Financial Advice Market Review & the Retail Distribution Review

Following a stream of significant reviews to the pensions industry which came into force in 2015, the need for widespread professional advice became even more evident. Individuals had to take responsibility for making crucial financial decisions now that they no longer needed to buy an annuity with their pension pots accrued during their working life.  Not only did they need to make the right financial decisions, but they also needed protection from frauds and ‘scams’. 

However, there were concerns that the financial advice industry did not match these needs. There was a perceived ‘advice gap’. 

A Treasury/ Financial Conduct Authority review – Financial Advice Market Review (FAMR) was established. This reported in March 2016 and made a large number of recommendations addressed to both the supply and demand for financial advice.

The financial advice industry had been distinctively shaped by a previous retail distribution review (RDR) which was a review of the way in which financial products were sold to the public. It came on the back of a series of mis-selling ‘scandals’ but also reflected long standing disquiet over the use of commission based remuneration systems at the heart of much financial advice.  Initial analysis of the impact of the proposals suggested that as a result of the changes proposed, a third of independent financial advisers might leave the industry. 

Such forecasts were downgraded over time but the new advice industry which emerged post RDR, was characterised by significantly fewer advisers, more qualified and impartial advisers but more expensive too. This put, it was argued, advice out of the reach of individuals with relatively small pension sums (or indeed other investment needs) leading to accusations of an ‘advice gap’.  The second part of this Paper describes the historical development and implementation of the RDR.

This note lists the main recommnedations of FAMR and explains the background to the RDR; its possible consequences and includes the first independent review of how the RDR has affected the sector two years on.