07 Jan 2015

RDR two years on- How has it affected consumers?

The Retail Distribution Reviews (RDR) aims were to make it clear to consumers how much they should pay for financial advice, what exactly that are paying for, and improve professional standards by introducing a minimum level of qualifications for all investment advisers.

It slowly turned into one of the most controversial pieces of financial regulation to be implemented in the UK, and spurred much debate and criticism.

So, two years on how has the RDR really affected consumers? Do they now receive advice with more clarity? Have professional standards improved? Has the RDR really made things better for consumers?

In a report by the FCA released on the 16th December 2014, called “Retail Distribution Review Post Implementation Review”, [http://fca.org.uk/static/documents/research/rdr-post-implementation-review-europe-economics.pdf] claims that the market has been split into two consumers:

  • Those who can and will pay for financial advice
  • Those who can’t, or won’t.

This has inadvertently created an “advice gap”.

For those who can…

Research has shown that consumers who can easily afford to pay for advice are willing to do so.

This type of consumer now has access to a more professional and transparent service, from better qualified advisers, as a result of the changes brought in by the RDR.

The independent advice vs. restricted element of RDR means consumers now know whose products they are being sold, and they can choose to receive completely unbiased information if they wish. Consumers are also aware of exactly how much they are being charged, and understand the true cost of advice.

So, for the first type of consumer who can, and will, pay for financial advice, initially it looks like the RDR has achieved its goals and made the industry more transparent. There has, although, been many downsides for the second type of consumer.

For those who can’t…

The second type of consumer can be split into three types of person:

(a) Those not engaged in the investment market;

(b) Those unwilling to pay for advice at true cost; and

(c) Those seeking advice but where firms are unable or unwilling to provide them advice.

Here the RDR has created a challenging advice gap and a section of customers who are unable to get financial advice, such as customers who have small amounts of money to invest or are not able to pay large hourly fees for on off advice on subjects such as pensions, savings, or insurance.

Many high street banks, where low investment consumers are more likely to seek advice, have pulled out of offering financial advice as “they could not continue giving cost effective advice at those levels”.  The implementation of RDR also meant that some advisers require the minimum of £1,500 investment from each client to sustain the amount of money they need to operate as a business, as they could no longer take commission from returns.

Smaller clients are being phased out and ignored in every aspect of financial advice since the introduction of RDR. Consumers for whom advice is not economic given, the small amounts they have available to invest, are increasingly reliant on using the internet to find information and invest direct. These people may not realise the reduced protection they have and could make investment decisions that leave them worse off as a result.

The changes that RDR has had on financial advice

Money Marketing recently reported that more advisers are continuing to outsource investment management post RDR, and the number of smaller clients being “shown the door” is on the rise.

The effect of RDR looks to be significantly reduced access to financial advice among consumers with less than £150,000 investible assets. There now seems to be an “advice gap”, which has been only furthered by the loss of financial advice on the high street.

Although it may be too early to see if the RDR has met its targets, there have been both improvements and negative effects for consumers looking for financial advice. The creation of an “advice gap” between wealthier and smaller clients has become evident, but the industry does seem to have become more transparent. The FCA has claimed that the RDR has reduced product bias, commission is no longer a drive in advisers recommendations, which improves their overall experience and an increasing number of advisers are gaining further qualifications. Regardless of this, adviser charges have not decreased.

Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), said:

‘The RDR aimed to create a truly professional financial advice sector; one that provides advice based solely on investors’ best interests. It is still early days but the indications are that the sector has responded positively to the reforms.

‘Importantly, we have seen a reduction in product bias, with a very noticeable decline in the sales of those products that before RDR came with higher commission.

‘These are positive signs but we know there is more to do. For example, early next year we’ll be looking at how we might encourage better disclosure of information to consumers. And, in 2017 we’ll undertake a further review of how the RDR has worked. It is vital that we continue to keep these wide-ranging reforms under review.’

Some experts now believe that the implementation of the RDR should have been done differently. Although its aims where to make the market a better place for consumers, access to advice and products should have been one of its objectives. The RDR should have looked at improving professionalism and changing remuneration practises that improves consumer outcomes for both wealthy clients and smaller investors.

If you would like to know how the RDR has effected financial advisers and their businesses, read our blog next week and discover how things have changed in the last two years.

By Rosa Mitchell