White Paper

RDR – What will it mean for customers?

What is RDR?

The Retail Distribution Review (RDR) is a key component of the FSA’s agenda for consumer protection. Its main aims are to increase consumer confidence in the retail investments market.

To quote from the FSA “It is establishing a resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning”.

When did it come into effect?

It came into effect on 31st December 2012.

Who does it apply to?

It applies 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, stockbrokers).

What are the main changes?

The regulation is focused on 4 key areas:

Providing greater clarity by providing consumers with clear distinction between ‘independent’ and ‘restricted’ advice;

Raising minimum qualification standards for advisers to increase levels of professionalism;

The removal of commission based charging and potential resultant conflicts of interest. Advisers will no longer be able to receive commissions from product providers and instead will have to charge consumers themselves directly up front from a disclosed price list or tariff;

Changes in respect of platform based investments and independence rules – particularly applicable to providers of investment advice.

What will be the likely result from the consumers’ perspective?

The aims are clearly stated as being to change the structure of the industry, raising professional standards, removing conflicts of interest from current remuneration arrangements to give consumers greater confidence in the quality and transparency of the advice they receive.

What will be the likely impacts on the industry?

Increased complexity of selling and costs of compliance could result in structural changes to the market such as a reduction in the number of IFAs or greater consolidation within the major IFA networks;

As product providers are forced to find new routes to market, the role of direct sales and the need to invest in direct routes to market could increase;

Clear disclosure around fees will change the nature of the competitive landscape. Substituting product provider paid commissions with a tariff of charges paid directly by the customer to the intermediary will give transparency in terms of perceived value that was previously lacking in the market;

Food for Thought?

Whilst clearly aiming to deliver improvements for consumers both from the perspectives of clarity of information and charging, could RDR actually restrict choice as advisers (transparent) charging structures could discourage some consumers from taking the advised route, encouraging them to ‘go it alone’ in the open market?

A reduction on the number of IFAs could further limit the extent to which consumers have access to the advised market;

Increased cost of compliance together with the need to employ better qualified staff could result in IFAs charging significant amounts to consumers for their advice;

Increased direct sales and marketing costs incurred by product providers might could well be passed on to consumers resulting in increased pricing;

Some product providers, who are largely dependent on intermediary sales will need to change significantly their business models to attract sales directly – the cost of restructure could force some out of business, resulting in consolidation and a potential reduction in consumer choice.

Engagement and Retention – The New Dawn for Investment Providers?

Regulatory changes under RDR will inevitably increase the onus on product providers to consider not only how to attract new customers using direct means as opposed to through IFAs but to find ways to maintain and grow customer stock through engaging better with their existing customers and retaining them for longer. Adopting practices and approaches that have worked successfully in other industries could well be a significant key to future success in the post-RDR era.

RDR – Time to Engage with Existing Customers

Increased transparency around fees and charges, better qualified advisers, the disappearance of commission based selling and greater clarity around what ‘independence’ really means. All designed to help the consumer – but will it?

Increased cost and complexity of compliance and having to pay more for better qualified advisers might see the end of the IFA as we know it. Transparent fees charged directly to the consumer based on tariffs might put many off using them and encourage them to buy directly – and not, therefore, getting the benefits of receiving impartial, expert advice. Fewer players might mean reduced consumer choice and less competition.

The dynamics of the industry will change – fundamentally in the way consumers by products and in the way in which manufacturers deliver products to market. The constants that will remain is the customer and their needs.

Product providers will have to change their business models incurring marketing and distribution costs of selling directly to consumers – and who will end up paying those costs. Guess? Greater cost of operation might mean that some providers might not survive. Consolidation could reduce customer choice further.

One thing is certain – with a focus on direct selling and higher sales and marketing costs driving up the cost of attracting new customers, product providers will be looking more and more at their existing customers as a means of sustaining and growing their businesses – engaging with them better and retaining them for longer. Customer engagement continues to be the ‘hot topic’ in financial services and to gather momentum across our industry. Those impacted by RDR will find themselves focusing ever more closely on it as 2013 progresses.