Critically, the FSA’s review only covers those products that fit its definition of investment products and does not extend to either mortgages or general insurance.
So far the FSA proposals are just that, but enough has been said to see that changes are going to be introduced which will affect the way in which investment products are sold.
It is important to understand why the FSA considered a review necessary. For some time it has been possible to identify a number of issues within the market for investment products.
Many traditional means of marketing have only achieved limited success and there have been cost issues that have caused many distribution mechanisms to close.
The withdrawal of direct sales has resulted in a significantly reduced penetration of these products. There are now many people who have withdrawn from the savings arena and, maybe by default, do not have adequate insurance. These same sales forces were also responsible for a large number of GI sales, which are now not being brought to the attention of individuals.
Another key factor behind the FSA’s review was the recognition that many of the product providers were not achieving a level of profitability that would sustain them in the future. Sales incentives traditionally offered advisers up-front commission and too many policies and plans were cancelled before the front end costs had been recovered. This not only impacts on the profitability of producers but also leads to poor value for the consumer.
The solution needs to address all of these points.
These issues do not apply in the same way to the mortgage industry. There is no evidence that the mortgage market, in particular the prime market, is broken in the same way as the investment sector.
However, many of the firms impacted by RDR are also involved in mortgage business. FSA figures show nearly half the directly authorised mortgage firms can also give investment advice. Their management will be making changes to their business to take account of RDR requirements affecting training, documentation and customer communications.
If the investment sector moves towards a fee-based service, there is a logic that would drive mortgage advice in the same direction. If investment advisers commit to offering their clients higher standards of professionalism, then those clients should legitimately expect that their mortgage advisers will operate to the same standards.
The RDR will inevitably have a very significant impact on the bank-assurance sector. New classes of low-cost products will encourage simplified distribution mechanisms and again there may be some carry-over into the mortgage market.
For clients not seeking advice, branches may be able to provide easy access to information-only services and there will inevitably be a gradual move towards web-based services. Simplified services may be appropriate for some but for the increasing numbers who are facing the difficulties of renewing their contracts in an ever more difficult market they may not provide the answer.
RDR will impact on the way in which business is done. Advisers must watch developments carefully and determine the action that they need to take.
Richard Fox is chief executive of the Society of Mortgage Professionals