Introduction

On 29 April 2008 the FSA published an Interim Report on the Retail Distribution Review (RDR). The Interim Report set out the principal areas of feedback that the FSA received on Discussion Paper 07/1: A Review of Retail Distribution (DP07/1).

In the Interim Report the FSA provided high level feedback on the proposals set out in DP07/1. The Interim Report is seen by the FSA as a continuation of the discussion process and not the final analysis.

Commitment

Obviously everyone’s attention is currently focussed on the impact of the credit crunch. However, the FSA believes that this has not reduced the importance of its retail priorities. The FSA remains committed to ensuring that firms keep to the December deadline for treating customers fairly.

The RDR remains a key priority for the FSA, complementing its work on improving financial capability and on ensuring that firms treat their customers fairly.

Approach

The FSA’s approach to the RDR has been to work with the market to identify and stimulate market-led approaches. The ideas from industry were set out in DP07/1.

The FSA’s aim in DP07/1 was to set out specific ideas from industry groups, but to do so in a way that provided incentives for firms to set up higher standards, or offer new services to customers where demand might exist. This resulted in the FSA proposing two tiers for advice and three tiers of adviser.

Feedback

The Interim Report is a continuation of the discussion process on the RDR and not the final analysis. In all the FSA received 888 responses to DP07/1 and the key feedback points were:

  • The proposals to separate the market into different tiers of advice were too complex and would be too confusing for customers, particularly when additional dimensions were added such as the possibility for advisers in different tiers to be tied, multi-tied or independent. The message was to keep things simple.
  • The advice brand should not be diluted. Firstly, it would be better if the proposals for “primary advice” be described as “guided sales”. Secondly, it should be easier for consumers to distinguish between a process that focuses on individual needs (and may or may not result in a product sale) and one which is intended to sell them a product.
  • The proposals to raise professional standards for those giving advice were generally supported.
  • Independent means “whole of market” – in other words choice and range of offering as well as free from conflicts. However, further discussion on this is needed in light of wraps and platforms.
  • Existing methods of remuneration should not be closed down. Some feedback suggested the FSA apply a more principles-based approach to remuneration whilst other feedback suggested a more interventionist approach.
  • Liability risk is a real barrier to market development. There was support for the introduction of a “long-stop” limitation period for complaints although consumer groups were strongly against this and some firms thought this would adversely impact industry's reputation. The FSA has found it difficult to justify on cost benefit grounds.

Keeping things simple

In light of the feedback the FSA believes that there is significant merit in making the future landscape as simple as possible. In a recent speech the FSA has stated that it wants to build on what many say is the most important test of regulatory change: the extent to which consumers will be able to understand the different services available to them. In addition to simplicity the FSA is committed to ensuring that the market can meet the longer term needs of consumers.

Three distinct services

In the Interim Report the FSA states that the starting point is to have three distinct services for consumers. These are advice, sales and money guidance.

Advice

There would only be one type of adviser and there would be a step change in the standards required of advisers which would build on the existing requirement that a firm must act honestly, fairly and professionally in line with the best interests of its customers. All advisers would be independent, both in terms of status and in their practices, operating remuneration determined without product provider input and recommending products from across the whole market.

Sales

The starting point for sales in services would be that they are strictly non-advised. However, this is only a starting point. The FSA recognises the limits of pure execution only services for complex products and recognises that it has to give guidance to firms and help find a way to help customers make a decision.

Money Guidance

A new national information and guidance service is proposed. This service would be called Money Guidance and the FSA is working with HM Treasury to see how this can be developed.

Sea change

An important point to note is that there has not been a sea change in FSA thinking between DP07/1 and the Interim Report. The Interim Report builds on DP07/1 and the proposed simpler landscape reflects the feedback.

Many of the proposals in DP07/1 remain including higher professional standards for advice and the possibility that the FSA might develop a new regulatory regime to sell simple products.

The big difference is that there is a less complex tiering of services and only one type of adviser which is closer to the professional financial planner than the general financial adviser which means a change in minimum standards for all.

Remuneration

In the Interim Report the FSA has provided a high level description of how remuneration might work as part of a step change in standards of advice. Whilst recognising the difficulties the FSA wants to stop product providers from playing any part in the determination of advisory remuneration. However, the FSA is not seeking to end the role for product providers in organising payments to advisers from clients’ accounts or investments.

The FSA is not stipulating that clients must pay fees by cheque (unless they want to), nor is it proposing to prevent product providers advancing payments to advisers and recovering the cost over time from charges on the investment or product. However, in either case the product provider cannot play a part in deciding what gets paid. This is effectively the customer agreed remuneration proposals that were set out in DP07/1.

Mortgages and general insurance

In DP07/1 the FSA had no plans to read across the RDR from the investment market to the mortgage or general insurance markets. In a recent FSA speech this was confirmed, however in the same speech it was also stated: “….we still have an open mind about where the review goes, but if feedback and our own analysis suggest a wider application then that is something we will of course consider and discuss openly with the market.”

Challenges to industry

In the Interim Report the FSA issues three specific challenges to industry and these are:

  • The FSA challenges more product providers to change their business models so that they do not determine how much advisers are paid.
  • The FSA challenges industry to develop and implement an agreed common framework for professional standards.
  • The FSA encourages firms to present propositions for new sales services and challenges them to make the case for FSA action to help implement their ideas in a way that delivers better outcomes for consumers.

Next steps

The FSA will publish a Feedback Statement on the RDR in October 2008 which will contain:

  • A full analysis of the responses to DP07/1. This would include a further analysis of what consumers understand, and the industry means, by “advice” and “sales”; the legal issues and possible competition issues of regulatory intervention; and the economic impacts on the retail investment market of a split between advice and sales.
  • An update on the progress industry has made to the FSA’s three specific challenges. 
  • Comments on the features of the market the FSA is seeking to deliver through regulatory change.
  • How the FSA might make that change happen and how it would like industry to respond. The FSA still favours market led solutions where appropriate.
  • A timetable for possible regulatory changes and necessary transitional arrangements