RDR: Lessons from the UK

Over the past few years we’ve seen a number of changes in the regulatory landscape – all of which have brought about significant change in how service providers and intermediaries conduct business.

Conflict of Interest legislation was quickly followed by the introduction of Regulatory Exams (RE) and Treating Customers Fairly (TCF) regulation. Retirement reform remains a work in progress, although the introduction of a tax-efficient savings vehicle has been earmarked for March 2015.

One of the next steps on our regulatory journey will see changes in how intermediaries are remunerated for their services – known as Retail Distribution Review (RDR) in the UK and Intermediary Remuneration Review in South Africa.

Once again, the Financial Services Board (FSB) will be taking its cue from changes that have already taken place in the UK.

Changes in the UK

Essentially, clients should be aware of the following when they get advice from financial intermediaries:

  • Advice has never been free and financial advisers are compelled to be transparent about the cost of their advice. Clients need to know to whom they’re paying fees and what these fees are for.
  • There are two categories of advisers in the UK – restricted and independent – and they have to make it clear which products they can advise clients on. Restricted advisers will, for example, deal with only two or three platforms. (They’re not tied agents). Independent advisers can advise on any product – although many advisers have changed, and continue to change, to restricted status. This is because UK legislation requires independent advisers to give whole of market advice each time they see a client, making it an expensive and time consuming way to service the client.
  • Minimum professional standards of qualification for financial advisers have been increased. Advisers are also required to sign an agreement relating to TCF, and firms are monitored to ensure they meet these standards.

Key areas affected

As noted from a recent UK trip, there are several key areas that are affected. We consider a few of these:

Fees

Advisers are no longer allowed to receive commission. They can receive fees only as negotiated with the client. Along with this, initial fees have – almost – been done away with in the UK platform industry. The level of disclosure between clients and advisers has increased dramatically, often resulting in more documentation to explain to the client exactly what they’re buying.

Behavioural changes

Following the implementation of RDR in the UK, it’s estimated that almost 12 500 intermediaries have left the industry in the UK, resulting in a 25% reduction in IFAs. Many retail banks have closed their tied agencies. Advisers no longer spend their time on portfolio construction but rather on identifying, quantifying, understanding, prioritising, fulfilling and servicing their clients’ financial needs. As a result, multi-management and risk-profiled solutions have become more prevalent.

Passive investment solutions

With more pressure on fees and increased disclosure, passive investments have seen significant growth in the UK over the past few years – giving investors exposure to world markets at reduced fees.

Product provider and intermediary relationship

Regulation that requires a greater level of interaction between product providers and independent financial advisers is resulting in more frequent training sessions to ensure these advisers understand the products and are properly accredited and equipped to sell them.

Direct business

Direct business has increased since the implementation of RDR in the UK. The baby boomer market segment in the UK is currently regarded as the main market for direct business. It’s estimated that roughly 50% of this market segment seeks validation only from an IFA – they’ve already identified, quantified and prioritised their financial needs by doing research via the internet.

The local approach

In South Africa the distribution landscape is complex, with a range of different distribution models from which clients can select. The FSB recognises that significant changes introduced in how this market operates could introduce risks to investors as well as intermediaries.

What they’re positive about is the fact that due to initiatives such as RE exams, the financial advice industry is seen to be more professional.

The industry regulator is currently considering some of the areas to be addressed locally and we expect a discussion paper during the second half of 2014.

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