Revealed: The FSA's nine RDR 'success indicators'

The Financial Services Authority (FSA) has outlined how it will measure the success of the retail distribution review (RDR), presenting nine key indicators and setting baselines for the post-implementation review.

It will not measure the short-term success of RDR until at least two years after implementation, meaning no sooner than the end of 2014. Long-term success will not be gauged until at least 2020.

These are the indicators and the latest research the FSA will use to compare the RDR outcomes against:

Short term - from 2014

1. Firms adhere to the new landscape (e.g. describe their advice services appropriately as independent or restricted)

• Can only be measured once the new rules come into effect, although the FSA will asses and measure progress over the next year through surveys, roadshow events and further firm meetings

2. Advisers meet required standards of professionalism

• According to research carried out by the FSA between July and August, 50% of advisers already held an appropriate qualification for RDR, and 39% had started studying for one
• 91% were either already qualified or expected to qualify by December 2012; 1% expected to qualify after the end of 2012; 5% did not intend to reach the new qualification level and 4% had not given any consideration or were unsure
• 77% of advisers indicated that they were members of a professional body
• 81% of advisers were able to estimate the number of hours CPD completed in the last 12 months were already meeting or exceeding the future yearly requirement under the RDR (35 or more hours, of which at least 21 hours should be structured)

3. Consumers understand the difference between independent and restricted advice

• Consumers should find it easier to understand the different types of advice available to them
• FSA Consumer Purchasing Outcomes Survey research last year suggests 39% of recent purchasers and 42% of non-purchasers either did not know or understand the status of their adviser
• Among recent purchasers who received multi-tied advice, 67% thought this advice was also independent; among those receiving single-tied advice, the figure was 34%

Long term - from 2020

1. Firms sell fewer products that pre-RDR currently pay high commission, sell more that currently pay little or no commission, and sell more cheaper/lower charging products

• The regulator has been collecting data on the average amount of commission for each product area and the relative sales values for these different products.
• It will also look at the relative activity levels within the actively and passively managed investment fund sectors

2. Consumer engagement in the market, caused by improved perception of the quality of services

• The main consumer perception we intend to track is confidence that advisers make recommendations in the client's best interest.
• When asked about this in June 2010, 10% agreed strongly, 28% agreed slightly, 28% neither agreed or disagreed, 19% disagreed slightly and 15% disagreed strongly

3. Fewer unsuitable sales

• The FSA has conducted thematic reviews into five areas of investment advice over the past three years and will use the suitability of the clients' files in these cases as a baseline.
• The area most in need of improvement was structured investment products, where 46% of reviewed files showed unsuitable sales.

4. Improved product persistency

• If the RDR reforms are successful, the FSA expects to see an increase in product persistency levels in future years
• In its most recent survey, Single contribution contracts generally enjoyed better persistency levels after four years, of typically 80%+ retention, than regular contribution contracts, which had a dropout rate on average of 10% a year

5. Firms' solvency increases along with cyclically adjusted profitability

• Average total capital and reserves and average profits of firms improve as a consequence of RDR reforms
• RMAR data from August 2010 shows the average profit across all intermediary firms that get at least half their revenue from retail investment business is £82,566. Average capital reserves for these firms are £145,088
• Among these, the firms with more than 51 advisers made an average loss of £437,249

6. Unintended consequences of the RDR do not materialise or are mitigated appropriately

• The FSA is monitoring for any significant changes in the numbers of and types of firms passporting into the UK to give investment advice, to circumvent full compliance with UK regulation such as the RDR rules
• It is also closely monitoring activity around commission levels and will take "any action necessary to prevent behaviour that is not in the spirit of the RDR"