August 2007

Retail Distribution Review

Addressing the issues

The Retail Distribution Review (RDR) has already generated huge speculation about what it might mean to the financial advice community, not all of it positive.

The key point that advisers must bear in mind is that publication of these proposals is the beginning - not the end - of the debate.

The RDR is a serious discussion paper and should be treated as such with ll those involved needing to take the time to fully understand its implications. The six-month consultation period allows plenty of time for the industry to have its say and we would urge all advisers to take this opportunity.

We support the need to improve the reputation of the industry by bolstering its professionalism and its need to explore ways to ensure remuneration is fair to both the consumer and adviser. However, it is clear to us that strong amendments to some of the RDR's initial proposals will be required in order to achieve those goals.

The Financial Services Authority must also remain on its guard when considering responses from the competing players seeking to influence its ultimate decisions. We are already concerned that the banks and insurers are determined to ensure the outcome of the review favours their commercial interests and we fear this may perhaps be at the expense of advisers and consumers.

Issues to address

One area we are keen the RDR should fully address is the lack of distribution capacity. There are very few consumers who could not benefit financially from high quality, independent financial advice. The reality is that millions of these potential customers do not currently seek advice and many of those that do turn to financial product providers such as banks who have in the past sold products that have turned out not to be the best option available.

The RDR reinforces the view that some advice is better than no advice with its proposal for primary advice. However, this overrides the evidence that when consumers are treated en mass, rather than as individuals, it can often result in the poorest outcomes. 'Simple' advice or 'simple' products rarely meet the consumer's true needs and over time any gains from streamlining or simplifying the process are easily lost.

Narrowing the capacity to deliver independent financial advice therefore looks like a retrograde step - fewer clients will receive good advice than before. Proposals in the current paper could easily lead to a situation where advisers could receive a higher remuneration by selling a smaller number of products, ultimately to the consumer's detriment. The consequences of not addressing this problem will be a further loss of confidence in the industry.

Adviser remuneration and the FSA's suspicion that commission distorts the market by leading to product bias or churn are key issues addressed in the RDR that need to be seen in context. The RDR has at least not fallen into the trap that 'fees are good, commission is bad'. Simply wiping out the commission option and insisting on fees across the board would result in a major shift away from financial advice as people chose not to hand over significant payments before they had seen evidence of the value of the advice.

Advisers need to be reassured that any change to remuneration needs to have a commensurate change in product pricing. We are constantly told how expensive commissions are so we look forward to seeing models showing that providers losing this cost can offer much more keenly priced and competitive products. If the change does not lead to the product price falling dramatically we cannot see distributors agreeing to Customer Agreed Remuneration.

The benefit to the consumer lies as much in better products - with efficient distributors getting even better products as the cost of distribution through them is cheaper - as it does in customers agreeing the cost of the advice.

Increased complexity

The RDR in its current form appears to add more levels of complexity to the market. The 'independent' brand is one of the strongest in the industry yet this is threatened by the proposal that independent should refer to those agreeing remuneration with the client rather than those advising on the whole of the market. Consumers are unlikely to appreciate this difference and their understanding will not be helped by the idea that different levels of advisers should co-exist within the same firm.

What is inevitable is that the added complexity will put pressure on financial advice companies to ensure their systems are capable of dealing with the changes that are introduced. The old adage that the customer is king these days comes second to the need to keep the authorities happy. Time spent dealing with regulatory and administrative errors is always at the expense of time spent dealing with clients, which is why the most successful IFA firms will be those who can remove these burdens from their advisers and deal with them in a cost-effective manner.

One of the outcomes of the RDR, along with the proposals for higher Capital Adequacy Requirements on adviser companies, is likely to be positive in that efficient, profitable, financially sound distributors will be able to grow and develop with weaker companies falling by the wayside. The irony here is that many good advisers could be forced out without reason, losing the diversity that is an important part of the industry.

The fact is that distribution does need a shake up - it is almost a unique industry in that it is fragmenting rather than consolidating which inevitably leads to greater inefficiencies. The changes likely to be introduced over the coming years might just help to bring some economic sense back to the market.

Eventual implementation of the RDR remains some way off and before any decisions are made the FSA must look back and learn from previous attempts to change the market. After all, it is just as easy to make this market worse than it is to make it better for all stakeholders.

Neil Johnson
Chief Executive
Positive Solutions