Outcome of RDR rules still unclear
Six years after its launch, the Retail Distribution Review may be in sight of the home stretch. This is an exercise whose intentions are welcome, indeed overdue: to bring all professional financial advice up to that of the best and to remove the conflicts of interest inherent in commission-driven sales of financial products.
Some of the detail is still to be finalised, but the FSA’s latest consultation closed this week. IMA’s response reflects some of our frustration with the process.
While much of the political debate has focused on financial advisers’ qualifications, the most far-reaching proposals concern the way that financial advice will be paid for in future. Many IFAs have already moved well beyond a pure commission model. But the FSA was right to address the issue.
Unfortunately a concession to industry lobbying (not by the fund management industry, I hasten to add) has put that at risk. Very early on, the FSA announced that it was going to allow product providers to “facilitate adviser charging”. This meant that financial products could continue to make payments to advisers for their advice, with customer consent.
The scope for circumventing the new rules is obvious. If the terms and conditions contain a clause about payment of something that looks like, but is not actually called, commission, then it will be paid. For technical reasons with which I will not bore you, it is not open to fund managers to make such payments. But it is available to many other participants – insurance products, distribution platforms and the like.
In order to make bending the rules more difficult, the regulator has introduced a series of ever more elaborate complications to the rules. They introduce further complexity and how they will play out in practice is still unclear. So long as “facilitation” of adviser payments remains possible, there will be scope for unscrupulous gaming by some and the regulator will have to be vigilant if it is to avoid seeing the objectives of the Review undermined.
These arguments are also being heard at EU level, as the inelegantly-named Markets in Financial Instruments Directive is debated between the European Commission, the Council of Ministers and the European Parliament. The future of commission payments (or “inducements” as they are rather pleasingly know in euro-speak) is up for discussion. The Commission wants to ban them only for independent advisers, which is a thoroughly retrograde step since it would foster the non-independent sector over the independent advice that works best for consumers. The relevant parliamentary committee has voted to allow them provided they are transparent and consumers understand what they are for. This still has a way to go and it remains unclear where it will end up.
These are not easy choices. I, for one, am not convinced the FSA has yet got it right in the UK. And the game has only just begun in Europe as a whole. But there is still a possibility of ending up with UK rules at odds with EU regulations.
Chief Executive, IMA
1 October 2012
Chief Executive, IMA