There was good to come out of the RDR in many ways, but at a price

Its aims were to ensure financial products and services delivered to consumers (clients) were clear, transparent, and met their needs. Another aim was to promote standards of professionalism that inspire consumer confidence and build trust.

Like everything in the world of financial services regulation, over some of the 40 years I have been part of it, it took a long time to gestate, cost a lot of money and changed (probably not forever) how retail investment products were sold, or, more accurately in RDR world 2022, advised upon and bought.

The link to 'professionalism' was intended to place financial advisers, now tooled up with ‘professional qualifications’, to use the master of the universe intellectual property that exams conferred upon them to deliver advice to a section of society that was prepared to pay for it and disenfranchise many more because they did not see why they should pay for advice when previously it was seen to be ‘free’.

However, unlike the professions the regulator intended to place advisers alongside (solicitors and accountants), the advice pretty much always was going to be and still is linked to a financial services product of some kind. A fund, a wrapper, an Isa, a pension plan.

That is when the lines blur as the sale post-RDR is now an integral extension of the advice process, simply rebadged.

For the regulator [RDR meant] rules, more rules and of course fees charged to regulated firms to feed the need created by more rules. Did it work? Like a curate's egg, in parts.

Pre-RDR, there were questions around free advice, product or commission sales bias, churning, access to advice, and product suitability.

The fee, something that used to be called commission, was post-RDR most often paid by the product provider via a deduction from the clients’ fund value, strangely enough almost always the equivalent of the commission that used to be paid.

RDR was designed to fix all these problems, a panacea in fact to cure all the ills that existed pre-RDR.

Sales was a key word in this process; it had become a dirty word. 

Pre-RDR financial advisers were viewed in some regulatory Canary Wharf corners as commission-hungry spivs whose activities were considered in many quarters to be more about the commission-generating product they were selling than about the customer.

Along with the RDR came a new language made up of words and phrases like stakeholder, consumer, outcomes, inherent conflict, inefficient markets, redress, compensation, clarity of advice, adviser charging, independent, restricted.

There was good to come out of this in many ways, but at a price.

The minimum professional qualification for all advisers was raised, seeing many older advisers selling up and retiring before they intended to.

They had to maintain a statement of professional standing, which can only be issued – at a cost of course – by a recognised professional body and must also complete 35 hours of continuing professional development each year.

For consumers, the intended impact of the RDR was to: 

• Increase confidence in financial advice. 
• Increase understanding of advice charges.
• Remove provider bias.

For advisers, this saw commissions removed as a form or remuneration, the trail commission many businesses relied upon and valued businesses by just gone.

They also had to decide whether they wanted to be offering independent or restricted advice.

Vertically integrated businesses were able to retain exit penalties conveniently and compliantly renamed commission as a ‘marketing allowance’ in the small print.

For providers, the commission ban saw huge savings by way of trail commission abolition, the facilitation of adviser charging against the client monies invested, execution only capabilities, and for their tied sales forces in particular a clear understanding of professional standards.

For the regulator, then the FSA now the FCA, it needed to ensure compliance with the new legislation.

That means rules, more rules and of course fees charged to regulated firms to feed the need created by more rules. Did it work? Like a curate's egg, in parts.

Persistent advice gap

It is now harder for investors with small portfolios to get advice post-RDR.

Many advisers have segmented their advice depending on the size of investor portfolios, meaning that for investors with small portfolios, it's very hard to get bespoke advice. Instead, you are likely to be risk-rated and sold a model portfolio based on that risk rating. 

Many studies have also shown that a kind of £50,000 rule applies and if you have less than £50,000, you are just not attractive to an adviser business. 

There's also some difficulty with self-selecting as well, because the smaller your portfolio, the less likely you are going to want to pay an upfront fee, because of course that fee will make up a larger proportion of your assets.

Of course, it should be remembered that general insurance and protection did not have to change the commission structures so, surprise, surprise, volumes have grown.

I think this is a work in progress – the FCA published a review in December 2020. 

In summary, after eight years, it has found that “on the whole, the financial advice market is improving, albeit slowly". It noted that “many consumers do not seek, or receive, the sort of help with their finances that would equip them to make better investment decisions”. 

Adviser numbers

Hidden bits of unintended consumer detriment are that the number of adviser firms has reduced. This is driven by the cost and complexity of regulation.

The first six months of 2022 saw 5,662 firms and 10,604 individuals join the FCA register.

Over the same period 8,444 firms de-authorised and 11,523 individuals left the register, according to the Autus Data Services FCA Register Summer Landscape report.

For larger advisory firms there has been a steady decline in average pre-tax profits per adviser. Single adviser firms having the highest decline.

Mass market potential users of financial advice are just not encouraged in the way they were pre-RDR.

Financial services products then were in most part sold, not bought. The very core process that was designed to provide access to all the things RDR was supposed to do was the architect of its own failing for the masses. 

10 years later that is where we are, lost in the ether of regulation and legislation.

And of course, a true indicator of RDR working is to be found in consumer detriment data.

Are consumers still being miss-sold or scammed, yes and in ways that the RDR had not perhaps even thought of or was intended to stop.

The 2021-22 FSCS budget was planning for £833mn of detriment, an increase on the 2020-21 figure of £700m.

The Treasury Committee noted in a June 2022 report on the future of financial services regulation that “the FCA should make every effort to ensure that it is not designing or implementing regulation in a way which could unreasonably limit the provision of financial services to consumers who might benefit from them”. 

The report notes: “The government has said that it intends to introduce a new power for the Treasury to be able to require the FCA and PRA, or an independent person, to review FCA or PRA rules where the Treasury considers that it is in the public interest.”

10 years later that is where we are, lost in the ether of regulation and legislation. A classic case of regulation bayonetting the wounded. In this case, both the consumer and the advisers all at the same time.

I would summarise that you could not make the RDR consequences up, but as we all know, with regulators and politicians you actually can, quite easily.

Derek Bradley is the founder and chief executive of Panacea Adviser