and investment market comprises a variety of clearly signposted services, including opportunities to self serve through non-advised services, and that consumers have trust in these services.

The interim feedback statement describes loosely how these tiers would fit together into an overall landscape, and discusses some complexities arising from it. They used the following diagram to help illustrate their thinking:

Source: Financial Services Authority

Professional standards

The FSA see professional standards as the area where it sees most scope for industry-led solutions. It welcomed the Edinburgh Declaration “and hopes these stimulate progress towards industry-wide agreement.” It notes significant agreement that there should be a benchmark qualification for financial advisers and this should be set at the CII Diploma level (or equivalent).

Most importantly the regulator acknowledges that competence is not just about examinations, it “is about skills, knowledge, expertise, ethical behaviour and the application and maintenance of these.” In the interim report, the FSA challenges the industry to develop a framework for professional standards, including mandatory professional body membership, governance and examinations.

It aspires to create standards of professionalism that “inspire consumer confidence and build trust” and 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.

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.

Meanwhile, the CII/PFS will:

• Develop further our discussions with firms developing support packages for advisers;
• Provide more detailed proposals to create a new professional body framework, including an independent professional standards board which will provide consistently high professional standards across all professional bodies;
• Continue to build the support infrastructure to ensure a realistic transition to the new Diploma benchmark qualification;
• Continue informing and supporting our members through the RDR process and timetable through our RDR website, conferences and member surveys; and
• Work with the industry on developing innovative ideas to bring new talent into the industry respond to all issues identified by the Interim Report on professional standards.