Why the RDR must be delayed
The retail distrib-ution review comes into force on January 1, 2013. At about the same time, the successor to the FSA, the Financial Conduct Authority, will open its doors to business and will be responsible for regulation in the period following the implementation of the RDR.
If the FCA was simply the FSA under a new name, picking up where the old regime left off, the coincidence of timing would be of no great concern. But under the Gov-ernment’s current plans, the focus and approach of the new regulator will be significantly different and the recent consultation documents issued by the Treasury emphasise this change.
In June, an FSA paper set out how the FCA will approach the delivery of its objectives. We are told the FCA “will have the single strategic objective of protecting and enhancing confidence in the UK financial system”. There will also be three operational objectives:
- to secure an appropriate degree of protection for consumers;
- to promote efficiency and choice in the market for financial services; and
- to protect and enhance the integrity of the UK financial system.
The FCA will also have a duty to discharge its general functions, such as rule-making and guidance, in a way that promotes competition.
The word competition rings alarm bells. Much of the criticism of the RDR has centred on concerns that it will result in reduced consumer choice and less competition. As a result, the question of the effects of the rules on comp-etition will be of serious concern to the new regulator.
On the assumption that the FCA does its job properly, it will need to review the rules it inherits from the FSA in order to comply with its duty to promote competition.
Since the RDR rules will have only come into force at about the same time as the FCA is established, would it not be sensible to avoid the potential damage and disruption to the financial services community by delaying the implement-ation of the RDR proposals until they can be reviewed by the FCA in the light of its own approach and objectives?
The answer, surely, is that the RDR proposals should not by implemented until the FCA has had a chance to consider them afresh.
That is reinforced by the recommendations of the Treasury select committee in its report on the RDR, published on July 16, 2011.
In its summary, the report says: “Some parts of the financial services advice market are not working properly for consumers. But some elements of the FSA’s evidence have appeared weak to the committee and the FSA itself concedes that its proposals would cause large numbers of independent financial advisers to leave the market.
“This would reduce competition and choice for consumers at a time when the savings rate is already too low. A delay of 12 months in the implementation of the RDR to allow advisers to satisfy the requirements of the RDR would be likely to increase the number of firms and advisers making the transition to the new system, while recognising the fact that many advisers have already complied with the RDR’s requirements.
“A hig her level of qualifi-cation for advisers can help build a stronger professional ethos among advisers and reflect the considerable responsibility advisers have for the financial welfare of their clients.
“By asking for a delay of a year to the introduction of the RDR, we hope advisers will take the opportunity to meet the new qualification requirements. We also recommend the FSA use other means, such as providing for flexibility for advisers on a case-by-case basis and allowing supervision of non-qualified advisers.”
The Treasury committee’s call for a delay of one year is not for the purpose of permitting the FCA to review the rules but the fact it calls for such a delay does create the opportunity for such a review by the FCA.
The Treasury committee itself was conscious of the point that the implementation of the RDR should be delayed until the FCA has taken over from the FSA and several of those who wrote to the committee said as much.
The Financial Services Smaller Practitioner Panel told the Treasury committee: “The RDR is being implemented at a time when the objectives of the regulation of retail conduct are to be changed with the creation of the FCA. We believe it would be much better if the new FCA objectives could be set and checked with the RDR before the requirements of the RDR are finalised.”
That makes good sense. But when the Treasury committee asked Hector Sants if the move to the FCA should halt implementation of the RDR, he was certain it should not. He said: “This is a thoughtfully constructed, vital reform to the market. We do not believe there is any suggestion in the thrust of Government policy that the FSA should be stepping back from continuing to deliver needed reform and improvements. I think it right and proper that the FCA will carry forward those initiatives.”
Mr Sants’ superficial answer does him no credit. Indeed, the Treasury committee did not accept it. It responded: “We note the assurances of Mr Sants that the FCA will be content with the RDR. However, the FCA will have different objectives to the FSA and we therefore recommend that the Treasury, in response to this report, states whether it is content that the RDR as currently constituted would be consistent with the objectives of the FCA as it sees them.”
It is also worth noting that many, including the Treasury committee, do not agree that the RDR is all “thoughtfully” constructed. For example, the committee concluded that the FSA’s evidence on the need to move to a level four qualification was weak and that “all aspects of the RDR be delayed by 12 months to maintain choice and competition in the advice market”.
So we come back to the word competition and the FCA’s duty to promote competition, so far as it is compatible with its general functions, including the function of rule-making.
There can be no doubt that the FCA will have to look at the rulebook it inherits from the FSA with an eye to promoting competition. The Treasury committee has endorsed the widespread view that the reduction in numbers of IFAs as a result of the RDR will reduce competition and choice for consumers.
The Treasury, when it considers the report, can surely only give one proper answer that it is not content the RDR as presently constituted is consistent with the objectives of the FCA.
It should therefore require the FSA to delay the implementation of the RDR until after the FCA has been established and has had reasonable opportunity to do its job by reviewing the RDR proposals in the light of its new objectives.