JUST over six years ago, the Financial Services Authority (FSA) announced a review of retail investment, with the aim of identifying and addressing the root cause of problems that continued to emerge in the market. Called the Retail Distribution Review (RDR), it’s a key part of the FSA’s consumer protection strategy.
But what problems have emerged and why? In 1986, the UK financial services market was deregulated, meaning that financial services companies could begin selling each other’s products and services almost without restriction. There was a degree of regulation, but it was untried, untested and rather amateur compared to the level of regulation we have today.
Since that time, the level of competition in financial services has, to some extent, encouraged firms to become more orientated towards selling products. Almost immediately, out went the days when a bank manager would personally manage his or her customers through the financial trials and tribulations of bringing up a family. And in came stories of people being hauled in to see a younger, possibly less experienced bank manager. They would talk about their bank account, only to be sold another credit card or loan that the customer did not want.
In short, the core idea of RDR was to establish a resilient, effective and attractive retail investment market. The FSA wants consumers to have trust and confidence in retail investment, at a time when they need more help and advice than ever with their retirement and investment planning.
Over the the last six years, a wide-ranging consultatation has taken place, followed by a huge amount of hard work by the financial advisory industry in the UK. All this effort culminated in a series of new rules that will come into effect on 31 December 2012. These rules will apply to all advisers in the retail investment market, regardless of the type of firm they work for. Banks, product providers, independent financial advisers, wealth managers and stockbrokers will all be affected.
The new rules require advisory firms to explicitly disclose and separately charge clients for their services. The firms will also have to clearly describe their services as either independent or restricted, and individual advisers must adhere to consistent professional standards, including a code of ethics.
The FSA has set a number of clear objectives for RDR:
■ “An industry that engages with consumers in a way that delivers more clarity for them on products and services;
■ A market which allows more consumers to have their needs and wants addressed;
■ Remuneration arrangements that allow competitive forces to work in favour of consumers;
■ Standards of professionalism that inspire consumer confidence and build trust;
■ An industry where firms are sufficiently viable to deliver on their longer-term commitments and where they treat their customers fairly; and
■ A regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers”.
But for this to be a truly successful strategy, the FSA and its successor organisation cannot just rely on the introduction of new rules and regulations. If firms only concentrate on improving their processes and procedures, they will well and truly lose the war. To win back the trust of customers, and to maintain their loyalty over the long term, firms will need to once more prove that the customer is king.
Paying lip-service to this ideal, and then being seen not to put it into practice is not good enough; customers do not deserve to be treated like that.
Financial services companies will have to prove they agree with the spirit of RDR; they will have to prove they care, when coming from the massively advantageous position that they currently occupy. It will take a huge effort and wholesale change of attitude.
RDR is an opportunity for the whole financial services industry to regain and retain the trust and loyalty of retail investors across Britain.