FTAdviser.com

Advertising

When the FSA began the lengthy consultation process for its Retail Distribution Review, the world was a very different place. The stock market was soaring, houses prices were going up almost daily and thousands of people were enjoying lavish lifestyles on the back of the consumer credit boom.

There was no evidence of the serious problems within the US subprime market that would materialise, nor any suggestion of an impending global recession. The prospect of major banking institutions having to be nationalised – or, worse still, being allowed to collapse – was simply risible. They were too big to fail.

Against this backdrop the FSA’s review hardly seemed a priority. After all, there were relatively few complaints as most investments were rising rapidly and fund management companies were falling over themselves to bring out new products to meet the voracious demand from investors wanting to maximise their returns.

However, the credit crunch and the ensuing wave of economic gloom that has swept the globe over the past 18 months have dramatically altered this outlook. Confidence in financial services has been replaced by deep-rooted suspicion as people have seen the value of their investments plummet overnight as a result of the financial crisis.

Suddenly the FSA’s determination to raise professional standards and tackle the apparent remuneration issues has grown in importance. At a time when everyone is nervous about losing money, it seems eminently sensible to ensure advisers are giving quality advice and their firms have enough financial resources to hand.

Andy Gadd, head of research at Lighthouse Group, acknowledges that the extraordinary events of the past few months have forever changed the economic landscape. In light of this, he suggests, the onus will be on advisers and the regulator to be seen to safeguard the interests of investors.

“The current economic environment means that there is an increased desirability for the RDR,” he says. “If it is successful, then consumers will have increased confidence in the financial services industry and this should mean that there is an increase in the number of consumers using financial products.”

As a result, the FSA’s most recent feedback statement – published last week – was read with interest as it laid out the three main objectives it intended to pursue: improving the clarity for consumers of different types of advice; raising professional standards; and improving the transparency of costs.

In a statement, Jon Pain, FSA managing director of retail markets, insisted the RDR proposals provided a “golden opportunity to regain consumer confidence and trust” in the industry. While wide-ranging and challenging for the industry, he added, the reforms would present significant opportunities for firms to modernise practices.

“Consumers need help more than ever with their financial decisions, whether planning for retirement, saving for the future or dealing with current financial pressures,” he stated. “We believe there has never been a better time to foster more confidence in the industry and provide consumers with real help and advice to empower them to use savings and investments products more often.”

The RDR proposals have been given a cautious welcome by the IFA community. Geoff Penrice, an adviser with Bates Investment Services, supports the idea of allowing clients to select the advice they require and pay accordingly.

“There is logic in segmenting the offering to clients so they get the appropriate level of advice,” he says. “Also, improving professional standards is clearly a good thing and many good IFAs have been working towards this for a number of years.”

Andrew Merricks at Skerritt Consultants does not believe the RDR will succeed in encouraging the public to take charge of their own finances voluntarily, and wonders whether such an overhaul is really required.

“I am not anti-regulation by any means and think that anything that improves the lot for consumers is good news, but I do not understand why they keep trying to fix something that basically is not that broken and just needs a little bit of tweaking,” he says. “This is the very time that people will need to take good advice, so everything should be done to encourage the availability of that advice without costing people and making it too difficult for them.”

Other advisers, however, are more sceptical and have questioned whether the proposals will ever see the light of day. Perhaps understandably, many IFA groups holding such views are anxious about being seen to criticise the FSA openly.

One, speaking on condition of anonymity, says: “We think RDR is completely irrelevant, to be honest, because no one trusts the banks any more. In fact, not many people trust the financial services community either.”

The FSA update addressed these concerns. “We know that there will be concerns about introducing such significant change at a time of market turmoil and uncertainty,” it said. “However, given the market’s appetite for change that became increasingly evident during this review, and the progress that many have made already to move in the direction we are proposing, we believe that we are right to set out our final proposals for consultation now and give the market sufficient time to implement the changes.”

Therefore, the next phase in the process is for these proposals to be taken through to a consultation paper and then implementation, which involves making changes to the FSA’s Handbook. The final implementation date for the changes is December 31 2012, although some proposals may be phased in ahead of this deadline.

“We are grateful for the feedback and engagement we have received from small and large firms alike,” adds Mr Pain. “We remain open to suggestions on how to open up access further to advice through industry solutions such as guided sales, as well as through the free Money Guidance service.”

Mr Gadd believes RDR is likely to have a far-reaching impact on the future of the IFA community, including how it operates, how it is remunerated and how it is perceived as a profession.

“The FSA has stated it is committed to taking the time to get things right and will introduce proposals leading to a more efficient and effective retail investment market for everyone,” he says. “As long as this is the reality, it is a sensible approach.”

If it is done right, he suggests, IFAs will be on a par with other professionals, such as accountants and lawyers. “From the outset, raising minimum professional standards has been a key component of the RDR,” he says. “It is a key driver to improving consumer confidence in the retail investment sector.”

However, Mr Penrice has some reservations. “Although many of the ambitions of the RDR are laudable, the reality is that most clients who are currently receiving good quality independent advice would not be willing to pay fees,” he points out. “There is a risk that if commission is scrapped, some IFAs might need to move to ‘sales’ because their clients might not be willing to pay, and this could end up lowering the quality of advice being given out.”

Trevor Matthews, president of the Chartered Insurance Institute, is more optimistic about future prospects. “The biggest challenge for the long-term future of this industry is to restore trust in financial services, which has been dented for too long,” he says. “RDR gives all of us the opportunity to move to higher levels of competence and professionalism and to kick-start that process.”

Rob Griffin is a freelance journalist