What is the global impact of RDR?
The retail distribution review is already having a big impact in the UK but advisers in other countries are also facing regulatory upheaval.
Institute of Financial Planning chief executive Nick Cann, who meets with the other 24 Financial Planning Standards Board member countries twice a year, says the UK’s RDR changes are being seen as a blueprint for other countries.
He says: “Global regulators are watching what is happening in the UK. Although it is a bit early to say whether advisers in other countries are as strongly opposed to RDR-style regulation as they are here, it is high priority.”
US-based Financial Planning Standards Board chief executive Noel Maye says the economic crisis was the trigger for greater adviser scrutiny.
“The global financial crisis was a wake-up call,” he says. “Most people were confident about the structures that existed but after the crisis, consumers thought, hold on, was my adviser doing the right thing?”
The fall in consumer trust seems to be the driving force behind regulation. “Financial planners have a fiduciary responsibility,” says Australian Financial Planning Association chief professionalism officer Deen Sanders. “A lack of restrictions leaves trusting consumers open to inappropriately qualified planners.”
Australian advisers have been facing a cycle of reform since 2001. Sanders says: “Although the RDR goes further than our current Corporations Act, our Future of Financial Advice reforms will in turn go further than the RDR when they become law in 2012. These reforms include banning commission on retail investment products, introducing adviser-charging and restricting usage of the term “financial planner”.
Sanders says: “This was actually our proposal. People who incorrectly represent themselves as financial planners without holding the specific competency erode consumer protection.”
The Netherlands has gone even further. After announcing the abolition of commission not only on investments but also on mortgages and protection from 2013, the Dutch regulator will also monitor advisers much more closely.
The US passed the RDR-esque Dodd Frank Bill in 2010 and is now in the process of creating a consumer protection body. “I cannot say what the scheduling is as regulation is driven by election cycles but there is a unity of effort in saying we need to have more protections in place,” says Maye.
South Africa is following suit. Financial Planning Institute of South Africa head of business development Gerhardt Meyer says: “Over the past few years, our financial planning industry has taken on the challenge of professionalising itself. Our regulators have indicated they will be considering certain components of the RDR and our next big development will be our version of the UK’s TCF initiative.”
It is not only the mature markets that are getting in on the regulatory act. The introduction of a new corporate governance framework in Hong Kong earlier this year introduced remuneration disclosure and India appears to be heading in a similar direction. Its FPSB has said that moving remuneration away from commission will lead to more objective advice. “India can see the potential for misselling because of the proliferation of loaded bonds-type products there and the regulator is dealing with that before it becomes epidemic,” says Cann. The Indian government has recently appointed a committee on investor awareness and protection to help achieve this.
Maye believes there is a cross-pollination of ideas between the emerging and mature markets. “The emerging markets are looking to the mature ones for efficient models and the mature markets are looking to the emerging ones for innovation,” he says. But despite this cross-pollination, the world’s regulators do not want to share anything more concrete than ideas. “At the last Iosco meeting, a global remuneration policy was discussed,” says Cann. “At the moment, we have a situation where you have the UK banning commission but also places like Thailand who are not even at full product disclosure, so it would be difficult.”
FPSB Germany chief executive Rudolf Fuhrmann does not think it is viable. “Each country is characterised by individual processes. We do not think a harmonised international policy would improve the situation for clients,” he says.
Fuhrman’s view appears to be shared across the world “I am in favour of a globallysupported set of principles,” says Meyer. “But principles differ from set rules.”
Maye agrees that a one-policy-fits-all approach will create problems: “It would be difficult to come up with one policy because different countries have different views on commission.”
That certainly seems to be the case. While the UK, Australia, the Netherlands and India believe that commission can skew objectivity, the US, South Africa and Germany do not think it is a problem.
Maye sees the commission versus fee split as potentially damaging. “Our focus is just on the client being fully informed,” he says. “It is more of a disclosure transparency issue than a compensation type issue. There may be compensation formats in the future that we have not even considered yet, so viewing these two categories as the fundamentals may limit that.”
Germany takes a slightly different approach. “Fee-based consulting is still very niche here,” says Fuhrmann. “We think the type of remuneration does not have an impact the quality of service, and our regulator intends to enable clients to decide individually on their preferred remuneration scheme.”
