The Wealth Management Association (WMA) has questioned whether Retail Distribution Review (RDR) rules will be changed as a result of oncoming European regulation.
While EU institutions came to an agreement on the Markets in Financial Instruments Directive (Mifid) on Tuesday, the WMA pointed out that UK regulators now face the task of interpreting its impact on their year-old regime governing financial advice under the RDR.
While the trade body's deputy chief executive John Barrass welcomed the agreement on ‘a really challenging programme of reforms’, he highlighted that Mifid and RDR have different definitions of independent and restricted services.
Although the European Council has not clarified a definition of 'restricted' advice, Barrass pointed out that 'what we do know is that if you are restricted, you will not have to solve your conflict of interest by accepting only fees and not being able to take commissions.
'Looking carefully at the text, it doesn’t say you have to forego the commission structure, so a restricted firm will be able to give advice, for example, free at the point of delivery to the recipient because both the restricted firm will be paid by commission by somebody else who hopes that the adviser will actually recommend the products that the commission payer is putting forward.'That will actually encourage, we fear (and we wrote about that at the time), a major shift in the market towards restricted firms rather than the development of the independent sector,' Barrass explained.
Under Mifid II - which is scheduled to be implemented in the second quarter of 2014 with full rules in place by 2017 - independence could also be determined by a company's ability to invest across a wide range of financial instruments in the market.
'It does not say that you must have the whole of market, like the RDR, nor does it define the market as the RDR does. The RDR excludes non-packaged products: it talks only in terms of packaged retail investment products.
'In the Mifid definition of wide range it is not defined, which implies open judgment by the regulator, I assume, about what a wide range actually constitutes,' Barrass said.The upshot could be that the UK has to change its rules again barely a year after a significant overhaul.
‘The agreed Mifid appears to permit an override by national regulators to enable them to continue to impose their own rules, but whether that means the RDR survives is unclear,' he explained.
‘Does this mean that RDR will continue, unaffected by this EU-wide agreement? And if it does will it put UK firms at a disadvantage to continental ones covered by a different and less onerous régime?’
Karen Bond, managing director at Walbrook Partners, the Financial Services consultancy, added that the recent trilogue agreement between the European Parliament, Commission and Council, could mean more firms fall into the restricted category, resulting in a review of requirements issued under RDR.