FSCA feedback on RDR Phase 1 and 2
When the Financial Sector Conduct Authority (FSCA) introduced the Retail Distribution Review (RDR) into the industry, there was a lot of criticism that the market didn’t need this kind of regulatory intervention. Further, RDR would cause unintended consequences that would increase the barriers of entry into the industry.
But the FSCA stuck to its guns and the industry had to accept the RDR. The roll out of Phase I of its implementation is well underway and the FAnews spoke to Farzana Badat, HOD Regulatory Framework in the Regulatory Policy Division at the FSCA, to find out whether Phase I was successful or not.
Was the roll out of Phase I of the RDR a success or not?
It is too early to measure the effect of these changes on the industry and specifically the impact it had on the distribution landscape (which was one of the main objectives of RDR) as we have given the industry two years to comply with Phase I objectives.
The effect of the changes and how the market reacts to the changes will therefore only become clear over the course of the next couple of years through the supervisory approach, including additional data gathered through conduct of business returns.
However, it appears as if there have been some initial reactions to the legislative changes manifesting in potential changes to business structures possibly to find ways to get around the new requirements. For example, because of binder fee caps, we have noted that some businesses are considering a move away from entering into binder agreements and instead migrating to an outsourcing “non-binder” model. Currently there is no regulatory cap on non-binder outsourcing fees, leading to concerns that this focus on business model migration could be because of businesses trying to attract remuneration in excess of the binder fee caps. This type of remuneration driven behaviour, if it is indeed the case, is unfortunate as it is inconsistent with the outcomes sought to be achieved by the RDR.
Unfortunately, such market reactions to regulatory changes can ultimately lead to additional legislation or more intrusive supervision to address potential gaps. This is one of the reasons why the shift to an outcome-based approach to regulation is so critical. Rules can be circumvented but only where there is a specific outcome.
What does the FSCA hope to achieve during Phase II of the RDR?
As mentioned in the original RDR document, the desired outcomes of the RDR are distribution models that:
- support the delivery of suitable products and provide fair access to suitable advice for financial customers;
- enable customers to understand and compare the nature, value and cost of advice and other services intermediaries provide;
- enhance standards of professionalism in financial advice and intermediary services to build consumer confidence and trust;
- enable customers and distributors to benefit from fair competition for quality advice and intermediary services, at a price more closely aligned with the nature and quality of the service; and
- support sustainable business models for financial advice that enable adviser businesses to viably deliver fair customer outcomes over the long term.
These remain the objectives of the RDR and all the work we are performing as part of the Phase II proposals hopes to achieve this. The rationale behind the phased approach to the RDR was also set out in the original RDR document published in 2014.
Has the FSCA found any evidence of the creation of unintended consequences in the industry?
Thus far, no. In developing the RDR we have consistently acknowledged that the impact of any proposed regulatory interventions must be assessed carefully and where barriers to entry are created, these must be alleviated where reasonable and possible.
An example of this is the proposal to introduce only 50% upfront commission and 50% ongoing commission. The FSCA decided to first do robust technical testing in consultation with the industry on the economic impact that the proposal might have on intermediaries to obtain insights into any potential unintended consequences prior to implementing the proposal.
We have also consistently indicated that if we implement this requirement, we might consider providing an exception for new market entrants. The various RDR proposals must be considered holistically and within the overall context of the objectives intended to be achieved by the various proposals.
To this end, it is important to note that the very purpose of Proposal TT is to promote financial inclusion and lower barriers to entry. In addition, all the legislative proposals are subject to detailed and robust consultation processes where insurers and intermediaries have the opportunity to raise any potential concerns relating to the legislative proposals.
We therefore believe that the robust consultative process we adopt in making legislation mitigates the risk you raise and all affected parties have ample opportunities to raise concerns.
What are some of the challenges that the FSCA anticipates that it will encounter during the roll out of RDR Phase II?
Phase II entails a lot of technical work with the purpose of ensuring that the proposals that are being developed are appropriate and do not have unintended consequences or an unduly adverse economic impact on the industry.
This includes an activity segmentation exercise, work on an actuarial model to test the impact of Proposal NN, work on equivalence of reward and the like. The challenge with the technical work is that it takes time to complete and significant stakeholder input and engagement is required.