FSA Retail Distribution Review - What does it mean for consumers

The FSA "RDR" has come up a few times and rather than go off topic on those threads, I have created this one so those interested can post comment.

At the moment you have tied agents, multi-tied agents, whole of market advisers and IFAs. The FSA want to change this and also improve standards. Here are the current proposed adviser levels:

Full Financial Advice

The FSA propose to split the provision of full financial advice into two clear intermediary classes:

1. Professional Financial Planner – firms with chartered status or similar charging by fee (or customer-agreed remuneration, which the FSA regards as a variant of fee) only.
2. General Financial Adviser – as now firms providing financial advice with a range of qualifications and accepting payment by methods including commission.

Primary Advice

Basic advice will be replaced by a new primary advice service:

3. Primary Advisers – a new advice category offering a limited service, the FSA will be looking for significant feedback on the Discussion Paper in this area.

Unregulated Advice

Subject to the outcomes emerging from the Thoresen Review of Generic Advice (currently being undertaken for the Government and due to report by the end of 2007), a fourth unregulated category of advice could be created:

4. Generic or Holistic Advice – offering advice on a variety of financial issues, from debt management to saving. Potentially an output from generic advice could be a portable fact find which could be used as an entry into regulated advice.

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They are listed in order of the best. However, it should be noted that only around 1000 advisers currently would meet the top standard based on early proposals. It requires qualifications which are at degree level. The general adviser level requires what used to be known as the advanced FPC but is now called diploma. The primary adviser will be at current level. However, there is less consumer protection from primary advisers as it will be more of a flow chart style advice process offering a limited range of products (likely to replace stakeholder advice process). There will be limited FOS protection at this level as you will sign to say you agree with the advice.

To use the term IFA, you will have to be at the top level. So, most are likely to either go general financial planner (which is higher than the current standard) or become mortgage advisers (it is estimated that nearly 2/3rds of IFAs are mostly mortgage advisers anyway and mortgage regulation is lower and far cheaper for the individual) or call it a day because they dont want to sit 5 more exams when they are going to retire shortly afterwards anyway. There has already been an increase of firms selling up.

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It is early days in the consultation process and it wont be until 2009 at the earliest before the changes come into play. Even then there will have to be a transitional period as it is estimated that it would take 5 years to get from diploma level to chartered level qualifications let alone from current certificate level (add another 2-3 years for that).

Many firms have acted. This typically tend to be your NMA IFAs as they already work on customer agreed remuneration and work with investment strategies and ongoing servicing. Indeed, the top level adviser is very much a match for NMAs.

Salesforces are almost certainly going to go with the primary advice level as they can mass employ individuals, not pay them as much as they are lower qualified than proper advisers, have more expensive products as there will be no charge cap and have little come back with complaints as there will be virtually no FOS protection for bad advice. Its almost like a return to the old insurance agent to service the mass market.

The FSA has said that it expects the number of IFAs to drop dramatically and it has admitted that the middle market consumer is likely to be worse off from its proposals.