The FSA’s Retail Distribution Review (“RDR”) will come into effect on 31 December 2012. It is the culmination of six years of consultation and discussion (yielding 19 FSA Consultation Papers), FSA roadshows and industry engagement. It is the most recent step on the long quest of the FSA and its predecessors to reform the distribution of retail investment products in the UK and to address the longstanding problem of bias in the advice given by financial advisers to their retail clients.
The RDR in a Nutshell -
The RDR adds new sections to the FSA’s Conduct of Business Sourcebook, in particular the rules relating to adviser disclosure and charging in COBS 6. The main requirements apply in the context of “personal recommendations” given to retail clients in relation to “retail investment products”, so apply only to “advised” business undertaken for retail clients in the UK. The most significant reform introduced by the RDR is the ban on commission paid by product providers to advisers in exchange for distributing their financial products. In the UK, independent financial advisers (IFAs) are the predominant means of distribution to retail investors, and earn the majority of their income from commission paid by product providers. Despite rules requiring clear disclosure to the customer of the amount of commission received by an IFA, the FSA considers that commission inevitably leads to bias in recommendations given by IFAs to customers and represents a significant part of the overall charges incurred by the customer over the life of its investment, typically being funded by up to half of the annual management fee.
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