Rest assured, we will see you later alligator
I am not sure who first waxed lyrical and made reference to the difficulty of trying to focus on draining the swamp when you are up to your neck in alligators, but it seems that scarcely a week goes by in this retail distribution review countdown year without further ‘issues’ arising and slipping into the already crowded waters.
The detail of RDR implementation was always going to complicate matters, but the ‘to-do’ list for advisers, product and services suppliers alike continues to lengthen and time is running out.
The regulator has consistently made plain its belief that transparent charges, higher professional standards, clear communication and lower costs will enhance public confidence and motivate consumers to take charge of their finances and make better choices. No one has any quarrel with these laudable objectives, but across the industry the effect of RDR policy requirements is becoming increasingly complex and costly. Most believe that consumers will end up paying more, and let us hope it is not for less.
Many providers have long argued that the ‘price of engagement’ is the main cause for the UK’s financial ‘advice gap’. They point to their spiralling costs for their businesses – chief among them regulatory fees and the Financial Services Compensation Scheme levies – that prevent them from providing an economically viable service to an increasing proportion of the public.
Recent research shows that customers genuinely want to assume greater control in the buying process and not simply be sold to. The sticking point is that because of the complexity of the purchases they are making, they recognise they will probably need guidance from a suitably qualified adviser. It seems, however, another type of ‘advice gap’ is emerging: the substantial difference between the price that the public deems worth paying for such advice and the level of fee economically realistic for an advisory firm to charge.
From the outset, regulators have had commission in their sights. UK retail financial consumers have long lived with the deduction of commission from their overall product benefits. Commission disclosure first became a regulatory requirement some 20 years ago. In this sense the regulator’s desire to achieve greater transparency was a relatively quick and straightforward win.
Things have moved on. The FSA believed that this admittedly more open framework nonetheless left consumers vulnerable to sales bias. It came as no surprise, when the final rules on adviser charging were published in March 2010, to learn that firms were to be banned from receiving or paying commission in relation to personal recommendations to retail customers on retail investment products.
This decision left in its wake a number of unanswered questions when it came to legacy commission, a significant cornerstone on which many advisers have constructed and developed their businesses. The more recent policy statement 12/3 which emerged from the FSA at the end of February provides clarity, with examples for advisers as to regulatory intent, but with minefields too for product providers, many of who are scrambling to separate same product payments contracted prior and post-RDR in order to treat them differently. The elegant simplicity of the solutions is confounded by the inherent complexity of needing to revise old systems, although the FSA makes clear that it does not expect providers to facilitate all options for all of their products.