09 January 2012

FTAdviser: RDR - Preparing for the unknown

Although the Retail Distribution Review has been more than five years in the planning and the making, the industry faces a number of uncertainties when it comes to the implementation of the RDR in 2013.

These uncertainties include the impact of VAT on financial advisers’ fees, new rules for investment platforms, and the EU’s Markets in Financial Instruments Directive (MiFID) and Packaged Retail Investment Products (PRIPs) review. It is hardly surprising, therefore, that there is still much for many advisers and asset managers to do by the end of 2012 to comply with the RDR and a number of implications for how both will operate in the future.

First, advisers must formally declare their status – independent or restricted – and provide either independent or restricted advice. Second, advisers must set up a range of fees for their services. They will have to take into account clients’ needs, effective means or services to meet those needs, how the charge is to be levied and an effective explanation as to how clients will benefit from these charges.

Fundamental change

The move from commission to adviser charging is a fundamental change to the way the UK retail market operates. There is pressure from consumer groups to lower charges but the demands of increased regulatory requirements have a strong counter effect. The bigger and currently more difficult decision is what price will asset managers set for their funds. Will the industry take the route of transparency and sell all their funds at a flat rate –say, 0.75 per cent to 0.85 per cent – or tier according to point of access?

Moreover, when dealing with these issues, asset managers have to take into account not only the existing RDR proposals, but also further sets of potential regulation. The implementation of the RDR has been split into two: there will be further consultation on rebates to platforms and cash rebates to clients, with a decision expected around the end of 2012. The EU’s MiFID II, which overlaps with the RDR in certain areas, could also come into force in 2014 or 2015.

RDR II will no doubt follow and, depending on timing, combine with the adoption of MiFID II. If transparency remains a key objective and simplicity is best for investors, it would be natural to expect the introduction of a complete ban on cash rebates and a removal of fund manager fees paid to platforms. Execution-only business may also be included, with commission payments ceasing. This could be very difficult for advisers as they will have to communicate with their clients on such issues twice, and in short succession. Advisers should start a rolling communication plan to prepare clients for the expected changes – both real and anticipated.

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