Changing the face of retail investment

ON 1 JANUARY, 2013, the Financial Service Authority’s new rules on retail investment products come into effect – the Retail Distribution Review (RDR). Hector Sants, chief executive officer of the FSA, argues that badly sold investments cost consumers between £400m and £600m per year.

The review is expected to cost around £1.5bn over five years to implement. Much of the investment marketing industry is in uproar about the new rules, which may dramatically restrict how they currently do business. A particular cause of resentment is the speed of the implementation. But what should investors know?

The RDR is intended to make the costs of retail investing much more transparent and to remove commission bias from the system by preventing consumers from being given compromised financial advice. To achieve those aims, it will implement several new rules.

1. Advisers will have to make it very clear whether they are offering completely independent advice about the whole market, or advice that is restricted to products offered by a limited number of companies or just one company.

2. Product providers will be banned from automatically setting and deducting charges from financial products to pay for commissions to advisors. Instead, advisors will have to agree their charges with customers in advance. The FSA prefers that consumers be charged explicit and separate fee for advice, thereby eliminating any commission bias at all, but the rules do not force that.

3. Advisers will now have to have a QCA level 4 qualification – equivalent to one year of a university course – instead of the level 3 qualification currently required. That is intended to improve the quality of advice for consumers, but it is also controversial among many providers because many advisers will not finish the appropriate exams in time for implementation. If many advisers leave the industry, it could well hurt retail consumers with higher upfront costs.

4. Platforms will need to adhere to certain new operational rules on client switching between platforms and client rebates, so as to increase transparency.

Numis, an advisory firm, warns that increased competition due to higher transparency may hit margins, but also that many smaller firms will be forced out. In the mean time, it is not yet clear who the winners and losers will be. Investors in financial product providers will just have to watch out.