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RDR – will it all end in tiers?

With the first stage of the retail distribution review now published, it seems time to step back and summarise how we think the review will affect the IFA community.

To use a cliched analogy, the RDR is a bit like a curate’s egg, good in parts.

Particular parts can be applauded, such as factory gate pricing and increased professionalism, but the overall vision for the future shape of the market still seems somewhat unclear.

The FSA proposes that the market be divided into different tiers of financial advice.

At the top end of the market will be firms that are able to offer full in-depth financial advice and planning based on a client’s full needs.

The proposal is that they are titled professional financial planners. Advisers in this category will need to offer customer-agreed remuneration, which would be a fee or a payment from the product, like Winterthur’s FAR system.

I am not sure there is anything really radical in this. There is already a financial advice and planning industry that does not necessarily rely on product sales. Formalising exam criteria should help consumer confidence.

The concept of customer-agreed remuneration makes sense in this environment and has already been used for a number of years.

Where the problems start is with the next tier down. Advisers that do not fit into the top tier can be general financial advisers.

This is likely to be the majority of the current adviser market. They are likely to have higher levels of regulatory supervision and capital requirements. They could have the same educational level but they will still be able to be remunerated by commission.

Two points concern me. First, if this is the majority of the current market, then why is it suggested that the general financial adviser tier could be temporary?

Second, if customer-agreed remuneration is so desirable, why should it not be an option offered by general financial advisers?

The next tier is primary financial advice, which will cover a range of savings and protection needs, with a limited suitability check when making recommendations. There will be lower regulatory requirements.

Finally, there will be generic advice which will no doubt consist of financial guidance and help which is likely to be unregulated.

What does this all mean? Do we end up with just primary advice and professional advice?

With the introduction of regulation in the 1980s, surely the concept of making sure a product was suitable was just enforcing common sense? Now we seem to be heading for lower standards of suitability and the concept that an “unsuitable” product is better than no product at all.

The consultation ends on December 31,with feedback in spring 2008. This will lead to a consultation paper in summer 2008, with rule changes in 2009. Any transition period on top of this would take us to 2012 – a busy year already with personal accounts and the Olympics.

Much is still up in the air but if I had to finish with one thought, it would be to respond to the paper. With more opinions and views aired, hopefully we will end up with constructive change.

David Thompson

Managing director, Winterthur

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