Criticism of industry masks fact that RDR changes may not have benefited consumers, says expert

Out-Law News | 10 Sep 2014 | 11:29 am | 3 min. read

Criticism of the way businesses operating in the retail investment advice market have approached changes in regulation should not disguise the fact that the changes themselves may not be benefiting consumers, an expert has said.

Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the Retail Distribution Review (RDR) delivered widespread changes to the way businesses in the retail investment advice market operate. He said it was therefore no surprise that some companies wanted more time than they were given to implement the changes before they took effect.

"As with all structural change, there will be those who embrace it and get on with it and those who are, shall we say, a little more reticent," Geiringer said. "The reforms introduced in 2012 as a result of the new rules and guidance which came out of the RDR were debated over a long period of time. The regulator, then the FSA, shifted quite a few times during the consultations and many of the proposals that the FSA published were changed three or four times at least.  So I think it is wrong to say that the industry had a long time to make these changes."

"The changes from the RDR were far-reaching, pretty radical compared to the rest of Europe at that time and required a significant step change up in a number of crucial areas, such as training and competence, systems and documentation. These take time to deliver in any industry," he said.

Geiringer was commenting after Sue Lewis, chair of the Financial Services Consumer Panel (FSCP), said financial services companies can be blamed for bringing at least some of the costs of regulation on themselves.

Lewis said "it almost seems [financial services companies] have to be dragged kicking and screaming instead of doing the right thing" and that this impacts on the number of new regulations that are needed and the subsequent costs of regulation to both those businesses and consumers, according to a report by the FT Advisor. Regulating "takes a long time" and is "expensive" and the more rules that are created "the more expensive regulation becomes", Lewis said.

She cited industry's gripes about the reforms contained in the RDR and the lack of time they felt they were given to implement those reforms. Lewis said, though, that companies operating in the retail investment advice market had years to prepare for the RDR and instead "kicked and screamed and resisted it" and are now "trying to find ways around the rules", the FT Advisor's report said.

However, Geiringer said discussion about industry's approach to the RDR is of less importance than whether the reforms are actually delivering more positive outcomes for consumers.

"The FCA which has inherited the outputs from the RDR has yet to complete its full post-implementation review," the expert said. "This recognises that it takes time for structural change to work through the system and show demonstrable and measurable results. We await the outcome of that review and meanwhile, we have noted the two thematic reviews which unfortunately show, that in some quarters, the adviser market has not embraced the spirit and letter of the RDR changes and more is needed to be done, possibly using enforcement action to get attention."

"Whilst this is a concern, what is more important is whether the RDR has served customers and potential customers well in the retail investment market. It is not clear that it has. There is ample evidence to suggest that the 'advice gap' is increasing as potential retail investment customers, unable to afford adviser charges, are being left behind or to fend for themselves via non-advised routes that place the onus on the customers to achieve a good outcome for themselves. Where is the customer protection in that?" he said.

Geiringer said that the FCA had received heavy criticism from the UK parliament's Treasury Select Committee on Tuesday for not doing more to close the advice gap. He said the Committee had also accused the FCA of being a barrier to the development and availability of new forms of product distribution as well as more cost effective advice.

Geiringer said it is timely that the FCA is currently consulting on retail investment advice issues and called on industry to respond to the Committee's accusations and "ask the FCA for more help to ensure good outcomes for more customers".

According to the FT Advisor's report, FSCP chair Sue Lewis called on industry to be more transparent, including being more "upfront about costs" and not "burying" those details in long consumer contracts.

Geiringer said, though, that transparency requirements are only effective "so long as people read the information put before them".

"For over 30 years, the various regulators have all had a go at forcing the industry to make clear disclosure of charges and key features of their products," he said. "For packaged retail investment and insurance-based investment products (PRIIPs), the industry has another disclosure regime coming down the line for them to wrestle with. It’s not the fault of the industry if disclosure has not worked as it has only done what the regulators have mandated it to do over the years. Like a horse can be taken to water, you can’t make customers read the documentation put in front of them if they don’t want to."