Cicero Policy Briefer

Issue 14, July 2007

Retail Distribution: The new order?

By John Rowland

What was the biggest story in Westminster on Wednesday 27 June? Was it Gordon Brown’s visit to Queen Elizabeth II? Or was it the financial service industry’s procession to the Queen Elizabeth II Conference Centre? For many of those FS grandees sat in the appropriately named Churchill Auditorium there was no question-“Discussion Paper 07/01: A Review of Retail Distribution” was the only game in town.

The Discussion Paper is the culmination of the work of five industry working parties convened by the FSA to look the way that investments such as pensions (but not non-investment products such as mortgages or general insurances) are sold to retail customers under the auspices of the Retail Distribution Review (RDR).

The RDR DP proposes a raft of changes, the most notable of which I outline below:

• An overhaul of prudential requirements: this will demand a risk-based approach to the capitalisation of advisory firms. High risk firms will be required to increase capital adequacy, while firms judged to have good systems and controls and high levels of training will see a ‘regulatory dividend’ in the form of lower requirements
• A possible statute of limitations: limiting the exposure of firms to claims of bad advice to 15 years
• A move towards customer agreed remuneration: commissions and fees will be unbundled from the cost of a product and disclosed up front. Any form of remuneration, if agreed with the customer first, will be deemed to be ‘fee-based’, even if it includes commission. It is hoped that by making the conversation about remuneration focused on the customer, rather than on the provider, advisers will better serve their client’s interests.
• (Re)segmenting the advisory sector: The diagram below shows how the sector might be segmented in to primary advice, general financial advice and, at the top-end, professional financial planning and the characteristics each segment is expected to have. John Howard of the FSCP quipped that you might need an adviser to tell you which adviser to go to. However Otto Thoresen may oblige us with his generic advice service!
  
  
• Improving professionalism: The development of a career path, and stronger individual accountability will be an important consideration in developing the attractiveness and status of the advisory sector as a profession. The group that considered this felt that there was probably some scope for rationalising the 11 awarding bodies and 43 examinations available though a unified awarding body would be undesirable.

Everyone’s a winner?

Callum McCarthy’s mounting fear that everyone was losing under the current system with poorly served customers, an unsustainable advisory sector and providers opening themselves to huge reputational risks, runs to the heart of this review.

The DP has, with various levels of fear and loathing, been described as everything from an essential shake up of a sector blighted by years of mis-selling scandals, to a manifesto for widespread consumer confusion and detriment.

What few people are calling it, however, is insignificant. And while many of the proposals are still somewhat green, the direction of travel is clear to see. As such expect controversy in the coming weeks and months. The major bone of contention is bound to be the role of the primary advice segment, which Chris Cummings of AIFA has memorably said is at risk of offering ‘McAdvice’-cheap, but bad for your health. The banks on the other hand will be keen to move in on this space, much along the lines of the European bancassurance model.

In an effort to make the exercise as constructive as possible, the FSA says it is determined to consult widely, and will be out and about meeting stakeholders. However it is also at pains to stress that this initiative belongs to the industry. This suggests that they are aware than this could be a turbulent experience…and it has only just begun!

John Rowland can be contacted on +44 (0)20 7665 9539 or click here to email.

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