It was always likely that some tough negotiations would be required by the FSA to ensure the RDR is not derailed by European legislation.
A leak of the latest draft of Mifid II, revealed last week by Money Marketing, highlights the size of the task.
It suggests the European Commission is looking to ban commission for independent advisers but not for other forms of advice.
If this was translated into the final rules, the FSA would need to agree an exemption with the European Commission to allow it to continue with its ban on commission for all forms of investment advice.
The FSA had trouble trying to convince the EC of the need to gold-plate the original directive, with the regulator forced to drop mandatory use of the menu and IDD.
With the commission currently looking to push through directives on a maximum harmonisation basis, it is in no mood for national regulators adding their own bells and whistles.
The FSA’s best bet is negotiating to ensure the final directive is worded to complement, rather than undermine, the RDR.
The UK has a unique financial advice landscape within Europe and undertakes a constant battle to guard against the unintended consequences of new rules.
The FSA’s RDR reforms have many supporters in Europe, for instance, the Netherlands is looking to ban all commission, and the regulator will hope other states will help it press its case to extend the commission ban.
But, with the horse-trading that takes place behind the scenes in the formation of such directives, it is by no means certain the FSA will prevail.
The RDR reforms were drawn up as a complete package. Allowing an unlevel playing field through the different treatment of independent and other advisers would completely undermine the goals of the review and lead to a market distortion which would more than likely favour the banks.
The FSA has always argued that waiting for Europe to update Mifid before finalising the RDR would lead to a loss of momentum for the reforms and that, as the EC agrees with the general direction of the review, there was no need to take a waitand-see approach.
This faith will soon be tested. If the FSA fails to win this critical argument, it could cast a shadow over much of its reforms.