European Retail Distribution Review – A reality?
By Colin George Haggart*, Ernst & Young, Luxembourg
Business Review
May 2010
There is currently much debate relating to the steps that must be taken to secure the long-term development of the European Asset Management Industry. This discussion primarily focuses on areas such as product manufacturing and distribution.
In this article we are going to concentrate on some of the discussion that is taking place around distribution of retail products, in particular the Retail Distribution Review (RDR).
Despite this being a UK initiative the RDR may, in the future, form a point of reference for the European Commission and their ongoing review of Packaged Retail Investment Products (“PRIP”). Before we consider the likelihood of a European RDR, let us look at the overall objectives of the UK initiative and how this is expected to work in practice.
What is the RDR?
The RDR was launched by the UK Financial Services Authority (FSA) in June 2009 to review how retail investment products are distributed to consumers. The proposals outlined in consultation paper (CP) 09/18 Distribution of Retail Investments – Delivering the RDR sought to:
- Improve clarity for consumers about how Investment firms describe and disclose their services
- Address the potential for remuneration bias
- Increase professional standards of advisers
How is it expected to work in practice?
The FSA published their Policy Statement (PS 10/6) on 26 March 2010 presenting rules on the first two of these objectives.
In this respect the FSA has introduced rules to enable consumers to more easily differentiate between different forms of advice offered to them. All investment firms must describe their services as either “independent” or “restricted”. Where advice is considered independent, the FSA requires that recommendations are based upon a “comprehensive and fair analysis’ of relevant market data”. Where advice takes account only of selected products, this restricted nature should be made clear to the consumer.
The FSA has further introduced an ‘Adviser Charging’ system whereby the investment firm providing the advice must disclose, in writing, the charging structure to their client. It is no longer acceptable for investment firms to receive commissions from the product provider, nor any benefits relating to recommendations made. Changes have also been made to the rules on inducements to ensure these cannot be circumvented by firms being paid using ‘soft commissions’.
The proposals relating to professional standards of advisers are the subject of a separate consultation paper (CP 09/31) that was published in December 2009. The FSA intend to release their feedback in Q3 2010.
What is the implementation timeline?
The FSA’s reforms will become effective from the end of 2012.
Benefits/challenges?
It is anticipated that the key benefits of the RDR will be an improved quality of investment advice and reduced instances of mis-selling which should culminate, through time, in improved consumer confidence. Unfortunately, this will come at a cost. Investment advisors and platform providers will need to make changes to their processes, systems, and in some cases business models pre-implementation. Incremental compliance and indirect costs may also be incurred.
What does the future hold?
It is interesting to note that the recent EFAMA report, Revisiting the landscape of European long-term savings – A call for action from the asset management industry, highlights distribution as one of the significant challenges facing the European Asset Management industry. When one further looks at the detail in the report, it can be seen that a number of the proposals are similar to that of the UK initiative.
As the European Commission continues with their PRIP review, there are many open questions including how PRIP will impact the distribution of retail products, including Luxembourg investment funds. One might also ask whether PRIP currently goes far enough and if over the longer term this will evolve into a European version of the RDR.
*Colin George Haggart, Senior Manager, Ernst & Young, Luxembourg
Posted on 10 May 2010
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