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Retail Distribution Review: opportunity, challenge or just plain confused?

At the end of last year the financial services regulator implemented what is arguably the biggest shake-up for the financial services sector since the introduction of the 1986 Financial Services Act.

On 31 December 2012, the Retail Distribution Review (RDR) was introduced. It contained a number of key measures that are intended to professionalise the retail investments sector. The RDR effectively brings the commission system to an end, replacing it with a fee-based model referred to as “adviser charging”. The intent behind this regulatory change is to remove the incentive for product bias across the retail investment advice sector.

All retail investment advisers will also have to meet higher qualification standards, comply with an overarching ethical code and meet mandatory CPD rules. From 31 December 2012, retail investment advisers must hold a statement of professional standing (SPS), issued by an approved ‘accredited body’. SPSs will be issued on an annual basis.
The RDR also changes the way retail financial advice firms are categorised. Under the old regulatory regime, financial advisers were classified as either independent (IFAs) or as tied or multi-tied agents.

IFAs had to offer a “whole of market” choice of products, with customers having the option of meeting the costs of advice on either a fee or commission basis. Tied and multi-tied agents only had to offer advice on a limited range of financial products and could do so on a commission-only basis.

In the post-RDR world, there are now only two types of advice firm – independent and restricted, with both types of adviser having to operate the new “adviser charging” model. Independent advisers must consider all types of potentially suitable retail investment products, whereas restricted advisers can limit their assessment to a restricted range of products.

Provided it is made clear, independent advisers can limit their range of activities to a narrow advice market, such as advising on ethical investments, or clients that only require advice on securing an income in retirement.

So what does this all mean for accountants?

First, the regulatory reclassification is likely to create many shades of grey in the restricted advice segment. Under the pre-RDR regime, it was arguably clear what range of products a financial advisor was supposed to cover: either ‘whole of market’ or limited to the range of products covered under some sort of tied-agency arrangement.

In the new world of independent and restricted advice, the delineation is not necessarily so clear-cut. Firms will be obligated to make it clear whether they are categorised as independent or restricted advisers. To make fully informed investment business referrals, accountants will therefore need to understand the practical implications and nuances of the post-RDR regime. 

Second, change offers opportunity and accountants are well positioned to benefit from the regulatory changes and associated demise of the commission system. Accountants are well placed to become more actively involved where their clients are likely to need this sort of advice and in so doing, to add value to their own businesses. This can be achieved in a number of ways, either by working more closely with external professional financial advice firms or by exploring ways to deliver aspects of this type of service in house.

Suggested further reading

Want to gain more insight into developments the sector?

The Financial Services Faculty is hosting a full-day Wealth Management Conference on 13 September at Chartered Accountants’ Hall. The ticket price also includes membership of the Faculty until the end of 2013. Find out more and book your place.

August 2013