Clampdowns, consultations, U-turns and delays: how the RDR unfolded
Financial Services Authority (FSA) chief executive John Tiner launches the retail distribution review (RDR) in a speech at the regulator’s retail intermediaries sector conference in Birmingham. He says the regulator needs to understand the steps it and financial services need to take ‘to secure a market place which is economically sustainable, attracts scarce capital and talent and which is able to meet the changing needs of consumers from across the socio-economic spectrum’. But the huge scale of what will become the FSA’s biggest-ever undertaking is not yet apparent, with Tiner optimistically aiming to publish findings and conclusions in the second half of 2007.
If Tiner’s speech led some to underestimate the importance of the FSA’s new work, chairman Callum McCarthy leaves no doubt about the scale of the regulator’s concerns about distribution. In a speech at Gleneagles entitled Is the present business model bust? McCarthy answers yes, it pretty much is.
He says commission-based advisers are too focused on sales at the expense of client needs. ‘My contention is that we have a system that serves neither the producer of the services nor the consumer of the services. It is doubtful whether it serves the intermediary either,’ he says.
The FSA publishes its first RDR paper, discussion paper DP07/1, A Review of Retail Distribution. It proposes to split the advice market between professional financial planning advisory services and primary advice. It plans a commission ban, but only for the higher qualified, independent financial planners. Firms not meeting those conditions would still be able to use commission but would not be able to call themselves independent. Primary advice would involve catering for more straightforward needs using simple products.
Regulation of platforms comes under the RDR with the FSA’s publication of its second RDR paper on the same day, Platforms: the role of wraps and fund supermarkets.
The regulator announces it will visit platform-using advisers as it publishes a feedback statement on its platform plans. It says it is worried about the risks that platforms could bring for consumers, such as added complexity and cost, but that prescriptive rules would soon become out-of-date.
The FSA steps back from establishing a professional financial planner category in its interim report on the RDR, opting instead to raise standards across the whole advice sector. But it says it is considering scrapping multi-tied and tied firms.
The FSA sets what becomes a well-established precedent by delaying the publication of a RDR paper. The feedback statement on its first RDR paper, which was promised for the second quarter of 2008, emerges. It refines its plans for the division of the advice market, distinguishing between independent advice and sales advice, meaning tied and multi-tied firms would be allowed to continue. Higher qualification requirements would apply to both, but the commission ban would only apply to independent advisers under its plans, with sales advisers being required only to ‘show clearly the cost of their advice’.
Jon Pain (pictured), FSA managing director of retail markets, says the RDR represents a ‘golden opportunity’ for financial services to regain consumer trust.
The regulator’s plans are completely overhauled, as it applies the commission ban to all advisers and scraps the proposed independent and sales divisions. It sides instead with independent and restricted divisions, and plans to introduce a new definition of independence. Instead of focusing on the lack of ties to a third party, it says it will concentrate on the scope of services a firm offers.
The FSA fleshes out its RDR qualification requirements, publishing a list of those that meet its demands. Director of conduct policy Sheila Nicoll tells advisers: ‘Now is the time to act.’
Platforms and distributor-influenced funds (DIFs) come into the FSA’s focus in its latest RDR paper. The regulator says it wants platforms to become pure wraps by the end of 2012, with plans to ban fund manager kick-backs and require in specie re-registration to be allowed. It also announces plans to stop advisers running DIFs from making extra margins on them.
The FSA extends the RDR commission ban to group personal pensions.
The statement of professional standing (SPS) makes its first appearance, with the FSA announcing plans for advisers to hold the certificate. It also cuts 20 qualifications from its RDR-ready list because they are not robust enough and replaces them with a further 14, resulting in a total list of 26.
Wraps receive a stunning blow when the FSA announces plans to ban platform cash rebates, arguing they could lead to advisers selecting funds based on the level of rebate available. After a sustained period of lobbying from fund supermarkets, it also backs down over its earlier plans to ban fund manager kick-backs.
The requirement for advisers to hold SPSs is confirmed as RDR policy, and the regulator says it will demand that firms alert it to advisers who are failing professionalism standards from July. Katharine Leaman (pictured), professional standards and policy manager at the FSA, said: ‘We will not say you must join a professional body, but you must get that independent confirmation. They [advisers] can’t do it through a firm.’
The regulator announces plans to clamp down on personal pension mis-selling by bringing them under Sipp rules on disclosure to align them with the RDR’s adviser charging rules.
The RDR comes under political pressure when the Treasury Select Committee (TSC) calls for a 12-month delay to its implementation. The FSA swiftly dismisses the call – too swiftly for the liking of TSC chairman Andrew Tyrie (pictured), who says it gives the impression ‘no adequate consideration had been given to the arguments’.
Another platform paper; another U-turn from the regulator. The FSA announces a volte face over its policy on fund manager rebates to platforms, reverting to its earlier policy of banning them. It gives wraps a glimmer of hope as it says it will delay a decision on cash rebates, although it claims a ban is ‘desirable’. Both proposed bans are shifted outside the RDR timetable, with the regulator saying it will consult again on the measures, which if adopted would not come into force until after 31 December 2012.
The FSA delays its changes to personal pension disclosure, announcing it will reconsult on the measures.
The regulator outlines how provider-facilitated adviser charging can work, proposing that either the full investment is paid into products, with the provider deducting the adviser charge, or that the provider deducts the adviser’s initial charge before the remainder is invested.
Providers are disappointed when their lobbying efforts for a relaxation of legacy commission rules fail to gain traction. The FSA stands firm over the rules, claiming that allowing commission to be paid on top-ups into legacy products would create ‘a systematic bias’.
Some clarification is given to the rules on independence, with the FSA assuring advisers they can adopt a specialism and maintain independence. The regulator also stands firm, yet again, on its legacy commission top-up rules. Its policy on independence, issued on 6 June, differs little from the stance outlined in this consultation.
The FSA’s scepticism of distributor-influenced funds gets another airing when it consults on guidance for centralised investment propositions. The consultation follows research into the investments, which the regulator says revealed widespread failings. The regulator’s investment intermediary department, headed by Linda Woodall (pictured), later confirms this guidance on 5 June, stating that advisers need to be clear to clients about who manages their investments when they outsource.
For once, the FSA publishes a platform paper without changing its mind over the rules. The plans for fund manager and cash rebate bans remain, with platforms being given a proposed deadline of 31 December 2013. But publication of the final rules, which had been promised before the end of 2012, is now expected early this year.