According to a recent study on the impact of the UK Retail Distribution Review (RDR), commissioned by the Association of the Luxembourg Fund Industry (Alfi) and carried out by Fundscape, the key lesson learned is that positive engagement between all parties creates an easier process and regulation that works effectively for all concerned.
The study, called ‘Navigating the post-RDR landscape in the UK; assessing the potential impact of an RDR regime on the European fund industry‘ assessed the effect of the RDR, which introduced new rules governing inducements and retrocessions.
Alfi chairman Marc Saluzzi (pictured) comments: “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.”
The report highlights that despite initially negative predictions, the changes did not result in an implosion of the UK financial services industry.
Certainly, there were impacts, such as a strong decline in flows through the retail banking channel, as banks withdrew from the advice market.
The study argues that the UK regulator should have set out a clearer timeline of requirements for the regulation. According to the researchers, the biggest failing of RDR consists in the removal of cross-subsidies without appropriate replacements, leading to banks pulling out of advice and customers being unwilling to pay for it, creating conditions for an ‘advice gap’.
At the same time, the study also highlights the growth of solutions and packaged products allowing advisers to provide a relatively low-cost and low-touch service.
Fundscape CEO Bella Caridade-Ferreira, said that the research into the effects of RDR carried further weight because of the potential impact of MiFID II, which she characterised as ’empire building’ by the European Commission and European Parliament with proposals being gold plated by the European Securities and Markets Authority (ESMA).
A key question for these institutions is to what extent the proposals as they currently stand have been done in mind of what is best for the end investor. For example, the most extreme effect of MiFID II could be that it destroys open architecture across the region, which would not be of benefit to the end investor, Caridade-Ferreira said.
Additionally, the research highlighted the need for financial education, given that it may take a generation for Europe’s savers to overcome the idea that they will need to pay for advice – even though, as is currently the case, they may already be doing so via the inducements and retrocessions, which are the elements that MiFID II would seek to remove. There is also uncertainty around what type of payment structure MiFID II would favour – say, an hourly fee structure as used by law firms, or a flat percentage fee structure – and linked to this the effects of moving to certain types of payment structures on the speed at which the industry might move away from open architecture toward guided architecture.
Saluzzi added that lack of information, of the type distilled by the report just published, was one of the key problems Alfi faced when constructing a response to MiFID II proposals.
A full copy of the report can be viewed at www.alfi.lu/note/2760