WHETHER investors are aware of it or not, the Retail Distribution Review (RDR) will shake up investing. Expect more regulation, professionalism, transparency, low-cost investments and investment trusts – but you should also assume we will get some unforeseen outcomes.
Even though it is soon to be abolished, the Financial Services Authority (FSA) is still throwing its regulatory weight around – and in no place is this more clear than in the regulatory framework of the RDR, which comes into force on 31 December 2012.
Although much of the regulation has already been worked out, there are more directions to come. Kenn Taylor of Navigant explains that there are two FSA papers yet to come that will have a big impact on investing. The first, due at the end of July, is on investment platforms and will, according to Taylor, “confirm whether the current rebating of fees from fund managers to platforms and advisers is going to change.” He also points out that a second paper on what happen to pre-RDR commissions – which advisers thought they could continue to receive post RDR – is due towards the end of the third quarter. Taylor warns: “This paper might cause advisers to lose the right to keep ongoing commission on pre-RDR business when they give a customer new advice.”
The website of Scottish Widows explains that the new professionalism requirements include raising the benchmark qualification for independent financial advisers (IFA) from the current level 320, equivalent to A-level, to QCF level 4 diploma, equivalent to first-year university degree level. Advisers will also need to be members of a professional body and be part of ongoing structured Continuing Professional Development (CPD).
Head of advice at Hargreaves Lansdown Danny Cox says regulation will promote improved professionalism, with advisers required to adhere to consistent professional standards, including a code of ethics, by joining an accredited professional body. After the deadline, those advisers who don’t make the grade will no longer be allowed to advise. Cox expects: “Improved professionalism through improved qualifications: those advisers who don’t make the grade shouldn’t still be advising, and won’t be allowed to, after 1 January 2013.” He adds: “Advisers will be required to adhere to consistent professional standards, including a code of ethics, by joining an accredited professional body.”
Taylor says: “Advisers will have to learn new skills and be confident to sell ‘financial advice’ rather than the latest fund or product offering. He thinks “the ban on commission is designed to remove conflicts of interest so advisers act for their customers,” while “best execution rules mean independent advisers will need to shop around for the best deals for customers rather than use a single investment platform for dealing.”
Jasper Berens, head of UK intermediary sales at JP Morgan Asset Management, says the regulation on charging “will, for the first time, make the cost of all investment advice absolutely explicit and transparent.” The FSA, explains Jonathan Chocqueel-Mangan of Tyler Mangan, is aiming “to establish a transparent payment structure that eliminates bias in the recommendations made to consumers by advisers.”
4. UNFORESEEN OUTCOMES
However, as with the best-laid plans of mice and men, those of regulators can also go askew. Cox argues the halo effect of fees for independent advice falling from the 6 per cent commission levels towards 1 per cent covers up the unintended consequence upon the mass market. Cox argues those with assets of less than £100,000 could be being priced out of the independent advice market. Things will certainly not get any easier for advisers, Naughton says “for wealth management firms who feel like they are struggling under the burden of compliance and regulation, things are only going to get tougher.” Berens thinks for “advisory firms that already charge fees profitably and in compliance, the 2013 deadline should hold no worries,” but believes “for those firms that have been remunerated primarily by commission, the new responsibilities posed by adviser charging may well be daunting.”
Taylor says: “It is expected that a significant number of current independent advisers will opt to become ‘restricted’ and sell a limited range of investments traded across a single platform to simplify their business model.” He also thinks it is arguable whether investors will use this increased transparency to shop around more, although he thinks it is clear many customers will be put off by the fees charged. He believes “it is likely many with small amounts to invest will opt not to take advice,” also noting estimates suggest that 20 per cent of current advisers are not even bothering to take the required exams to continue advising. Less advisers would mean less advice.
5. LOW-COST INVESTMENTS
Unintended consequences can be positive as well as negative. In this instance, the changes could – counter to the actual aims of the regulations – push individuals to take more responsibility for their own finances. Investors unable to get paid help might take on the task of learning and managing their own finances, while advisers could turn to lower cost passive investments, arguably to the benefit of their clients.
6. INVESTMENT TRUSTS
As well as increasing demand for low-cost passive investments such as index trackers and ETFs, JP Morgan, in its recently published paper Investment Trusts: The Case for Consideration, claims RDR will make investment trusts more appealing: “For those advisers and clients who want active investment, very few other retail investment vehicles have been able to offer professional portfolio management at lower overall cost than an investment trust.”
David Barron, head of investment trusts at JP Morgan Asset Management, says: “With a track record over 140 years, attractive performance and structural advantages that can work really well for long term investors, we believe there are opportunities for advisers to use investment trusts.”
Whatever the impacts for good or ill of RDR, there can be no doubting that these regulations will change the UK’s investment landscape. The advantages of more professional and transparent service could be offset by less advice. Then again, we might just see cheaper lower-cost investments alongside a growing sophistication among investors.
TIME LINE | KEY DATES PAST AND FUTURE FOR RDR
SOURCE: SCOTTISH WIDOWS
● June 2007
FSA issue discussion paper on “A Review of Retail Distribution”
● March 2010
FSA issue final rules for “improving clarity services” and “adviser remuneration”
● July 2010
FSA issue final rules for corporate pensions
● September 2010
FSA issue final rules for pure protection products
● October 2010
FSA issues quarterly consultation – clarifies advisor charging, rules on trail commission and proposes training and competence reporting requirements
● November 2010
FSA issue proposals for platforms, wraps and fund supermarkets
● December 2010
FSA issues final rules on competence and ethics
● February 2010
FSA issues proposals on product disclosure
● May 2011
FSA issues proposals on data collection
WE ARE HERE
● Third quarter
Estimated date for FSA to issue final rules on platforms, wraps and fund supermarkets
● End of 2011
Prudential rules for Personal Investment Firms – transitional deadlines for capital adequacy requirements
● 1 January 2013
Full implementation of RDR framework
● 31 December 2013
Personal Investment Firms must comply fully with the new prudential rules