EXCLUSIVE INTERVIEW: New RDR Consultation Paper Could Throw DFM Sector Into Disarray

Wendy Spires

26 September 2012

The UK advisory industry is broadly ready for the implementation of the Retail Distribution Review, but an eleventh-hour consultation paper on discretionary fund management services could pose a serious setback for a number of firms, Bovill consultant Andrew Garner told WealthBriefing in a recent interview.

The RDR comes into force on 31 December, and since the package of reforms was first announced in June 2006 consultation papers and guidance have come thick and fast from the Financial Services Authority. Now, the industry is holding its breath for one final missive from the regulator on DFMs.

With the RDR deadline looming, the industry is rightly concerned about the as-yet unissued new consultation paper, said Garner, noting that the paper was actually expected months ago. In fact, there has been no firm date set for its release, no doubt adding to the uneasiness firms will be feeling.

“The Association of Private Client Investment Managers and Stockbrokers had said the paper was scheduled for August, but the FSA is now saying ‘early Autumn’,” said Garner.

“The problem is that DFMs are going to have a very short lead time to adjust their business models, even if the paper was published tomorrow,” he said.

Clamouring for clarity

“In certain areas people are very well prepared for RDR, for example the professionalism part, because this is something that people have known is coming for a long time. Everyone has been working hard, there have been a lot of people sitting a lot of exams, or doing gap-fill. In some of the other areas firms are less well prepared,” he said.

“More fundamental difficulties or potential issues are in some of the areas where there is still not the clarity we would quite like.”

Indeed, for Garner, the fact that discretionary portfolios are likely to get caught in the RDR net at all is in itself symptomatic of a generalised lack of clarity within some parts of the reform programme.

“Discretionary portfolios in themselves aren’t retail products so theoretically they should be out of the scope of RDR, but the FSA is saying that they can be caught depending on what they invest in, how they are recommended and the reasons that they’re recommended. The FSA has come up with some fairly convoluted reasons why they might be caught. That means that firms would have to rethink their distribution, if this is what’s going to happen,” he said.

The latest guidance paper

In its July guidance paper FG12/16: Assessing suitability: Replacement business and centralised investment propositions, the FSA acknowledged that there are benefits to clients from the use of model portfolios, but also expressed concerns about clients being “shoe-horned” into unsuitable investments. However, the more controversial part of the paper concerned the use of third-party centralised investment propositions.

The regulator said that when third-party providers are used that both the introducing firm and the DFM should ensure that investment recommendations and trades are suitable for clients. The FSA’s paper did not, however, offer any comment on the involvement of platforms in the DFM space, nor did it address precisely how suitability should be assessed (perhaps we should not be surprised here, since, although the FSA has suitability firmly in its sights, it has yet to definitively say which methodology it prefers firms to use).

In trying to make financial advice more professional, more objective and more transparent, the regulator seems to have a very clear vision of where it wants the industry to be. However, there may be many more bumps in the road as firms complete their RDR journeys.

Practical problems

Aside from the threat of firms having to readjust their business models and processes to accommodate any last minute regulatory changes, Garner also warned that the industry might be heading for some practical problems in the coming months.

“It can often be the little things, administrative things, such as getting brochures reprinted. If everybody is trying to reprint at once…there’s a limit as to how many printing companies are out there. Or take getting IT systems updated - it might be only very minor changes which need to be made, but, depending on who your IT providers are, some people might struggle to get these minor changes made in time,” said Garner.

As Garner notes, however, what seems like tardiness on the part of some firms actually might be more a reluctance to “put their heads above the parapet” first.

“I think one of the difficulties is that there are conflicting pressures on firms. Obviously they need to be ready for the regulations, on the other hand they haven’t wanted to be first-mover - particularly in the case of product providers,” he said.

“If you provide retail investment products you don’t want to be the first to publish your new RDR-compliant charges because that gives everyone a wonderful view of what you are doing and they can re-price accordingly. You don’t necessarily want to be first so even if people are ready – internally ready – they’ve not yet necessarily rolled out their charges to the wider marketplace. There is a risk for some of them that when they go into a marketplace they might find that their distribution network of advisors says ‘oh no, we don’t like that’. It might be then that some firms have to rethink things, and time is tight.”

With less than a hundred days to go before RDR comes into force, one might have hoped that the regulator’s package of reforms would have been fully bedded down by now, but it looks like the industry will have to wait a little longer to see what the FSA’s final stance on DFM propositions is. Perhaps a little last minute tweaking of the rules was always going to happen with an industry shake-up of this magnitude, but, as Garner says, “time is tight”. Let’s hope the regulator issues its last word soon.