Managing my financial journey
Managing my financial journey

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Managing my financial journey

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.

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How are the Retail Distribution Review the RDR and the Conduct Risk Review changing the way which regulation is undertaken in the financial market place and in particular how is it helping consumers and what's the impact upon financial firms?
If we look at some of the impact on RDR for example we've seen very clearly and very quickly decisions and advice being given on the basis of commission disappear from the market.
We can see advisers now beginning to give consumers advice about which products to buy and often within that they are recommending products that have now got far lower charges than historically has been the case.
We are also seeing you know a growth of more products that are offering very low charges compared to some of the more traditional products that are in the market. So we're seeing some differentiation beginning to occur and some consumer choice beginning to free up.
What about the impact on financial firms though? I mean obviously there is progress from the viewpoint of the consumer how do you think the financial firms are reacting to these new requirements in respect of conduct risk management and reacting to the Retail Distribution Review, the RDR?
So if we look at the specific reaction to RDR for a second and perhaps talk about some of those wider questions. On RDR we are seeing a small reduction overall in advisers numbers which we expected to see at the time.
We are also seeing advisers now across the board are better qualified than historically they have been and therefore you know I think if you are taking financial advice at this moment in time you're in a position where probably the chances of getting a better outcome from that advice are significantly increased.
At the same time we have seen, and this is before RDR began and continued after RDR, some of the larger retail banks leaving the advice market, whether that's temporary or permanent remains to be seen. And so that's definitely one of the reasons that's sitting behind the Financial Advice Market Review that we've launched with the Treasury of saying how does that middle market potentially get served in the future.
If we then think about the wider conduct agenda and the range of things that we've done to try and promote that, I think it would be fair to say we are seeing across the senior management of most large institutions that we deal with a very serious intent to begin to tackle conduct issues within business and to think about how they align the needs of their consumers with the obviously the profitability of their own businesses and running those businesses successfully, that we always knew was going to be potentially quite a long journey. You've got to take that down through several layers of management and to the frontline and some are doing that more quickly than others.
Do you think we've got to the point though where financial firms are being over regulated to the point where the boards of firms and senior managers within those firms are focusing so much on regulation they're taking their eye off the ball when it comes to the main business of that firm?
As I said earlier I think one of the things we are looking at here is how we reach a place where we can talk about sustainable regulation. So it is clearly not a good situation to be in where we were a number of years ago, which was for many boards the conduct agenda was sort of, you know, Annex 27 of the Board Pack noted within a minute or two at one extreme, to characterise for a second. However you know we now regularly hear stories of someone saying "we spend 60-70 per cent of our time on this".
Now clearly there is a balance to be struck somewhere in there which is we do want a strong focus on compliance, a strong focus particularly on conduct and consumer outcomes but it's absolutely right obviously that the directors of a board focus on how they're running the business and look at the future of the market in which they operate.
We've talked about the Retail Distribution Review during this interview. Do you think the RDR - to give it its abbreviation, has had unintended consequences?
Yes absolutely.
I was part of the original steering committee or whatever and then three years or four years later it emerged as something very different from what we all intended. I think people often say it's improved the professionalism of the advisers, well you could have done that without a Retail Distribution Review.
The unintended consequences are Martin - I think we will get this right, the regulator they're just human beings like you and I. They mean well and in the main they do the right thing, they try to do the right thing, but the big unintended consequence is that they've introduced a level of cost into the market, which the market didn't need. It is now more costly to get the same product you would have got before RDR. That's factual. That's you know it. I'm not guessing.
My company has about 20 per cent of the market so we handle 20 per cent fees, commissions et cetera, et cetera. And we've seen that increase in the cost to the end consumer, which I think, has year consequences. You're getting a shrinking market now, so when the chancellor says it's easy to get all of your money out of the pension if you want now when you’re fifty-five, people are turning somewhere and they can't find somebody to help them. A, they don't need to help people because they're looking after their clients, and B, the cost will put people off.
If you heavily regulate savings so for instance if I, as an adviser want to advise you on how to save money in a stocks and shares ISA, I'd probably have to spend about an hour or two hours talking to you doing a fact find, getting to know you, ensuring I don't get anything wrong. And then I'd go away and I'd research the market if I'm an independent financial adviser or if I'm a restricted adviser I know what I'm talking about because that's my job on a daily basis. I know the product I'm selling. And then come back to you and put something to you and you go "oh that's really, really interesting David. Can I - can I give you fifty pounds a month - hundred pounds - something like that". Yeah, that's fine. I might out of all of that get a hundred pounds, two hundred pounds for all that work. You're not gonna do it you know. So you'll talk to people you've known for twenty, fifteen, ten, five years. You'll get them to put more money with you et cetera, et cetera.
So if you're that person that's looking for advice that's really tricky and because of all that there's a huge savings gap opened up et cetera. If however if you wanted to buy a house that would take me ten minutes. It would take you ten minutes. Once you've bought one house, think buying a car, think getting insurance for a car, once you've done it once you know how you're doing and it's not regulated. Okay it's regulated with a very, very, very light touch. So over there is somebody who could get you to lose all your money you've ever had in the world through borrowing and over here's somebody who’s trying to get you to save regulated right up to their eyebrows.
And that - that difference has been one of the things that's causing the savings gap. There's no I mean it's an obvious thing if you want to borrow money, if you want the quick route to something - fine, you know don't do as your mum and dad told you and I as we've told everybody and everybody's told you know borrowing money is the right thing in some circumstances but it's dead easy - it's dead easy. Look at Wonga. Look at all these things. It's dead easy. At the bottom of that advert I think Wonga this was two thousand two hundred and whatever per cent APR. Well I dunno if you've tried to work out APR. You know what APR is. I actually do know what APR is but most people go "what's that? Is that a big number?" It's a really nice advert - right. If I was saying to you "I recommend that you do this and that will be two thousand per cent APR", I'd go to the Tower of London. I'd never be let out. They'd chop my head off. As an adviser you have that. You have this silly bias where savings and other things are heavily regulated and in the past borrowing was not regulated. Now it's lightly regulated. If you were to just as I said earlier, regulate the product not the person then you and I would be able to make our minds up much easier. I'm not trying to talk myself out of a job by the way. I think advice is valuable and needed but overdone. And over regulated.
End transcript
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Activity 4.2

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.


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