After years of a complex and opaque financial services remuneration systems, tales of dishonest wealth and pensioner exploitation and about a year of planning, in January 2013 the UK Financial Services Authority (FSA) decided to act.

In one swift move, they launched the Retail Distribution Review (RDR) – aimed at improving service levels and transparency in the financial advice industry and increasing the professional standards of investment advisers.

Under this regulation, financial advisers were required to introduce fee-based models and were banned from earning commission from fund management companies in return for selling or recommending investment products. They also had to offer either “independent” or “restricted” advice and explain the difference to clients.

At the heart of the RDR was an increased focus on transparency and the need to put client service at the centre of business models.

Will Maye, from the CoreData London office, files a series of reports about what has changed, what life is like now and the potential lessons for Australians as their industry follows fast in the English footsteps.

Critical Impacts:

  1. Adviser Numbers Fall by 18% – Then Stabilise

The RDR caused a decrease in adviser numbers. The Association of Professional Financial Advisers (APFA) estimates the total number of UK advisers stood at 27,080 in 2009. Numbers subsequently plunged to 22,168 in 2013 after RDR was introduced.

But after several years of decline, the number of UK financial advisers has recently stabilised. According to the APFA, the number of advisers increased slightly from 23,640 at the end of 2014 to 23,864 as of December 31, 2015.

The RDR also saw a jump in the number of restricted advisers. CoreData’s UK Adviser Fees and Business Models 2015 report showed the number of restricted advisers increased from 3.7% of the UK adviser universe pre-RDR (2012) to 14.6% in 2015.

The driver for this appears not to be business simplicity – but the desire for advisers not to take the exams required to be come professionals and offer full advice services.

  1. Outsourcing Investment Management Jumps

Outsourcing of investment management has become increasingly popular in the wake of the RDR.  This isn’t because advisers think that someone else can do a better job, or they find the work too difficult – the driver appears to be to reduce their liabilities and invest greater energy in financial planning and client management,  rather than investment management.

The shift from managing investments to financial planning was underscored by CoreData’s Adviser Fees and Business Models 2015 report that found advisers only spend 15% of their time managing existing client investments and that just 11% of advisers consider managing client investments their most important task.

  1. Advisers Think The Advice Gap Has Grown

CoreData Research (Adviser fees and business models 2015 report) found advisers strongly believe the RDR has created an “advice gap” with over half (52%) claiming its introduction has had a negative impact on mass market investors. (The advice gap refers to those people who cannot or will not pay for full regulated advice following the introduction of the RDR’s fee-based model.)

Interestingly, this phenomenon now seems to be playing out in the U.S. ahead of the Department of Labor’s fiduciary rule which is set to come into effect in April 2017. CoreData’s November 2016 report, The Fiduciary Rule, found a strong majority (71%) of US advisers plan to disengage from some mass-market investors because of the DOL rule. The expected move away from mass-market clients comes amid concerns the fiduciary rule will make advice too costly.

Previous CoreData analysis revealed about seven in 10 advisers in the UK said the RDR had made it more challenging to work with low balance clients. To combat this, a third said they would consider adding an execution-only service for such clients.

The advice gap is generally considered to be the most negative outcome stemming from the RDR. In 2016, the Government’s Financial Advice Market Review examined how technology can help close the advice gap through the delivery of cost-effective solutions.

  1. The Advice Gap Triggers The Rise of Passives and Robo Advice

Passive investments have found favour with advisers and investors in the post-RDR world. Their low cost appeal and use within automated advice propositions make them an attractive proposition to mass market investors and a potential solution to the advice gap created by RDR.

Passives have also risen to prominence as active managers struggle to outperform and their higher fees come under increased scrutiny.

  1. The Work Required in Compliance Documentation Jumps

In CoreData’s UK Adviser Fees and Business Models 2015 study, advisers cited increased paperwork and the cost of remaining independent as the biggest obstacles they faced resulting from RDR. The study laid bare the pressure advisers are under — with regulation, general administration and continued professional development taking up 40% of their time.

  1. Complaints Numbers Fall

Financial Ombudsman figures reveal a fall in the number of complaints about financial advisers after the introduction of the RDR.

Data from the Financial Ombudsman’s annual reports published in April 2012 and April 2014 show financial adviser-related complaints fell from 6,850 to just under 5,000 in the respective preceding 12-month periods.

The fall in complaints has been attributed to a more highly qualified and professional adviser workforce.

  1. Fund Charges Fall

Fund charges have decreased since the introduction of RDR. According to a 2016 analysis of the top selling funds by online investment platform rplan, the average annual fee had fallen from 1.32% in 2013 to 1.03%.

– The RDR’s focus on transparency has seen fund fees become more competitive. The downward pressure on prices is also due to the popularity of ETFs and passive investments.

– Fees will likely continue to come under downward pressure amid increased regulatory scrutiny. The FCA’s recent asset management study was highly critical of active fund managers for charging high fees for low returns at a time when cheaper passive alternatives are available. The regulator said fund managers have not embraced the spirit of RDR and proposed an all-in fund management fee.

  1. Regulatory Fines Fall

Fines dished out by the FCA and predecessor body FSA on financial service firms have decreased since 2014.

In 2013, the total value of fines was £474.2 million (A$772.8 million). The total fine bill then hit a peak of £1.5bn in 2014 before declining to £905.2m in 2015 and £22.2m in 2016.

The 2016 figure represents the lowest total since 2007 when the FSA imposed fines worth £5.3m.

The fine total fell in 2016 due to the fact that the huge fines meted out to banks for forex and Libor rigging in 2015 and 2014 were not repeated.

Aviva received the largest fine in 2016 of £8.2m for platform failings.