Something big is happening in six weeks…and it’s nothing to do with a man in a red suit. After the Christmas turkey’s been digested and New Year celebrations are a fading niggle, savers and investors are going to wake up on 1st Jan 2013 to an even bigger headache – Retail Distribution Review, or RDR.
Once again the financial services industry has surpassed itself by inventing a confusing name for a crucially important change which will fundamentally affect the way firms engage with their customers. Worse than that, the industry has collectively failed in its duty to explain clearly to customers exactly what the changes mean.
In theory RDR makes good sense. The regulation, drafted by the FSA, is designed to promote greater consumer confidence in the financial services industry and the products it sells. Let’s face it, historically the industry has been extremely good at making money for itself but arguably less good at ensuring customers buy appropriate products and investments. So anything that aims to raise confidence should be welcomed.
This means that from 1st Jan 2013 anyone who receives financial advice before buying a product or making an investment will have to pay upfront for that advice. But, as with most regulation, there is a potentially very large unintended consequence: how do you persuade less affluent customers to pay, possibly many hundreds of pounds, upfront for financial advice. The risk is that a large proportion of customers simply opt out of taking advice and choose to become DIY investors instead.
The law of unintended consequences could mean that RDR gives greater transparency (but not 100% transparency) on cost of some investment products, but means that millions of mass-market investors are left poorer and without access to the independent advice they need to maximise returns and build a sufficient savings pot.
In addition to creating a generation of so called “advice orphans” here this poses a very real threat to the business models of many financial services firms. So why haven’t financial services firms been doing more to shout about the benefit of RDR to their clients? So far there seems to have been very little effort by the financial services industry in general, or companies themselves, to communicate the change to the people who’ll be most affected. The FSA has produced a small leaflet for consumers…has anyone seen it?
This is a golden opportunity for firms to make a noise about trust, loyalty, integrity, performance and value; about going the extra mile – not just sticking to the minimum requirements of RDR, about putting customers first…I could go on but I think you get the point?
So far the FSA’s efforts to raise awareness of RDR have been insipid. But so too have the industry’s. Companies need to wake up to this and start shouting from the rooftops. If they don’t, then the unintended consequence of RDR could become a reality.