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Polarised lenses

We are expecting the retail distribution review interim statement next Tuesday and we should prepare ourselves for a change or two from what we were told and read in Jane 2007 with the 111-page RDR first discussion paper.

Now, if you remember, the RDR was set up to address the root causes of persistent problems in the retail investment market and the FSA planned to report back on the RDR in June 2008.

But in light of significant feedback, the report will be published earlier to give the market an indication of where the review is heading. Stephen Bland, of the FSA, recently said: “We think we can achieve better outcomes overall by taking more time during the discussion phase of the RDR to develop the detail and consider the regulatory implications of that detail. The overwhelming message we are getting from all in the market is that if we are to make regulatory changes, we must get it right.”

This is stating the obvious. The cost to the financial services industry and the consumer if the FSA does not get distribution right is astronomical.

Within the six-month consultation period on the RDR, the FSA has received feedback from thousands through public events and written responses. These responses should help shape the RDR and the rumour mill has started on the future state of the RDR. The good money is on the idea that the FSA has decided to scrap its suggestion to bring in three tiers of adviser – primary adviser, general financial adviser and professional financial planner. It is expected to regulate with a distinction made between sales and advice. This is a move in the right direction so consumers can decide whether to be sold to akin to buying a car or choose to be advised, which will be perceived as being the same service as provided by the other professional bodies, lawyers and accountants and the like.

The advice will be provided by the PFP and the onus is on the consumer to act on the advice or not. Whether or not the client acts on this advice, the advice is already paid for by fee and the client is comforted that the adviser is at all times acting on the client’s behalf.

Customer-agreed remuneration is far too complicated for clients to understand and to be able to take an informed choice. The most important thing is that the term independence is only used by those who offer the gold standard of whole of market advice. The general financial adviser route may not be open indefinitely and may even be removed by 2012. The thousands of existing IFAs who do not want to study to get to diploma level may have to move up or down the distribution food chain or leave.

The distribution model brought in by the RDR will polarise distribution, with professional financial planners with stacks of examinations and designations within the firm and the primary adviser route dominated by the bancassurers. As Ernst & Young said in its Issues and impact of the FSA’s RDR report in July 2007, “We need to keep an eye on the blue-collar supervisor who has retirement aspirations of lifestyle and enjoyment but will struggle to find an advice model to fit his needs, not wanting to visit and expensive fee-based IFA (akin to a stockbroker in his eyes) or a bank with whom he has little brand resonance”.

As the paper due this month is an interim paper, the detailed response should follow in October which should include research on the proposals in the detailed responses. This feedback statement will include the full feedback received during the discussion period along with the FSA’s decisions on the future implementation of any regulatory changes coming out of the RDR and the timetable for formal consultation on those changes.

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