Better Business: The RDR’s latest milestone

Peter Hicks, head of UK retail sales at Fidelity International, looks at what the most recent RDR paper means for consumers and platforms.

It might seem strange to say this, but there is something reassuring about reading the FSA’s latest papers on the RDR. What the papers lack in gripping prose, they make up for in reason and principle. They remind us precisely what all of us in the industry should be striving to achieve: products and services delivered with transparency and integrity, intended to give the best outcomes for our customers.

The FSA’s stated top priorities are to help consumers understand what they are buying; to eradicate the reality and suspicion of mis-selling; and to improve the standing of the advice industry by raising professional standards. No one can argue with what the RDR is aiming to achieve, and to read this in black and white helps refocus the mind on what is the best way to achieve those priorities.

Policy Statement

The latest milestone on the epic RDR journey is the publication of the Policy Statement, which sets out the results of the consultation period and the proposed rules that will come into effect at the end of 2012. Accompanying this statement is a new Discussion Paper that asks for views on the role of, and rules for, platforms in the implementation of the RDR.

It is good news for the industry that the FSA recognises the central role platforms will have in the implementation of the RDR. Platforms will be able to offer services to advisers, product providers and investors that make the mechanics of separating the cost of advice from the cost of products easy. For this and other reasons, the FSA accepts a growing proportion of new and existing business will find itself onto platforms.

The Discussion Paper asks for views on what role platforms will take in the industry, on whether they are product or service providers and on who should pay for them. Of concern to the FSA is the potential for platforms to favour product providers that offer them the most money to distribute their funds with the potential for advisers and their clients to be led into unsuitable products as a result.

The FSA’s stated preference, according to the paper, is to stop product providers from making payments to platforms and for the platform pricing structure to be unbundled. The mechanisms through which platform pricing and charging are delivered should be determined by the principles of transparency and cost to the consumer.

However, it seems the paper takes a giant leap from insisting upon transparency of pricing, which we think is necessary and fully support, to suggesting that transparency is only to be achieved by unbundling and the prohibition of payments from providers to platforms. We think that is wrong.

At first glance, unbundled pricing – that which separates the cost of each element of the distribution chain – is a transparent solution. But breaking down a product’s cost is not necessarily a route to consumer value.

Bundled or unbundled?

The low-cost airline industry famously unbundles its costs, but for most customers the result is a tangle of virtually compulsory add-ons. When passengers are forking out £100 for a £1 flight, they can be forgiven for feeling cheated when they could have taken a different flight for a cheaper, ‘all in’ price. I doubt the FSA would be happy if investors had the same sense of injustice when making their investments.

In addition, in the same paper, the FSA concedes that stopping product providers from making payments to platforms is likely to result in higher prices for consumers. We would argue higher costs to consumers are not a good outcome.

Good value is not necessarily delivered through one pricing structure over another. Good value is more likely to be delivered by efficient platforms that can use their scale and technological know-how to deliver ultra-efficient administration processes for the benefit of advisers and their clients.

At the same time, they should be truly transparent in their business approach, including pricing, and supportive of the need to avoid bias. Then consumers can choose with confidence.

It seems to us the leap from transparency to unbundling is a non sequitur. Both models of pricing, bundled and unbundled, exist today side-by-side and each has its supporters.

However, if good value and cost are to feature as desirable outcomes for consumers, improvements in transparency and disclosure for both models – assured by new FSA rules – would enable both to co-exist within the FSA’s stated aims.

And it is on these developments that the industry should focus between now and the end of 2012. The principles of the RDR are agreed; the only points outstanding are how the industry will mobilise itself behind its customers to reassure them the new rules have been adopted in the spirit in which they were written.