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The Retail Distribution Review (RDR)

" The RDR's objective of ensuring a better deal for consumers through greater transparency in the retail market is welcome.  Increased professionalism and enforcing professional standards will be critical to helping to achieve this.  We also support wholeheartedly the aim of removing commission bias.  But there remains a real risk that the resulting proposals on adviser charging may not succeed in achieving greater transparency and better outcomes for consumers.” 

Richard Saunders, Chief Executive

What is the Review aiming to achieve?

Improvements to the quality of financial advice being given to consumers by:

  • Removing commission bias from the decision-making process for giving financial advice to consumers so that the end result is a transparent and fairer charging system. 
  • Ensuring advisers meet basic minimum standards
  • Making clear what type of advice is being offered so that consumers understand the difference between independent and non-independent advice

Will the proposals on adviser charging work?

Advisers and consumers will have to agree charges between them.  Product providers will not be allowed to pay commission but will be able to “facilitate” adviser charging out of the product.  If advisers seek this, it is likely that payments that look very similar to existing commission may continue.

What will this mean for funds?

Trail commission will no longer be allowed.  And no mechanism is available which would allow the payment of adviser charges to be facilitated from funds.  But providers of many other investment products will be able to offer to facilitate payments to advisers agreed by the consumer. 

The FSA is proposing to prohibit rebates to clients, which could have provided a mechanism for facilitating adviser charging via client cash accounts, based on agreements with consumers.  But there will be no corresponding prohibition on rebates to other intermediaries such as platforms and life companies, which will thus have access to cash with which to pay advisers. 

The result will be an unlevel playing field between “unwrapped” funds and those bought via platforms or inside other products, because the latter will be able to use rebates to pay advisers.  These payments will be less transparent than a disclosed annual charge.  The IMA fears that this may distort competition and result in outcomes which do not match the FSA’s stated objectives.

Impact of prospective EU rules

These new rules may have to be changed within a few years to implement new European proposals on “Packaged Retail Investment Products” which aim to provide the same rules on disclosure and selling for all retail investment products.  The EU proposals cover payment of advisers among other matters.

Will minimum standards help?

A better qualification framework will contribute to improved standards of professional advice.  All advisers should meet a basic minimum standard and maintain higher standards through CPD.   But it will be important for consumers to understand the value of advice and how to recognise good quality advice. 

Will the RDR achieve its aims?

The IMA believes that the way the proposals have been developed means that their impact will vary between different product providers.  The risk is that this will distort competition by not providing a level playing field between different types of product and different types of firm.  The knock on effect of this could be increased costs and less transparency for consumers.

Further reading

FSA Consultation Papers and Policy Statements

IMA views

IMA policy responses
IMA response to the FSA’s consultation: Distribution of retail investments: RDR Adviser Charging - treatment of legacy assets (January 2012)
IMA response to FSA consultation on Platforms: Delivering the RDR (February 2011)
IMA written evidence to Treasury Select Committee inquiry (January 2011)
IMA response to FSA consultation Delivering the RDR (September 2010)
IMA response to FSA consultation Delivering the Retail Distribution Review and other Issues (May 2010)
IMA response to FSA paper on Distribution of retail investments - Delivering the RDR (November 2009)

IMA Press Releases
IMA: Treatment of legacy business remains unclear (17 January 2012)
IMA calls upon FSA to consider unintended consequences of latest RDR proposals (18 February 2011)
IMA says FSA should consider unforeseen consequences of RDR platform proposals (17 November 2010)
IMA continues to support overall aims of the RDR review (28 May 2010)
IMA welcomes further consultation on the RDR (26 March 2010)
IMA welcomes approach of RDR but questions some practicalities (25 June 2009)

IMA blog
The FSA rolls the dice (30 November 2010)

Parliamentary debates on the RDR
IMA briefing for Backbench Committee (29 November 2010)
IMA briefing to Harriet Baldwin MP (20 October 2010) 

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