If you are an investor, you owe it to yourself to know about the Retail Distribution Review (RDR), as it's a key part of the Financial Services Authority's (FSA) consumer protection strategy.
The Retail Distribution Review aims to establish a resilient, effective and attractive retail investment market. This means that you'll be able to have more confidence and trust in the retirement & investment planning advice you receive.
The Retail Distribution Review aims to ensure that:
- consumers are offered a transparent and fair charging system for the advice they receive
- consumers are clear about the service they receive; and
- consumers receive advice from highly respected professionals.
To achieve this, the FSA have published new rules under the Retail Distribution Review that will require:
- advisory firms to explicitly disclose and separately charge clients for their services;
- advisory firms to clearly describe their services as either independent or restricted; and
- individual advisers to adhere to consistent professional standards, including a code of ethics.
These changes will come into effect on 31 December 2012 and 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 or stockbrokers).
Professionalism and the Retail Distribution Review
The new professionalism requirements under the Retail Distribution Review aim to improve levels of consumer confidence and generally build trust in the retail investment sector.
By 31 December 2012, advisers will need to:
- subscribe to a code of ethics;
- hold an appropriate qualification, including any qualification gap-fill;
- carry out at least 35 hours of continuing professional development a year; and
- hold a Statement of Professional Standing (SPS) from an accredited body.
These standards will be maintained and enforced by the FSA. Firms will be required to submit data to the FSA about their individual advisers. Accredited bodies will inform the FSA of any advisers who are not meeting the standards required to obtain an SPS.
If existing advisers do not meet these standards they will not be able to make personal recommendations to retail customers from 1 January 2013.
The FSA are also setting a new standard for independent retail investment advice. The aim is to ensure that advice is genuinely independent and advisers consider all retail investment products when making a recommendation.
If a firm claims to be independent from 31 December 2012, it will need to:
- consider a broader range of products (retail investment products);
- provide unbiased and unrestricted advice based on a comprehensive and fair analysis of the relevant market; and
- inform its clients before providing advice, that it provides independent advice.
To reflect the range of products that an independent adviser should have knowledge of, we have introduced the term ‘retail investment product’. This is wider than packaged products.
Under the Retail Distribution Review, if a firm gives advice on products from a limited number of providers, or only considers certain types of products, it will need to describe itself as ‘restricted’. Firms must disclose in writing and orally, before providing advice, that they provide restricted advice and explain the nature of the restriction.
Whether providing restricted or independent advice, the same suitability, professionalism and adviser charging rules apply.
The new rules on adviser charging, which come into force on 31 December 2012, will make the process of adviser remuneration more transparent, so you will know exactly what you are paying for.
The FSA’s new rules will mean you can be confident that the advice you receive is not biased by commission, as the adviser’s remuneration will be agreed between you and the adviser instead of being determined by a provider.
The new adviser charging rules under the Retail Distribution Review mean that all firms that give retail investment advice (such as banks, independent financial advisers, wealth managers, stockbrokers and product providers on their own products) will have to:
- set their own charging structure;
- have a charging structure based on the level of service they provide;
- disclose charges to clients upfront, using some form of price list or tariff; and
- deliver an ongoing service when an ongoing fee is levied, unless the product is a regular payment one.
It is unfortunate but normal that a client of the investment advice industry will employ the services of an adviser who has scant understanding of or respect for the inherent uncertainties of investment. It is also a regular occurrence for the client to fail to spot the conflicts of interest that colour the advice they receive and buy products that are not suitable. What’s more, the client will pay a price that makes it highly unlikely they will achieve their objectives.
In our eyes there are clearly three major flaws in the investment advisory industry:
1) Bad practice.
2) Conflicting agenda.
3) Excessive costs.
Hopefully the Retail Distribution Review will reduce these flaws significantly and help clean up the industry. ISACO are huge supporters of the Retail Distribution Review and look forward to the positive impact it should have on the retail investment market.
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