Retail Distribution Review

The review of the distribution of retail investment products was originally announced in November 2006. A discussion paper was then published on 27 June 2007 (DP07/1). It stated that the review covered -

• the distribution of retail investment products and services by any regulated entity, including banks, building societies, insurers, fund managers and financial advisers; and
• the sales and distribution of investment products both advised and non-advised.

Five working groups were set up to consider the issues and identify potential solutions. They were asked to consider five themes:

• sustainability of the distribution sector;
• impact of incentives on advice processes;
• professionalism and reputation of the sector;
• consumer access to financial products and services; and
• regulatory barriers and enablers for the market solutions.

Given the focus on retail investments, mortgage lenders were not represented on any of the working groups. The DP stated (para 1.7) that the FSA did not intend any read-across to the mortgage and general insurance regimes. However, it acknowledged that the provision of mortgages and general insurance was often linked to provision of investment advice or services and stated that "as such, the market may choose to apply the ideas put forward in this paper to other types of business and we would be interested in feedback on the implications of this."  

The DP identified a number of shortcomings in the current distribution structure: it suggested that distribution should be segmented more in terms of the services provided to consumers, rather than the current product-led or status-led structure (tied, multi-tied, independent) and envisaged five tiers of advice:

• Full advice
• Focused advice
• Primary Advice
• Generic Advice
• Non-advised purchases and sales

given by three types of adviser -

• Professional financial planners
• General financial advisers  
• Primary advisers

It also put forward proposals for -

• improving the qualifications and professionalism of advisers;
• an enhanced role for professional and trade associations;
• revised remuneration arrangements: one model considered is the Customer Agreed Remuneration or CAR approach (also known as "factory gate pricing" whereby providers price products excluding charges to cover the costs of remuneration to advisers for their services. Advisers and consumers then agree the level and pattern of remuneration and add charges to the product cost as agreed.

The closing date for comments on the DP was 31 December 2007. We did not submit a response. 

The FSA has published an interim report setting out the current thinking on the RDR. Feedback to the DP called for a simpler marketplace, particularly a clear separation between sales and advice. The interim report, which is not a final policy document, sets out how this might be achieved, as well as acknowledging the significant challenges this separation poses.

A full feedback statement will be published in October. This will set out in detail the regulatory implications and timetable for change, once further work has been done.