Retail Distribution Review:
How does this impact consumers and why is it important
In November 2014, the Financial Services Board (FSB) initiated a Retail Distribution Review (RDR) to introduce some reforms to the regulatory framework that would ensure fair treatment of customers and responsible dispensing of advice by financial intermediaries. The review was a response to concerns regarding the role of broker consultants and financial advisers in giving financial advice and their motivation for recommending financial products. Part of the concern was that the needs of the consumer weren’t always the main motivating factor as lucrative incentives often played a distracting role.
The RDR proposals seek to give customers faith in the retail financial services market as well as to establish the necessary trust in the product providers and financial advisers that they will be treated fairly. The long term objective is to create a more sustainable and responsible market for financial advice and financial services in the future.
The objectives and benefits
The FSB noticed that there were still considerable concerns with regards to consumers being sold products that do not meet the individual’s needs. Moreover, financial advice was still heavily tied into commission based product sales which led to a sales bias and in turn, resulted in advisors selling products that suit their own needs instead of tailoring products to the needs of the individual consumer.
The Retail Distribution Review proposes that the adviser gets remunerated directly by the customer to ensure that the focus remains on serving the customer’s best interest. For that reason, advisers will need to clearly define and articulate their value propositions, as well as agree with their customers on the services they will deliver and the remuneration they will receive.
One of the most outstanding benefits for the consumer, and a clear way in which transparency will be established, is limiting commission based products and adopting a fee-based approach where the consumer pays an agreed upon fee for tailored, individual financial advice. Thus, financial advisors will be forced to adopt a more consumer-centric model which will remove the conflict of interest distraction and improve overall service levels. Major finance and insurance companies will have to change their current business models going forward in order to comply with the coming legislation.
In conclusion, the review proposes more proactive transformation and comes with an administrative and compliance responsibility on financial advisers. The FSB welcomed comments to the proposal which was be submitted on 7 March 2015. At this point, no firm date has been communicated by the FSB for the adoption of the RDR proposals.