Retail Distribution Review

From Planipedia

The Financial Services Authority (FSA) in the United Kingdom launched the Retail Distribution Review (RDR) in June 2006 to look at how investments were distributed to retail customers and the long-running problems that impact on the quality of advice provided to their customers.

The RDR is seeking to tackle a number of market failures:

• Many products are complex and not transparent in respect to the charging structure or fees, which in turn makes it difficult to access how benefits accrue to the consumer. Because of the difficulty in determining the risks, costs and benefits clients must therefore heavily rely on advisers to interpret this for them.
• In most cases product providers remunerate or pay the adviser directly by way of commissions. This can cause a misalignment of interests between the consumer and adviser.
• Those providing advice in the financial services can do so with relatively little training and testing to ensure competency when compared to other groups that are held out as "professionals".
• Consumers have low levels of trust in those selling and advising on investment products, not least becuase of widespread misselling in the past.
• Many consumers who have the capacity to save cannot afford to "pay" for separate objective advice and therefore rely on the advisers that are selling the products.

What is the FSA trying to achieve?

The FSA is trying to address what they consider to be the root causes of the problems, namely greater or total transparency, higher standards of professionalism for advisers, compensation that does not create potential abuses by advisers.

What are the Key proposals?

• In the matter of remuneration, firms that give advice must set their own adviser charges up front, in agreement with the client. This must clearly show the cost of the product versus the cost of advice. The current commission-based system is brought to an end. The FSA has proposed banning product companies from paying commissions to an adviser or adviser firm directly.
• Greater clarity for the consumer between "independent advice" and "restricted advice", where restricted advice is provided by captive agents of a specific firm.
• Standards of professionalism will be raised for all advisers whether independent or restricted. This means the equivalent of first year university (QCF (Qualifications and Credit Framework) Level 4 as opposed to high school standards by the end of 2012.