4.2.4 Viewpoints on the Retail Distribution Review
In the next video Chris Woolard, director of strategy and competition at the Financial Conduct Authority (FCA), sets out the purpose and objectives of the Retail Distribution Review (RDR).
David Harrison of True Potential LLP expresses his views on the review, and his reservations about the differences in the extent of regulation of different financial products.
Having reviewed the process for selling financial products, and assuming that the financial adviser follows this process fully and correctly, do you think that there are any weaknesses in the safeguards against customers buying the wrong type of product? Think particularly about the compilation of the suitability report.
The risk of buying the wrong product still arises through the customer’s disclosures, and the adviser’s interpretations of these disclosures when obtaining information for the completion of the suitability report.
Having some knowledge, as a customer, of financial products and their risks is not the same as being expert in both. Customers may not fully disclose the nature of their financial position – perhaps through inadvertently underestimating their prevailing liabilities, thus producing a mis-impression of their ability to bear the financial consequences that may arise from their investments. Customer understanding of different risk categories may also be superficial. Lack of clarity about the intended term of the investments – short-, medium- or long-term, also risks the wrong product being sold.
Additionally, even where customers accurately understand their current financial position and risk appetite, they may not be allowing for adverse contingencies like a household member losing their job. Additionally, the returns from investments will depend upon the customer’s tax circumstances (e.g. whether they are a basic-rate or a higher-rate tax payer and their liability for capital gains tax). Some customers may be insufficiently aware of their own, individual tax circumstances to know whether the product being sold is appropriate for them.