Long ReadJan 9 2023

RDR 10 years on: FCA unveils plans to ‘streamline’ investment advice

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RDR 10 years on: FCA unveils plans to ‘streamline’ investment advice
Credit: Gajus/Dreamstime

This shift has coincided with an overall movement within the market for customers to take greater control over their own personal finances. For example, the transition from defined benefit pension schemes to defined contribution schemes has given individuals much greater freedom over how they manage their long-term finances.

This in turn gives individuals a far greater degree of personal discretion and responsibility for ensuring that they can achieve their financial goals. 

The FCA’s evaluation of the impact of the Retail Distribution Review and its Financial Advice Market Review recognised that more and more individuals across the UK hold their savings in cash, rather than in investments.

Moreover, individuals have more options (via the usage of self-invested personal pensions and/or the ability to take lump sum amounts from a pension) to take control of how their finances are managed.

The FCA recognises that one of the ways to encourage more people to take on a more pro-active role in the management of their finances, and therefore make the most of the money they have, is to ensure that individuals have access to quality advice.

Following the polarisation and then de-polarisation of investment advice providers between the 1980s and early 2000s, the RDR represented the first concerted attempt by regulators to ensure that consumers had access to the information necessary to make informed investment decisions and to be able to trust the individuals and institutions advising them on those decisions.

The RDR represented the first concerted attempt by regulators to ensure that consumers had access to the information necessary to make informed investment decisions and to be able to trust the individuals and institutions advising them on those decisions

The FCA’s new consumer duty seeks to go further on this journey, by requiring companies to act to deliver good outcomes for retail customers.

However, it has been said that the RDR resulted in an “advice gap” in the UK: that the regulatory perimeter around investment advice was uncertain, and that regulatory requirements around the provision of investment advice made its provision unviable in some settings.

The FCA has now released proposals to address some of these issues. Coming 10 years on from the RDR, the regulator is now planning to introduce a “streamlined” regime for the provision of “core investment advice”.

If introduced as consulted upon, this new regime will allow companies to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investing into mainstream products, specifically within stocks and shares Isas.

The proposals have the potential to facilitate another major, structural adjustment to the retail investment market. Clearly, with the RDR, the story is far from over.

Background to the RDR

The RDR was announced by the Financial Services Authority – the FCA’s predecessor – in 2006. The purpose of the review was to identify areas of consumer risk in the retail investment market and to implement changes designed to mitigate these risks and to improve standards for consumers when dealing with retail financial services products.

The 10-year anniversary of the RDR – which came into effect on December 31 2012 – marks a fitting milestone to look back at the impacts of the RDR, its interplay with recent regulatory initiatives such as the new consumer duty, and how these initiatives reflect some of the broader trends in retail financial services regulation over the past decade.

Impacts of the RDR

Prior to the RDR, it was standard practice in the retail investment market for advisers to give advice to consumers free of charge while simultaneously receiving commissions from the providers whose products they were recommending. The RDR considered that this created an inherent conflict of interest for advisers that had a tendency to result in poorer overall outcomes for consumers. 

The FSA considered that these poor outcomes could be addressed through the RDR by introducing rules that would increase transparency in the process of delivering financial services advice, promote higher standards of professionalism and ethics among advisers, and improve the quality of the advice received by consumers.

Consequently, one of the key changes introduced by the RDR was a ban on advisers receiving product commissions and the standardisation of adviser charges, thereby theoretically removing the conflict of interests at the heart of the pre-RDR retail finance industry.

The ban on product commissions for advisers has indirectly changed the remuneration model for financial advisers, such that they can only receive income directly from their customers under the RDR. 

One of the key changes introduced by the RDR was a ban on advisers receiving product commissions and the standardisation of adviser charges

Additionally, the RDR also introduced the requirement for advisers to disclose to consumers whether their advice is “independent” or “restricted” – in other words, to disclose whether their advice was in any way influenced by the scope of product providers that were ultimately available to the customer.

Finally, the RDR made it mandatory for advisers to achieve certain professional qualifications, as well as to maintain an annual statement confirming their satisfaction of certain standards.

These reforms were designed to result in improved customer outcomes by promoting increased clarity, providing a clearer correlation between the price paid and the service provided, and incentivising the provision of advice that is catered to consumer needs. 

