The most important lesson to be learned from the UK experience of the Retail Distribution Review (RDR) is that positive engagement between all parties creates an easier process and regulation that works effectively for all concerned.
That’s according to a study commissioned by the Association of the Luxembourg Fund Industry (ALFI) and carried out by Fundscape.
The report, 'Navigating the post-RDR landscape in the UK; assessing the potential impact of an RDR regime on the European fund industry', looks at RDR, which came into effect in the UK on 1 January 2013 and which aimed to improve adviser qualifications and remove product bias from the advice process by changing the way advisers are remunerated.
The study also looks at the Dutch inducement ban, as well as the impact of RDR / MiFID on Europe and its potential impact on France, Germany, Italy and Spain.
Despite predictions that the UK financial services industry would simply implode under such radical regulations, the timing of RDR coincided with a more sustained recovery in the UK, an improved outlook in the Eurozone and consequently rising stock markets. Investor sentiment improved dramatically and helped to minimise the impact of RDR as well as mask its potentially negative effects.
Flows by distribution channel for the first year of the post-RDR era show that while the advice channel remained fairly stable, the retail banking channel saw the most dramatic changes with flows plummeting as a result of banks withdrawing from advice. The execution-only channel, in turn, was steaming ahead because of investors being unable or unwilling to pay for advice.
The overriding view on what the regulator could have done better in the UK is to map out a timeline of what the requirements of the regulation are, what they would achieve and when that burden might start to ease. The overwhelming feedback from advisers in the UK is that regulatory costs – both in time and direct costs – have continually risen both through the higher qualification requirements and through increasing reporting and documentation.
The biggest failing of RDR is the advice gap, born out of advisers finding advice was too expensive for some clients or too unprofitable, banks pulling out of advice and customers being unwilling to pay for advice. Removing the cross-subsidy inherent in management and advice fees may be fair, but RDR did not replace it with anything or consider the downstream impact on lower-value customers.
The focus on price has been inevitable but it has also played out in unexpected ways, with consistent alpha-generators able to charge a premium for their fund over and above the typical 75 bps prices and, at the other end of the scale, passive solutions have fallen to new lows, resulting in flows into passive investment funds having grown.
There has also been a substantial rise in solutions and packaged products such as fund of funds and risk-profiled solutions that allow advisers to provide a relatively low-cost and low-touch service. As a result, influencers and gatekeepers that manage model portfolios are increasing the overall control of the industry.
There have been some changes in the value chain:
o Advisers are outsourcing investment to wealth managers, and wealth managers are moving into the retail sphere by unitising their model portfolios and providing solutions to advisers and other distributors.
o Vertical integration is back in the UK, with insurance companies becoming active once again in creating or strengthening their own investment product, developing wrap platforms and buying up other forms of distribution.
Marc Saluzzi, chairman of ALFI, says: “As the concepts of RDR are adopted more widely across Europe, the fund industry has an opportunity to have wider appeal as long as it learns from the lessons of the UK and the Netherlands. The main message for the industry is that, to anticipate and avoid any pitfalls, we must engage, engage, engage; engage with policy makers, engage with the regulators, engage with distributors and, last but not least, engage with consumers.
“We have seen a digital revolution that has radically changed our lives, yet the investment industry has failed to harness the power of this new technology which could help to deliver cost-effective, automated advice and guidance solutions for mainstream cost-conscious investors.
“A key question in every market is how more people can be persuaded to save and regulatory change can be an opportunity to facilitate this. But it will not be enough. More generic education and guidance, together with tools to enable investors to make their own decisions where necessary, are to be welcomed. But regulators need to provide clarity to the industry on what is, and is not advice.
“Regulators and the industry need to work together to ensure clients of all sizes can access affordable advice and investment products that can ultimately drive significant growth for our industry and lead to more satisfied investors.”