Along with remuneration, adviser qualifications comprise a substantial part of current global regulation. It is almost more advanced abroad,” says Cann. “Places like the US, Canada, the Netherlands, Australia and Japan have had a natural buy-in to high qualifications as a way of doing business whereas in the UK it is about working towards the minimum requirements to keep the regulator happy.”
Meyer agrees that the UK approach to qualifications is flawed. “The view of getting qualified to scrape by needs to change,” he says. “Financial planning is complex and it has become almost impossible to offer advice without a suitable qualification.”
In South Africa, the regulator has taken a similar approach to the FSA and specified that advisers must pass a first set of examinations at the end of this year and another set by the end of 2013. This is already increasing the industry’s attractiveness as a career, with more South African universities offering financial planning courses.
Similarly, the US has 300 colleges offering financial planning certifications but its fragmented approach means the regulator is looking at creating a single qualification.
“There are more hoops to jump through in order to get qualified because we have so many regulators,” says Maye. The certified financial planning qualification sits on top of the basic licensing scheme, which works on a state-by-state basis. “You could have an individual in a state multiply licensed for each strand of advice they offer and they could get the CFP qualification on top,” he says. “But components of what they do could fall between the cracks, which is why we are looking at an industrywide standard.”
Industry wide minimum qualifications are already in place in some other countries. The Netherlands has had them in place since 2006’s Federation of Financial Planners qualification and is one of the few countries that also specifies a degree as entry criteria, alongside Australia, Spain and France. The Dutch government is now looking at increasing the minimum in line with its stricter approach.
Elsewhere in Europe, Germany is rectifying its irregular approach to qualifications. “There are major variations in terms of quality of learning content,” says Fuhrmann. “Although the certified financial planners approved by FPSB Germany receive more comprehensive training, introducing harmonised minimum requirements beyond product knowledge will secure a higher level of industry quality.”
However, the UK view that experience is equally as important as education holds fast across the globe. Although qualifications are important in Australia, the consensus there is that professionalism is about more than just exams.
“Qualifications are the foundation of a profession but they only attest to educational competence. We believe that professional designations will become more of a defining feature rather than qualifications alone,” says Sanders.
Maye says: “Just as important as exams is a level of experience but that is not to say that advisers should just get the basic qualification. I think we will see them continuing beyond level four in the name of competition. It is human nature.”
The FSA and other global regulators are aiming to build a competitive and professionally attractive industry, albeit with varying levels of attention to remuneration and qualifications. “Basically, we want to get to a point where people are proudly discussing their financial planner in the same way as their GP and lawyer,” says Maye.
This is why organisations such as the FPSB are making sure successful regulatory models are shared globally. “We are taking our cues from each other,” says Cann. “The development of the RDR will be keenly watched.”
Global views from members of the FPSB across the world
On independent versus restricted advice
US ’If I said to you, ’You have to go to a doctor in a hospital or your GP,’ you might say, ’I am indifferent’, because you expect that the person treating you will be qualified. The focus should be on competency, not type of practice. I am not sure these categories matter so much’
South Africa ’ I would not like to see an over-emphasis on independence but would rather focus on being professional. You can be professional and still be employed by a larger institution
Australia ’Australia’s definition of independence is harder to attain than the UK’s. It is attached to product and remuneration independence and cannot be overcome through an expansive product list’
UK ’Restricted advice has a real place in the industry but at the moment we are looking at it with the wrong focus. Restricted advice needs to be consumer-focused to allow young and less wealthy people access to advice’
On providing advice to less wealthy clients
Germany ’We already do. Retail clients are frequently offered free standard consulting services and standard products which include commission’
South Africa ’ Products are sold through non-traditional channels such as convenience stores. We also make use of mobile banking, which has the potential to significantly reduce overall costs. The regulator has launched events that offer advice on a group basis rather than a costly individual basis
US Regardless of socio-economic status, people should have the right to access professional services. Advisers could split the level of services they provide based on clients’ ability to pay
Australia ’ We are all searching for this holy grail. Scaled advice could be a catalyst for greater engagement but we must be very careful that we do not inculcate a second-class advice model for the less wealthy