The Retail Distribution Review: how will it affect structured products?

The Retail Distribution Review is hailed as the biggest shake-up of UK financial services since the Big Bang. But there is disagreement about its likely effect on structured products. Vita Millers reports

One of the main reasons for all the fuss about the arrival of the UK's Retail Distribution Review (RDR) is the complete change it will bring to how independent financial advisers (IFAs) do their business. The Financial Services Authority (FSA) has stipulated that from December 31, IFAs will be severely restricted in how they can earn commission and must pass the higher Qualification and Credit Framework Level 4 qualification. In addition, IFAs must consider the entire range of products that may be suitable for clients.

However, what the implementation of the RDR means for the structured products industry is less clear. Participants are not helped by the fact that some rules, such as stipulations for advisers referring investors to platforms, have only recently been consolidated by the FSA, nor by the regulator's wait-and-see approach to the prospect that smaller investors will choose to buy products on an execution-only basis rather than pay for advice. In short, it is anyone's guess whether the new regime will usher in a rise or fall in structured product sales or the higher quality of advice that the FSA craves.

 

Industry readiness questioned

Although the industry has known about the forthcoming RDR regime for six years, there is still a sense, considering the enormity of the task at hand, that some companies could find themselves pushed for time to change their business models for selling structured products.

Less sophisticated investors might not have access to advice - and yet they may be the ones who need it most

In July, an Ascentric survey found that of delegates attending RDR workshops held in Bath, Birmingham and London, more than two thirds (68.7%) said they were not ready for the new regulations. "Many IFAs we've spoken to have said they plan to change on December 31 and not before," says one London-based banker.

"We've seen firms start to come out with their adviser charging schedules, but generally everyone thinks there's not necessarily an advantage to being first mover," says Andrew Power, lead RDR partner at global financial consultancy firm Deloitte UK in London.

However, while there will no doubt be last-minute work to do, distributors will be ready for the big change because they have no choice, says Penny Miller, managing associate at Simmons & Simmons law firm in London. "From what we have seen, most of the bigger players are in the final stages of implementation," she says.

"The exercise is more extensive on the distributor side, but product providers are also in the process of doing due diligence on their intermediaries and ensuring they have contractual protections in place to ensure they do not pay commissions on advised sales," she says. "Practically speaking, the biggest issue is the documentation that must be done to ensure that distributors are compliant.

"There is a significant repapering exercise being undertaken by the market at the moment. It is not just a legal exercise - it also affects the businesses that need to finalise their charging models and all relevant disclosure documents, including the key features document, terms of business and related documents."

While selling commission-free products is straightforward for distributors as they have no issues with trail commission, IFAs must consider their company models carefully, says Adrian Neave, managing director at structured products distributor Gilliat in London, who says the industry is less ready than it thinks. "While an awful lot of firms are happy saying they will be ready, they can't say they are ready, says Neave.

"From an IFA perspective, I suspect the biggest change is going to be the move from using a transactional model to the whole fee-based model," he says. "Effectively, you are taking your earnings from a product over five years as opposed to getting them in year one. That might cause some stress in company finances, particularly at a time when it's quite hard to get funding from banks. IFAs might find it difficult to manage their cashflow in the first year or two."

 

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The Retail Distribution Review: how will it affect structured products?

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