Retail Distribution Review: a primer

The Retail Distribution Review's specific objectives are:

• to establish an industry that delivers more clarity on products and services for consumers;

• to create a market that allows more consumers to have their needs and wants addressed;

• to create remuneration arrangements that allow competitive forces to work in favour of the consumer;

• to create an industry with standards of professionalism that inspire consumer confidence and build trust;

• to create an industry where firms are sufficiently viable to deliver on their long-term commitments and where they treat customers fairly; and

• to establish a regulatory framework that can support the delivery of these aspirations yet does not inhibit future innovation where this benefits the consumer.

General insurance products are not currently included in the RDR. But it is worth understanding the changes as they could be extended to general insurance products, especially if market distortions arise as a result of the review.

Delivering the RDR

The following regulatory changes will take effect by the end of 2012:

1) To improve the clarity with which firms describe their services to customers, all firms will be expected to provide descriptions of their services so that consumers can distinguish if the advice they are receiving is ‘independent’, that is, provides recommendations based on comprehensive and fair analysis leading to unbiased, unrestricted advice; or ‘restricted’, that is, advice is provided on a firm’s range of products only.

2) To address the potential for adviser remuneration to distort consumer outcomes, all firms will be expected to set their own charges in agreement with their customers, and will have to meet new standards regarding how they determine and operate those charges. Specifically, the FSA is seeking to ban commissions from product providers to secure sales through adviser firms, and to ban adviser firms from recommending products that automatically pay commission.

3) To increase professional standards, the industry can expect to be ‘professionalised’ although who will be responsible for overall governance is yet to be fully established. It is proposed that investment advisers will have to have a minimum of QCF Level 4 qualifications (equivalent to completing the first year of a degree) before they can practise as advisers. An overarching code of ethics will be introduced.

Other matters

Future developments might be expected in the following areas:

Prudential requirements for investment advisers

This area is not strictly within the remit of the RDR but the FSA highlighted this issue during consultations so clearly sees it as part of a professionalised industry that inspires trust and confidence. It covers three areas:

• Capital resources: The FSA is keen to simplify calculations for capital resources and make them more consistent across firms. This would raise the quality of capital held by firms.

• Capital requirements: Discussions around the expenditure-based requirement are ongoing. The FSA is proposing that it be based on three months of relevant annual expenditure and that the minimum capital floor double.

• Professional Indemnity insurance: The FSA is proposing a sliding scale of additional capital for potential liabilities not covered by a firm’s PPI policies

Long-stops

The FSA looked at introducing a time limit on claims for negligence to bring the adviser community more in line with the way that the Limitation Act 1980 sets limits for negligence claims. The FSA has currently ruled this out, as a long-stop would transfer any benefit from consumer to advisers. With the FSA focus on consumer outcomes, this is currently unlikely to change. IT

Where can I find out more about the RDR?

FSA: http://www.fsa.gov.uk/Pages/About/What/rdr/index.shtml