Success of the RDR?

The FCA conducted an evaluation in 2020 on the impact of the RDR and the FAMR. The FCA’s evaluation concluded that, “on the whole, the financial advice market is improving, albeit slowly”. 

While the RDR represented a sweeping overhaul of the existing retail finance regulatory framework, it was not fully comprehensive. Critics of the policy feel that the RDR is too focused on the “sharp end” of the retail finance distribution chain – that is, the relationship between the last company in the distribution chain – advisers – and the consumer.

A consequence of this has been that due to increased regulatory costs and the loss of commission income, the overall number of advisers – especially those prepared to offer services to smaller investors – has declined significantly since the end of 2012.

Some have therefore argued that the RDR made it more difficult for consumers to obtain advice, to the detriment of consumer outcomes.

Regardless, the FCA’s December 2020 evaluation of the impact of the RDR found that consumer satisfaction with the advice received, as well as consumer trust in advisers, have both increased in recent years, while consumer complaints regarding mis-selling have decreased in number.

When considered alongside the fact that use of advisory services increased during the same period, these are all positive indications that the RDR has succeeded in improving the quality delivered to consumers.

One of the indirect effects of the RDR’s increased regulation and the consequent decline in the number of advisers has been the rise in automated advice as a more efficient means of providing services, especially to smaller investors

Another indicator of the success of the RDR in achieving its aims is the type of financial advice offered to consumers. The 2020 evaluation found that the majority (85 per cent in 2019) of financial advice qualified as “independent”, indicating that most consumers enjoy transparency and freedom from the influence of product providers.

Having said this, restricted advice remains far more profitable for advisers, accounting for only 13 per cent of advice but 40 per cent of adviser charge revenues in 2019. This suggests that the loss of income may continue to reduce the number of advisers and undermine competition, a notion alluded to in the FCA’s own evaluation, which noted a “lack of competitive pressure to innovate, even where this could have significant benefits to their existing customer base”.

This would seem to support the arguments posed by critics of the RDR, who assert that by reducing the number of (especially small, independent) advisers, incentives to improve the quality of service have been eroded.

Despite concerns over innovation, one of the indirect effects of the RDR’s increased regulation and the consequent decline in the number of advisers has been the rise in automated advice as a more efficient means of providing services, especially to smaller investors.

While assets under the advice of automated advice represent a relatively small share of the overall market, this share has been rapidly rising, a trend that is predicted to continue in the coming years. 

The FCA is also seeking to build on the move towards more streamlined advice services as a way to get more people into advice services.

The watchdog released a consultation paper in November 2022 on “broadening access to financial advice for mainstream investments”, which considers the introduction of a new core investment advice regime. This is intended to allow greater access to simplified advice on mainstream products – such as stocks and shares Isas – by reducing the compliance burden on financial advisers.

The new consumer duty 

The new consumer duty, the rules of which were finalised in July 2022 and which starts coming into effect in July 2023, is aimed at addressing some of the “gaps” in the RDR. 

The consumer duty is considerably wider in scope than the RDR – applying to entities across retail distribution chains, even when an entity may have no direct contractual relationship with the end retail consumer.

The various new rules to which retail finance institutions will be subject are built around four core outcomes: products and services, price and value, consumer understanding, and consumer support. 

The consumer duty is an outcome-oriented policy and shares the same goal as the RDR in pursuing good customer outcomes (albeit on a broader scale). The consumer duty requirements will have an impact on financial advisers, given the requirements on companies to “enable and support retail customers to pursue their financial objectives”, and the greater emphasis within the rules on empowering customers to take their own investment decisions. 

As with the RDR, the FCA hopes that the consumer duty will improve the quality of advice provided to customers, and consequently encourage more individuals to take advice going forwards.

However, there remains an open question as to whether the consumer duty will have a similar impact to the RDR – in improving the quality of advice provided to customers, but at the cost of reducing the number of providers and competitiveness within the market.

Notwithstanding this, unlike the RDR, the consumer duty’s requirements on fair value may at least provide some mitigation against unfair charging practices in a potentially less-competitive environment.

Matthew Gregory is counsel and Joe Bamford is senior associate at Norton Rose Fulbright