The greatest challenge of implementing something novel is the creation of an unintended consequence.
One of the best modern examples comes from the story of a little blue pill. Initially designed as a medicine to reduce blood pressure, Viagra has had a much broader impact on society and potentially a counter impact to that which was initially envisaged.
Similarly, a decade on from the implementation of the Retail Distribution Review, the unintended consequences appear to have had a much broader impact than that intended by the architects of this watershed change in regulation.
While these unintended consequences are myriad, one of the most important stemmed from a clearer definition of independence as a moniker for financial advisers and investment managers.
Claiming to be ‘independent’
The term “independent” had long been cherished by financial advisers as a badge of honour and a commercial advantage over other advisers that represented a narrow range of products.
In reality, most independent advisers worked from a constrained list of providers. These providers were often chosen with great care, but nevertheless represented a small subset of the providers.
The regulator was clearly concerned that this was not meeting the unique investment needs of the end clients, and consequently this familiar way of operating was upended by two clauses in the Financial Conduct Authority’s handbook that were implemented as part of the RDR.
The first (COBS 6.2A.3R) states: “A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are […] based on a comprehensive and fair analysis of the relevant market.”
While the second clause (COBS 6.2A.11G) states: “A relevant market should comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client.”
Taken together this was interpreted as meaning that advisers must consider the full range of available investments when making an investment recommendation. This would be challenging enough but, when combined with the FCA’s ever-present mantra that “past performance is not a guide to future returns”, advisers were faced with an overwhelming task.
Many wondered how it would be possible to have an in-depth knowledge of all the investment options available and not screen by past performance. In addition, some advisers had deep concerns about certain retail product types that they consequently refused to use for any client.
Justified or not, this deliberate exclusion of a class of products would prevent advisers from claiming to be independent.
Finally, for an adviser who had grown up on a diet of regular “visits” from the Personal Investment Authority/Financial Services Authority, the natural expectation was that they would have to demonstrate the efficacy of their “whole-of-market” research approach to a sceptical regulator, a seemingly unassailable challenge for most.
