FSA reforms will raise costs – IMA

ASSET managers have raised fears that the Financial Services Authority’s reforms to the Retail Distribution Review (RDR), an overhaul of rules governing retail investment advisers, could create a “distortion of the market” and might be based on an unreliable assessment of its impacts.

The Investment Management Association (IMA), an industry body, has said that the FSA’s latest proposed changes to the RDR “do not provide a level playing field between different types of product and distributor”.

Specifically, the IMA is concerned about a plan to ban rebates of asset management commissions. The RDR includes a broader ban on investment advisers taking commissions from providers whose products they recommend, but the FSA’s most recent version would also ban the practice of repaying the commission to investors in cash.

Many firms take a commission from providers for selling their product, but then give retail investors a cash rebate on the commission to avoid a conflict of interest, a system that the FSA says is “confusing” and fails to do away with adviser bias in product selection.

But the IMA’s Julie Patterson says a ban on this practice “will not benefit consumers”, adding: “The FSA’s proposals will have the perverse effect of leading to increased costs and less transparency for consumers.”

A spokesman for Killik & Co also called into question the impact assessment of the proposals, saying: “Given the government has no faith in the FSA... and is breaking it up, why is it relying solely on the FSA’s assessment on the impact of the RDR?”

The FSA has estimated that the RDR will cost the industry £127m in one-off compliance costs and £47.6m in ongoing annual costs.