The Retail Distribution Review (RDR) came into effect on the 31 December 2013, heralding a radical change to the way in which retail investment products are sold, with the ambition of improving standards of financial advice and transparency sale of financial products to consumers.
Now, one year on, can we draw a meaningful assessment of what the impact has been on the industry? The FCA is due to review RDR by measurement of the short term indicators towards the end of 2014. Although the review should provide us with a clearer picture of the impact of the RDR, there are certain implications that are clear.
The main change brought under the RDR was the ban on certain commissions. Under the new rules, firms providing independent or restricted advice to retail clients on retail investment products can only be remunerated by an adviser charge agreed with the client in advance. This rule however does not apply to those selling pure protection products such as critical illness, income protection and non- investment life insurance.
During 2013, most life insurers reported a drop in sales and new business from 2012, with some insurers reporting an over 10% drop in life and pension sales in the UK. Other trends in the market included a fall in the number of advisers and the widening of the ‘advice gap’.
It may be that these indicators are attributable to the ban on commission and the qualification requirements introduced by the RDR - however it is perhaps misleading to simply pin these trends on the RDR, as 2013 also saw changes to the insurance accounting rules and the introduction of the Gender Directive, which, according to some industry sources, brought to bear their own challenging effects on the market. At a recent speech, Martin Wheatley, chief executive of the FCA, asserted that advisers have generally benefited from the RDR, as professional standards increased and revenue increased.
However, in its thematic review into life insurace and advisory firms’ compliance with the RDR, published in September last year, the FCA found that some life insurance firms still had arrangements in place that undermined the RDR’s objective to remove commission bias in financial advice. Two firms were referred to enforcement for potential rule breaches. The FCA published its final Guidance in inducements and conflicts of interest earlier this month (see news item below): this publication is clear that firms must focus on non-monetary and potential future benefits to customers arising from their commercial arrangements with contracting partners, as well as purely financial rewards.
A recent survey indicated that confidence, activity and profitability in the life insurance industry are at its highest since the introduction of the RDR last year. Life Insurers are particularly focused on investing in IT and compliance to improve efficiency and enhance distribution channels, which is vital to growth following the introduction of the RDR.
Accordingly, after a tough transition period, the industry appears to be adapting to this new modus operandi: it is our hope that firms will now be allowed a measure of breathing space to consolidate and develop their businesses, especially as insurers focus their energies and resources on preparation for the implementation of Solvency II.