Before I look at some specifics of the RDR and, in particular, how it may affect structured products, it would be remiss not to remind ourselves of the ethos behind the review.
Essentially, the FSA is looking to remove provider bias on remuneration and generally raise professional standards across the investment industry. The regulatory framework will be developed and revised to support delivery of these aspirations without inhibiting future innovations where this may benefit consumers.
In short, give the word "independence", in so far as it relates to advice, back its true status. Having said all that I do not believe the RDR will enhance the advice model going forward. My own view is that RDR, in its current format, may result in less people accessing quality advice which I have to believe was not in the original objectives.
Advisers would definitely appear to be divided on many of the proposals contained within the latest consultation paper with many either extolling the virtues of the ill-fated RDR or declaring doomsday on the industry! I say ill-fated as no matter what the eventual outcomes, it is bound to upset and disappoint more than not.
Will RDR deliver what it set out to achieve? Who can say, that is not the purpose of this short article. What is clear is that we are now on CP 09/18 which has been published following much debate and dialogue within the market since the initial FSA discussion paper in 2007.
Implementation of these proposals is targeted for 2012. In summary, there is still a lot of talking to be done and undoubtedly many things will change time and again before the results (good or bad) are embedded. Let's not forget that we also have a general election between now and then which may also bring additional or differing sweeping changes to our industry.
"RDR spells the end of IFA commissions", "IFA market to consolidate following sweeping industry changes", "Structured Products providers need to rethink business models", "RDR could cost £10k per registered individual", etc are just some of the comments I have read or heard over the past few weeks or so.
Whilst many of these comments may be true, I do take exception to the notion that Structured Product providers may need to change our products and business models to cope with RDR ramifications. In addition the comments from some that many of these "opaque and complex" products cannot be sold without high adviser commissions are simply not true.
Many Structured Product providers may indeed be caught by these proposed changes to adviser remuneration however this will be by default and not design. One of the key benefits of Structured Products is that they are quickly able to adapt to change including not only adviser remuneration, but also product design.
Ignoring any minor operational issues that need to be considered, providers will very quickly be able to change the way that Structured Products are marketed and designed whilst some of the more traditional investment houses and life companies, may not be as fortunate. Contrary to general industry comment, Structured Products are not designed with hidden charges and costs and are in fact built in a very transparent way.
The Guarantee and performance elements of any plan have specific costs and added to these costs currently are product provider charges and adviser commissions. Removing the adviser commission part is very straightforward with the performance element of the Plan simply being enhanced as a result.
Removing commissions from a unit trust for example will enhance the invested amount but will not enhance the performance of that particular fund per se; it will simply remove the initial charge and reduce the ongoing annual management fees, neither of which a Structured Product has.
In addition, post RDR, adviser firms will need to describe their services as either ‘independent advice' or ‘restricted advice'. For the purposes of this article I'd like to focus on ‘independent advice'.
To be ‘independent' firms will need to offer advice on packaged and retail investment products. The latter category includes unregulated collectives, investment trusts and structured investment products (i.e. all structured products except structured deposits which I'll comment upon later in this article).
However, firms will still be able to provide independent advice on just a specialist relevant market, e.g. Pensions, provided the client is aware that the advice only relates to this specialist market. Providers and advisers will also need to disclose separately, both the costs relating to the product and the cost of advice respectively. As I have alluded to above, these changes present no major concerns for Structured Product providers hopefully ensuring a fairly smooth transition.
The situation with regards to Structured Deposits is not clear from CP09/18. Structured Deposits are specifically excluded from the scope of the RDR therefore the situation for these products may be unchanged following the implementation of RDR.
Investec will be replying to CP 09/18 to seek further guidance and clarity on several points including this, however it may well be the case that providers may still be able to offer Structured Deposits including adviser commission post RDR.
To finish on a positive note, I do believe there is substance to one recent headline, "RDR will give advisers ‘control' over their finances". Whilst not perfect, the remuneration proposals WILL remove provider bias AND give the word ‘independence' back its proper status.
I also believe many Structured Product providers are well placed to ride the RDR wave and demonstrate that transparency in product design and changes in remuneration will not result in the chaos predicted by some.
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