Two Cheers For The RDR?

Last Updated: 2 June 2023

How significant are the latest proposals from the UK regulator to reorganise the financial advisory sector?

The Financial Services Authority’s consultation paper on the Retail Distribution Review (“RDR”), released yesterday, is in the headlines this morning.  Broadly speaking, the RDR aims to force financial advisers into one of two categories (“independent” and “restricted”), to introduce full transparency on fees by banning commission bias, and to raise financial advisors’ professional qualifications.

I’ve also had press releases from ETF providers welcoming the latest RDR proposals, since they should give a boost to the fee-based advisory sector.  As we know, ETFs and index funds do not pay commission to intermediaries, so up to now there has been an inbuilt bias against passive, tracker funds amongst some independent financial advisors (“IFAs”).

What stands out in the FSA’s report?

First, the plan to split advisors into two broad categories – independent and restricted – represents a welcome injection of clarity.  Previous attempts to categorise financial advisors allowed both “tied” and “multi-tied” agents, and the latter were often confused with independent financial advisors.  Meanwhile, the “independence” of the IFAs was often more apparent than real, with many reliant on commission, and widespread behind-the-scenes deals taking place with the fund providers to recommend particular products.

Will the ban on commission bias really work?  Here, I’m more sceptical.  The FSA proposes to “ban product providers from offering amounts of commission to secure sales from adviser firms and, in turn, to ban adviser firms from recommending products that automatically pay commission. Consumers will still be able to have their adviser charges deducted from their investments if they wish, but these charges will no longer be determined by the product providers they are recommended.”

Aren’t “adviser charges deducted from investments” the same thing as commission?  Not to dwell on semantics, I suppose that, if the charging policy is stated up-front by the adviser and agreed with the purchaser of advice, there’s a case to be made that this is a more or less equivalent form of adviser remuneration, but I still don’t think this creates a completely level playing field.

For a start, ETFs and index funds won’t have the facility to pay such advisor fees out of their annual charges, so they have an automatic obstacle to overcome.  And how many clients, given the option of writing a cheque of several hundred pounds for investment advice out of their taxed income, or allowing the advisor’s fees to be deducted over time from their investment portfolio, are going to choose the former route?

Second, I’ve worked in the investment industry and know how creative service providers are in offering hidden forms of remuneration: soft commissions, sponsored “free” Bloomberg terminals, foreign trips for analysts, the list is endless.  Can the FSA really stop biases of all kinds?

The third part of the FSA’s proposals, involving the compulsory raising of professional standards, sounds good on paper, but this is the section that will really impact advisory firms’ costs, particularly the smaller operations.  Some people have suggested that the regulator has a not-so-hidden agenda here, of clearing out some of the “dead wood” in the advisor community.  “Exam mania” seems an automatic outcome of UK regulation these days – good news if you are setting and selling the exams, though I’m not sure the public can’t be trusted themselves to shop around, check recommendations, and tell if their advisor is competent or not, particularly if there is to be full fee disclosure.

Will the push to move to fee-based advice deprive the less-well-off from obtaining the services of an IFA, as many critics of the RDR have claimed?  I’m sceptical of this argument.  For a start, one recent study shows that 35% of UK family units have no savings at all, and another 21% have less than £1500.  These people need to try to get out of debt, open a savings account and stick to a monthly plan, rather than obtaining the services of an IFA.  But there is almost certainly going to be further downward pressure on costs, amongst fund providers, IFAs and the platforms that they use, so it’s not really a question of advice being only for the rich.

So, in summary, I’d say two cheers for the RDR.  Any move to insist on clarity in a market for investment products that is notorious for opacity and layers of hidden charges should be welcomed. There are still some potential loopholes for commission bias, though, and the imposition of fresh costs on advisors in the current economic environment is controversial.  And, given the troubled history of the regulation of personal financial services in the UK, it must be right to wait the review is implemented in 2012 before giving a full assessment.


  • Luke Handt

    Hello, my name is Luke Handt; I am a successful Bitcoin trader, financial analyst, and researcher. I have been studying the market trends for the conventional stock exchange system globally since I was in college.

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