28th February 2011
Richard Saunders, chief executive of the Investment Management Association (IMA), outlines why he welcomes the premise behind the retail distribution review (RDR), but is wary that it may not deliver.
Does the IMA support the central premise behind the RDR – in that the Financial Services Authority (FSA) is trying to deliver a transparent and fairer charging system and increase the professional standards of all investment advisers?
Absolutely we do. The distribution of financial products has been dogged in the past by opacity and misaligned incentives. The FSA are right to try and tackle these. They are also right to seek increased professionalism and transparency with appropriate qualifications for all forms of advisers.
Do you believe, in its current form, the RDR will create a market where prices are transparent for consumers?
Unfortunately, I'm not sure it will. Although advisers and consumers will in theory have to agree charges between them, and product providers will not be allowed to pay commission in its present form, the FSA is allowing providers to ‘facilitate' (in their words) adviser charging out of the product. This is a potentially massive loophole which could result in payments that look very similar to existing commissions.
Specifically, the intermediaries between certain types of product providers and advisers will have the facility to make payments in ways which may not be fully apparent to end customers. And while pricing is in theory agreed by the customer, it is taking a lot on trust to suppose that all the implications will always be fully explained.
Does the IMA support the new pricing model for financial advice which will implement up-front pricing and ban advisers' commission for selling financial products?
If it works, yes. But I'm not sure it will. The impact will vary between different product providers and different types of distributor. This in turn risks distorting competition and may end up encouraging adviser remuneration through the back door. The result of that could be increased costs and less transparency for consumers.
The FSA is nevertheless set on its present course, and we may have to accept that. In that event, it will be important to monitor very carefully how the market develops in practice. There are real risks that consumers will end up paying more in aggregate than they are doing today, because there are real signs in the market that any reduction in product charges will be more than offset by higher advisory fees, and because those higher fees will become subject to 20 per cent VAT.
The fund-management industry has always supported transparency in product distribution. We are fearful that a review which has taken over four years to finalise may not deliver its objectives. That would be a great shame. The regulator will need to be vigilant in ensuring that is not the outcome.
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