RDR to herald major changes in financial services industry

The Retail Distribution Review (RDR) proposals released on 7 November 2014, while needing scrutiny by the financial services industry, will affect intermediaries, product providers and consumers.

The RDR, which is open for comment until 2 March 2015 and is expected to be implemented in mid-2016, introduces “a variety of overdue proposals designed to better protect retail financial services customers during the distribution process by ensuring that they are treated fairly and equitably by their financial advisors,” explains George Cavaleros, partner at Deloitte.

Current model fraught with risks

The FSB’s view is that the current retail environment is fraught with risks affecting fair customer outcomes and that all retail customers require regulatory protection. “The risks include possible lack of consumer financial astuteness and disparity in negotiating power between customers and product providers or intermediaries,” says Cavaleros. “In addition, intermediary remuneration models are perceived to be unclear and confusing to customers.”

The current environment supports a relationship structure between product providers and intermediaries that is not always in the best interests of the consumer, often resulting in inappropriate advice being given or products “mis-sold” to customers. “The consequent conflicts of interests are not easy for customers to always identify, appreciate and defend against,” comments Cavaleros.

He adds that the current distribution framework negatively impacts intermediaries in that they do not receive fees for advice where a product is not ultimately sold to the customer. “It also detracts from the FSB’s effectiveness to regulate the current retail environment given that product providers are not, from a legislative viewpoint, held as responsible as advisors for failed or inadequate customer outcomes.”

Challenges for intermediaries

“The degree of consumer trust in financial advisors needs to improve beyond the gains made by the Financial Advisory and Intermediary Services Act (FAIS),” says Cavaleros. He adds that products and advice must be appropriate to consumers’ needs, who should be able to understand and compare the nature and value of the services offered.

Intermediaries of investment products will not be able to earn commission. Similarly, investment product providers will be prohibited from paying any remuneration to intermediaries, other than advice fees agreed with a customer.

But intermediaries are likely to oppose the new legislation on the grounds of cost of compliance and anticipated dwindling revenue, which could mean that financial advisors who are unable to adapt to more consumer-centric models may find themselves forced out of business.

“The increasing costs of regulatory compliance and of doing business in a falling income and more competitive environment may place a significant squeeze on future profit margins and business sustainability for intermediaries,” says Cavaleros.

Cavaleros explains that intermediaries may move up the value chain focusing on the affluent and mid-market segments, while the lower mass market who would most benefit from financial advice, may be marginalised by advisors. “This could be an opportunity for product providers to create products that comply with the “no advice” or ‘low advice’ distribution model envisaged by the FSB.”

On the whole, however, the RDR proposals should offer the financial services industry a more sustainable approach to advice-led solutions. As Cavaleros concludes: “Together with the FAIS and Treating Customers Fairly (TCF) regulations, the RDR should not only further enhance customer protection, but will create a sustainable financial services retail market and distribution environment of trust in which all stakeholder interests are aligned and from which all can benefit.”