What it means to you - the effect of the retail distribution review (RDR) so far!Posted by Chris Rowe
Chris Rowe explains how banks are unable to offer a consistently high level of advice service since the introduction of RDR.
The first of January 2013 is a date that many firms that operate in the financial services sector will see as very important for many reasons and the changes that it has presented do have an impact on the consumer. What has been the effect on these firms and more importantly what do you as a consumer have to consider in the wake of its introduction?
Changes brought in by the Financial Conduct Authority (FCA), (formally the Financial Services Authority (FSA)), the ‘retail distribution review’ (RDR) see the payment of commission for investment advice abolished and all advisers will also have to pass a higher qualification as a minimum in order to do their job.
From January 2013 anyone to get investment advice has to pay an ‘adviser charge’ agreed with the adviser. This can either be paid as a separate fee or deducted from their savings. This will replace the system of commission in which insurers and fund managers paid advisers each time they recommended one of their products. The FCA and other critics said the commission system gave the public the misleading impression that advice was free, when in fact consumers paid for it through higher product charges.
Although the RDR reforms which have been scheduled for several years the radical changes they entail have caused upheaval at financial advisory firms and the banks, insurers and investment companies that either service or employ them.
We have seen the impact on many of the banks in particular with Santander, the Spanish bank that bought Abbey National, Alliance & Leicester and Bradford & Bingley, and Nationwide, the country’s biggest building society, who decided they were not ready. Santander has suspended its face-to-face investment advice service until further notice and has launched a strategic review of the division which could put 880 jobs at risk. In September 2012 Santander announced that from the start of 2013 it would offer a ‘restricted’, i.e. not fully independent, level of advice for customers with more than £25,000. (1)
The FSA carried out a mystery shopping exercise between March and September last year to look at the quality of the investment advice given by banks and building societies and six unnamed "major firms" in the retail banking sector were examined, and a total of 231 mystery shops took place. The "customers" were seeking an investment for a lump sum. For anyone working in the financial service sector the findings were alarming with a quarter of cases the advice was found and classified as poor. This meant customers "could be at risk of suffering detriment" as a result of being recommended unsuitable products. (2)
The FSA said the results showed that in 11% of cases the evidence suggested the adviser gave the customer unsuitable advice, and in a further 15% of cases the bank or building society employee did not gather enough information to make sure their advice was suitable, so it was not possible to assess whether the customer received good or bad advice. The FSA said both of these constituted poor advice. Often the failure in advice involved the level of risk customers were willing to accept, and their financial circumstances. (2)
In 15% of cases, advisers made "misleading statements" – typically about the potential risks and performance of products. (2)
Clive Adamson, director of supervision at the regulator, said: "This review shows that customers are not consistently getting the quality of advice on their investments they should expect when visiting an adviser in a bank or building society. (2)
We have also seen Lloyds Banking Group closing its branch-based investment service saying it would only offer investment advice to customers with more than £100,000 in savings through its private bank. (1)
This followed a similar move in early 2011 by Barclays, which shut its financial planning division saying it would only offer advice to wealthy clients through its Barclays Wealth arm. (1)
Meanwhile, this year Royal Bank of Scotland and HSBC have respectively closed and cancelled plans for an independent financial advice service. Both banks will focus on a ‘restricted’ level of service instead, meaning they will offer advice on a narrow range of products only. (1)
Chris Rowe investment specialist with Worldwide Financial Planning says:
“Many customers who initially invested with the banks could be putting their savings at risk now that the banks have pulled out of the advice market.
"It is possible that your funds may not be reviewed and in many cases the advice you received initially could have been a better fit for the bank than for you as a customer.
“The impact of this new regulation was initiated with the intention that the consumer would benefit from improved quality of advice and the transparency around the charges for that advice. What we are seeing is a reduction in the availability of advice for investment products. An independent adviser with unrestricted access to the investment market can offer a review of your funds to highlight and identify underperformance or suitability issues.
The value of shares and investments can go down as well as up
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. Your home may be repossessed if you do not keep up repayments on your mortgage.
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