Retail Distribution Review (RDR) 10 things you need to know
New rules governing how investors pay for the advice they receive from their financial adviser came into force in January 2013. What is the RDR is all about, and what has changed?
- What is the Retail Distribution Review?
The Retail Distribution Review, commonly referred to as the RDR, defines the changes which the Financial Services Authority (FSA) (now replaced by the Financial Conduct Authority (FCA) our regulator) made to the way financial advice is provided and paid for in the UK. It took effect from 31 December 2012.
- What types of financial advice are now available?
An adviser offers either independent advice, which is a comprehensive review of a client’s financial circumstances and allows them to make recommendations in respect of a wide range of financial products, or restricted advice, which means the clients will choose products from a pre-selected range. Advisers will confirm the basis on which they are providing their clients with advice.
- How are adviser qualifications changing?
The FSA (now FCS) wanted to instil in investors a greater level of confidence in the individuals who provide both independent and restricted financial advice. As a result, they increased the level of qualification advisers needs to hold. The FSA’s (now FCA’s) own statistics showed that around 93% of advisers would be qualified to the new standards by the beginning of 2013. In the light of the new requirements, advisers will either already be qualified to the required standard, or will achieve the qualifications shortly thereafter. Clients will be able to confirm this with their adviser.
- How has the method of paying for advice changed?
Historically, financial advice has generally been paid for by commission. The commission is paid by the provider of the product in which the adviser recommends the client invest. The widely held view is that the payment of commission can cause product bias if an adviser has a choice between two products, one paying commission, and the other not, then there is a risk that they may recommend the one that pays commission. This might not be the product which best meets the client’s financial needs.
As a result, the FSA (now FCA) decided that commission cannot be paid for advice on any new investment. From the beginning of 2013, advisers will discuss and agree the cost of the financial advice with their clients prior to providing it. Employing the services of a financial adviser will be similar to the way individuals pay for a Solicitor or an Accountant: the service is described, the individual agrees the cost or fee and then they pay for the advice.
- How will clients pay for advice without commission?
It is likely that advisers will present their clients with a number of different ways to pay, depending on the nature of the services they receive. These may range from an upfront payment to an ongoing direct debit arrangement.
Some advisers may offer the option of having their charges taken from clients’ investments however, clients will still agree this arrangement and fee level in advance.
- Will commission on existing investments cease?
Not necessarily: although the RDR covers new advice from 31 December 2012, any advice which was provided before this date can continue to be paid for by commission. Advisers will be able to provide clients with information on the commission that they receive from their clients’ investments.
- Are all relationships covered by the RDR?
No. If a client has a relationship with their adviser or broker in which they do not provide advice but do help with arranging the investment or purchase of a product, then this service can continue to be paid for by commission. However, the FSA (FCA) stated in the past that they will be looking at this market in due course and that more changes may follow.
- How much will financial advice cost?
That is a matter for the client to discuss and agree with their adviser. Clients may, for example, opt for a relationship where advice is provided as and when they need it, or prefer an ongoing relationship with regular reviews. Advisers will discuss their full range of services and their associated costs with clients.
- Does the RDR cover initial commission as well as renewal commission?
Yes: from 31 December 2012, your adviser cannot charge, or be paid, initial commission (i.e. commission paid at the point of investment) or renewal commission (commission paid on an ongoing basis) for financial advice on new investments. As mentioned earlier, in question 6, existing investments can continue to pay your adviser renewal commission.
- Where can I get more information?
If you have an adviser, they will be able to talk to you about how the changes impact on you, your advice relationship and your investments. You can also find out more details about RDR on the FCA’s website: https://www.fca.org.uk/publication/archive/fsa-rdr-consumer-guide-booklet.pdf
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