RDR client rebate alternative an 'appalling prospect': IMA chief

IMA chief executive Richard Saunders has hit out at the FSA for inconsistencies in its RDR proposals, saying the regulator is ‘rolling the dice’.

In September 2006 I sat in the annual JP Morgan conference at Gleneagles listening to the then FSA Chairman making the speech which launched the retail distribution review. I don't think anybody there thought for a moment that it would still not be fully implemented over four years later.

To be fair to the FSA, they have had some other things to think about in that time. The biggest financial crisis in nearly a century, for one. A new Government with radical regulatory reform on its mind, for another. But even so this has been a long time coming.

And the outcome is a surprise. Its genesis was the use of large initial commissions to buy distribution - a pernicious practice that cannot possibly be in the interests of consumers. But it has ended up focusing largely on the payment of trail commission by fund managers.

This is very odd, because trail does not distort investment choices. And it actually gives some quite benign incentives to advisers: to provide a good service in order to retain their clients, and to maximise the value of their clients' portfolios.

Banning client rebates may in theory be subject to consultation, but after six months of arguing passionately behind the scenes I can tell you I think it is effectively a final decision. And it appears likely to bring unintended consequences in its wake.

It will shift the balance of competitive advantage in many ways, the precise outcome of which is difficult to predict: between wrap platforms and supermarkets; between life products and funds; between advisers and execution only brokers. Why? Because the net effect of the rules will be to leave some products able to "facilitate" payments to advisers (the FSA's term) and others not.

Specifically, funds won't be able to. The FSA has suggested that they could do so by allocating additional units to investors to allow them to be redeemed for that purpose. That is an appalling prospect. It would be incomprehensible to investors. I sincerely hope the industry does not go there.

But other consequences which are quite possible include a continuation of initial commissions by another name, higher charges to consumers, and greater opacity about who is paying what to whom. And of course the cost of advice will go up at the minimum by a 20% VAT charge. We are urging the FSA to be alert to these possibilities. If they are not they will end up with a quite different result from what they intended.

The FSA has rolled the dice. It is far from clear whether they will come up aces or jacks.