Retail Distribution Review- An On-going Disaster?
On 31 December 2012 probably the greatest failure of UK retail customer regulation was set in stone by the then Financial Services Authority
By Geoff Spencer, CEO
8 January 2024
It was the Retail Distribution Review which effectively ended the payment of commission by product manufacturers to anyone who distributed, sold or advised on investment-based insurance and pension products.
It did though allow payment of commission to continue on general insurance and pure protection products.
At a stroke it removed personal financial advice on the most important investment areas for the vast majority of consumers looking for the best way to invest for their long-term needs.
The Financial Conduct Authority have recently said –
“Reforms implemented as part of the Retail Distribution Review in 2012, and the Financial Advice Market Review in 2016 tried to address this topic. Despite this, we know that more needs to be done” Sarah Pritchard (Executive Director, Markets and International).
The removal from being able to receive/afford personal financial advice is without doubt, in our opinion, the greatest unintended consequence of Financial Services Regulation in this, or any other, century!
But why does it have to remain so?
Yes, pre 2013 there were some bad practices, driven by a commission race, that did lead to some consumers not receiving fair value from their investment products as, clearly, high commission payments would eat into product returns. However, times have moved on and we now have in place the two greatest innovations of the regulatory regime post the 2007/8 financial crisis, both of which set demanding standards of behaviour.
Firstly, the Senior Managers & Certification Regime has resulted in greater personal accountability for all those involved in running financial services companies. All Board members, executives, senior managers and other key staff have to be approved persons and have to adhere to the standards and code of conduct behaviours expected of them.
Secondly, the Consumer Duty rules came into force on 31 July 2023. The FCA tell us these are a “game changer”. They set rules, at a personal as well as firm level, including “you must not cause foreseeable harm”. You must also achieve good customer outcomes in four areas, one of which is “Services and Products” which must be suitable for their target market and which are required to deliver fair value outcomes.
Both the above should mean in practice that no firm will be able to pay damaging levels of commission when advising a consumer to take out a particular investment product. If that is so then why do we still need the Retail Distribution Review rules, which deter the vast majority of customers from obtaining personal financial advice? As long as the customer knows the level of commission, and its effect on their investment returns, then harm is not done and many millions of consumers will once again be able to obtain expert financial advice they so badly need and want.
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