Financial advice for retail clients: a decade since the Retail Distribution Review



The Retail Distribution Review ("RDR") was a deep dive into the distribution of financial services to retail investors (private individuals) in the UK, launched by the FCA's predecessor (the FSA) in 2006. Following a series of scandals involving the miss-selling of financial products and provision of improper financial advice to retail clients, the RDR was launched to improve outcomes for consumers and uplift investor confidence in the sector. One of the main concerns was with product providers paying commission to introducing financial advisers, and the concern that this might impugn advisers giving independent and impartial advice to retail clients.

Following a lengthy review, final rules were enacted and came into effect on 31 December 2012 ("RDR rules"). The RDR rules brought about a fundamental change in the way that investment products were, and continue to be, distributed to retail clients. The RDR rules are contained in the FCA's Conduct of Business Sourcebook (COBS 6) and Training and Competence handbook.


The RDR rules brought about 3 key changes:

Banning commission: Financial advisers would no longer be remunerated by way of commission for the sale of product providers' financial products. The FSA considered there to be an inherent conflict in this remuneration structure with financial advisers' recommendations being unavoidably influenced by receiving larger commissions from selling certain products over others. Under the RDR rules commission would be banned and, instead, the onus would be placed on financial advisers to set upfront adviser charges for the provision of professional services to consumers. This was thought to eliminate "commission bias" whilst also revealing true product costs to consumers which were previously hidden in the opaque pricing of products that tried to factor in sales commissions payable to financial advisers.

Clarity of Advice: Financial advisers would need to clearly describe their services as either "independent advice" or "restricted advice", so that consumers better understand the scope of products being considered by the adviser. Independent advice involves advice based upon a full consideration of the client's financial needs from a full range of available products in the market whereas restricted advice is given only in relation to a restricted range of products.

Professional qualifications: raising the minimum level of qualification for all financial advisers from a level 3 to a level 4 under the Qualifications and Credit Framework and requiring 35 years of continuing professional development each year, as well as maintaining a statement of professional standing issued by a recognised professional body. The goal here was to raise professionalism in the industry and improve consumers trust in the aptitude of financial advisers and the integrity of the service.


There was widespread fear across the industry that the changes would make financial advisory services even less accessible to the public, thereby widening the so-called "advice gap", as a consequence of consumers having to pay increased adviser charges in order to accommodate advisory firms costs of meeting the new administrative and professional requirements.

There was also fear that many financial advisers would be pushed into early retirement or out of the industry altogether in response to the new professional qualification requirements.


Advice gap

The fears surrounding the "advice gap" proved to be legitimate. In December 2014, the FCA  released an evaluation of the RDR and found, amongst others, the following:

".. by revealing the true cost of advice, the RDR has led some consumers to consider the extent to which the advice they receive represents value for money, and in some cases conclude it does not" and  "...there is evidence the cost of advice has increased."

"..the average advised customer has over £150,000 of assets under advice. Robo-advice services, offering automated digital or online advice, are becoming more common but remain only a small fraction of the overall market."

"….we also found that many consumers are holding their money in cash rather than investing it, so are missing out on the potential opportunity to make their money work better for them in the longer term. Many consumers do not seek, or receive, the sort of help with their finances that would equip them to make better investment decisions."

This data indicates that the cost of advice actually increased following the implementation of the RDR rules and that financial advice as a service was generally for wealthy customers (at least up until 2020) who were better placed to suffer a loss than those less well off, and not taking advice. It also revealed that take-up of automated robo advice with scope for cost-cutting was still in its early stages.

Much has happened since then, including the COVID 19 pandemic and the cost of living crisis which have both put unprecedented stress on the everyday person's finances. On 17 February 2023, My Pension Expert published their findings from a survey taken from a sample of 2000 nationally representative adults in the UK asking them about their retirement ambitions. This data revealed some interesting insights into the take-up of financial advice in Britain:

"One in three (34%) Britons say they have spoken with an independent financial adviser (IFA) in the past, while just over a fifth (23%) currently using the services of an IFA. Only 18% have called upon an IFA to assist them with their financial planning and management as a result of the cost-of-living crisis. Why are Britons not using IFAs to help prepare financially for retirement? Cost emerged as a key factor with 52% of respondents believing that financial advice is too expensive for them to access it, with this figure at its highest among the over 55s (55%)."

This data indicates that the advice gap remains huge with only a fifth of the adult British population currently taking up the services of a financial adviser. In times of financial stress, like COVID 19 and the cost of living crisis, its eye-opening that according to the report only 18% have since called on the aid of an expert to help them navigate record high inflation and the erosion of value of uninvested or incorrectly invested cash.

Culling of advisers

There was certainly an initial exodus from the advice sector, with many advisers being pushed into early retirement or switching careers due to the administrative burdens of re-qualifying. Ten years on, it appears that there are more advisers now than in 2012, according to figures from the FCA. However, the increase is marginal and arguably the numbers should be a lot higher considering population growth, improved access to education and growth of the financial services sector over the last 10 years.


Although scandals certainly do exist in the post-RDR world, popular opinion seems to suggest a boost to the reputation of the profession over the years, perhaps in part due the heightened qualification requirements brought about by RDR.


The idea behind the RDR was to improve consumer outcomes but, with statistics like those discussed above, its difficult to argue that it has succeeded as a whole. There have been some positives, like greater transparency over cost and eradication of commission bias, but also a significant negative in the form of the large advice gap.

With the RDR failing to address the advice gap, market participants remain focussed on the potential for technology solutions to close the gap by providing more people with financial advice for an appropriate fee.

Ten years on, the FCA continues to have consumer protection at the forefront of its mind with the introduction of the Consumer Duty. The Consumer Duty has a very similar goal to the RDR, aiming to deliver good outcomes for retail customers across the distribution chain. It will be interesting to evaluate the success, or lack thereof, of the Consumer Duty in the next decade.

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