The RDR: Unintended consequences?

The Retail Distribution Review started out with laudable goals, such as widening access to financial markets and advice, and increasing customer choice. But what might be some of the unintended consequences?

Advisers may leave the market early, reducing the availability of advice.

The increased cost of regulations (accompanied by increased costs of capital), and additional qualification requirements (without grandfathering) may lead advisers to exit the market, or just to retire earlier than they might otherwise have done. According to evidence submitted to parliament by the Adviser Alliance in Feb 2011 independent surveys suggest that 20-50% of older advisers may leave the market. Research from Aviva suggests about 7% of advisers in total will leave the industry.

As of June 2011, recruitment consultant BWD says 35% of advisers have not passed any papers towards QCF level 4. The CII has further pointed out that the pass rate on some diploma papers is as low as 50%.

Barclays has already closed down Barclays Financial Planning at a cost of 1,000 jobs, and although, for example, AWD Chase de Vere has already picked up 20 of these, these are likely to be only those who are already fully qualified.

Adviser charges may increase.

Aside from the more obvious increased costs arising from increased qualification requirements, regulatory burden and the cost of capital in the absence of the factoring effect of indemnified commissions (the FSA estimates that these incremental costs could amount to 0.3% of the value of annual retail investment new business), confusion around the application of VAT may lead some advisers to err on the side of caution and overcharge for VAT.

Increased disclosure requirements around adviser remuneration may mean customers actually read less.

Addition disclosure may add to the mountains of paperwork customers are expected to read, and may, in fact, mean that even fewer customers can be bothered to try and read it all. Disclosure will need to be more focused and clear, rather than simply more extensive.

All of the above suggests tough times ahead for advisers. But as Ralph Waldo Emerson once said "Can anyone remember when the times were not hard and money not scarce?" The challenge remains to find opportunity in adversity.

Product innovation may decrease.

As advisers and providers alike focus on changing their systems to allow for adviser charging and VAT etc., they will have less time and resources left over to devote to product and service innovation and improvement, and new product launches.