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The Retail Distribution Review (RDR) introduced wholesale, and often controversial, changes to the UK’s financial advice sector, reforming the way that retail consumers were offered, paid for, and received investment advice. As it approaches its ten-year anniversary, and despite having a huge impact on some of our clients, whether RDR was a positive innovation and had its desired effect remains hotly contested.
The Financial Services Authority or FSA (now known as the Financial Conduct Authority or FCA) implemented RDR in response to its concerns that customers were receiving inappropriate advice and were, therefore, buying products that did not meet their needs. A system of commissions for advisers who sold certain products meant that there were significant concerns about undue influence affecting consumer outcomes. A series of scandals in the early 2000s only confirmed the FSA’s suspicions.
RDR made landmark changes, which were far-reaching across the industry and focused on three core tenets:
- Reducing product bias by banning UK advisers from receiving product commission for retail investment products to UK customers. Instead, consumers had to pay for any investment advice they received.
- Setting higher professional standards for advisers through improved qualifications, ongoing professional improvement and ensuring that investment advisers made an annual statement of professionalism.
- Delineating between ‘independent’ and ‘restricted’ advice models. Restricted advisers focus on a particular market or products from certain providers, whilst independent advisers consider all retail investment products.
Did RDR have its desired effect?
It would be safe to say that in some quarters the reception remains decidedly mixed. Many advisers didn’t like it at the time and many still have grumbles now. Nonetheless, it’s overall effect – to inspire greater independence and accountability amongst advisers – has had a positive outcome for the profession and its consumers.
The advice gap
The biggest and most consistent criticism of RDR is that it has worsened the ‘advice gap’ by making financial advice less appealing to consumers and reducing the number of financial advisers trading. The advice gap is ultimately an issue of access to financial services – how many people are paying for, and getting, financial advice, versus the number who are letting their savings sit as cash. In an era of high inflation, consumers who fail to receive investment advice risk seeing their savings eroded.
It was argued at the time RDR was implemented that fewer people would be convinced that they should pay for financial advice, when previously they were getting it for free. Moreover, many advisers decided to quit or retire early, finding that the additional requirements for training and development burdensome. Those of a more cynical persuasion might argue that the higher standards pushed many out of the industry who should not have been there in the first place.
Initially, the number of financial advisers and product sales did fall after RDR was introduced. In 2015, a study from IRN Research concluded that, between 2012 and 2015, ‘had RDR not been introduced, another 1.8 million advised product sales would have taken place’.
However, it is of course unfair to lay all the challenges of the advice gap at the door of RDR. Since that initial drop the number of advisers has bounced back, and between 2013 and 2021 the number of firms offering retail investment services rose by 11%. The FCA Financial Lives Survey in 2020 found that while only 17% of UK consumers with over GBP10,000 to invest had most of it in investments, the main reason for the low uptake of advice was that clients did not feel that they would benefit from it. Encouraging people to take financial advice is a critical barrier to reducing the advice gap.
The FCA has long recognised the problems created by the advice gap and is still working on an effective way to reduce it. The regulator recently began consulting on proposals to reduce the cost of face-to-face advice for stocks-and-shares ISAs by making qualification requirements more proportionate and allowing consumers to pay for advice in instalments. However, some have criticised the proposals as being too narrow and only marginally reducing the cost of advice. More comprehensive and extensive measures are expected.
The advice gap isn’t the only criticism that has been made of RDR. The demand that professionals undertake at least 35 hours of continuing professional development (CPD) training a year is often cited as an unnecessary burden. Moreover, ‘how’ and ‘when’ some reach that milestone –for example by cramming it all into a week – is evidence for the fact that setting fixed hours requirements does not always drive good behaviours.
Then there is the issue of RDR’s age – at ten years, it is inevitable that some bits of it seem redundant, and that the development of technology requires a new look at some regulations. For example, advisers must orally explain the difference between independent and restricted advice. This does not fit well with modern life or the prevailing direction of financial services, which is towards digital, online consumer interfaces.
The rise of FinTechs in particular has made RDR look dated in places. The rules currently make it difficult for FinTechs to offer low-cost, scalable financial advice. Here, there is an opportunity for the FCA to refresh the rules and make them more compatible with modern life. In September, the FCA announced it would look at the challenges around the boundaries of advice, which has been welcomed by the industry.
RDR looks good for its age
Overall, however, the impact of RDR should be described as positive. This can most easily be seen in the data captured by the FCA, which shows massive increases in the fees taken by advisers over the last decade. Customer charges grew from over GBP995 million to GBP4.5 billion between 2013 and 2021, while the number of retail investments paying commission dropped by 52% over the same period. Consumers are seeking, and paying for, more advice than ever, so from the perspective of the regulator the reforms have had the desired effect.
Moreover, the purveyors of that advice are more transparent about why they suggest certain products. RDR has put a clear onus on individual accountability. Indeed, the removal of product bias was so successful that the model was exported to the EU in the form of MiFID II.
The measures introduced in RDR have generally aged well. The statistics, when measured against what the regulator wanted to see happen, are impressive, while the accountability and professionalism measures have made a noticeable difference. The reaction to the greater independence of advisers has been more muted, however this is understandable given that it is less immediately obvious to consumers than the fact that advisers charge for advice. It has nonetheless been good for the industry and for consumers.
As an additional benefit, some firms decided to extend the scope of RDR to professional clients, as a way of making life operationally simpler. This ‘gold plating’ of the regulations meant that professional clients were offered the same level of investor protection as retail clients.
Looking ahead to the Consumer Duty
The Consumer Duty will touch on the legacy areas of RDR such as adviser charging, disclosures and supporting client investment needs. It will require firms to deliver good outcomes for retail consumers and sets three cross-cutting rules requiring firms to act in good faith, avoid foreseeable harm and support customers to pursue their financial objectives. Many of the RDR changes introduced by the FSA ten years ago touch on these areas and remain relevant ten years on.
The last ten years have seen an evolution in the UK’s regulatory approach – spearheaded by RDR, Mifid II, and now the Consumer Duty. The regulators’ priorities and direction of travel is clear: more and better consumer protection. Some in the industry complain that regulatory regimes have become too burdensome, and that this is making it challenging to be cost effective, especially in broader markets. This is largely where the divides in opinion on RDR were – and where they will likely be for the Consumer Duty too.
This article first appeared in FT Adviser on 21 December 2022.
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