Evershed’s Tamara Cizeika sees laws of unintended consequences at play around RDR

Tamara Cizeika, senior regulatory lawyer at Eversheds, sees considerable levels of unintended consequences in the law supporting the UK’s Retail Distribution Review (RDR).

The Office of the Parliamentary Counsel in the UK has apparently launched something called “The Good Law” initiative, with the express purpose of making legislation clearer, simpler and more accessible. This follows a report titled “When Laws Become Too Complex – a review into the causes of complex legislation” dated March 2013. Perhaps not unsurprisingly, this reached the view that complex legislation is due to a combination of factors, such as complicated internal procedures within government, ineffective consultation, a lack of time for scrutiny and a lack of consolidation.

But perhaps RDR should be a case study for such a project.

In the making for some 6 years, 3 months and 15 or so days, it cannot be said that there was a “lack of time for scrutiny”. But what RDR may demonstrate is that the law of unintended consequences is a powerful force of nature and should not be underestimated.

Although there is much to praise in the thinking and intentions behind RDR, even its ardent admirers would admit that it has precipitated some undesirable developments in the market. For example, Barclays announced a withdrawal from the general advisory market in January 2011. HSBC announced one wave of adviser redundancies in 2011 and then another in 2012, saying that “the forthcoming introduction of the Retail Distribution Review in January 2013 will have a major impact on the bank’s UK business.” RBS later scaled back its financial planning and advisory services, followed by Lloyds, Santander, the Clydesdale Bank, the Yorkshire Bank and the Co-operative Bank. A press release by AXA in particular is telling:

“AXA UK remains a strong advocate of consumers being able to access affordable advice for their particular investment needs. Following similar announcements by major retail banks, we are very disappointed that AXA UK must also now withdraw this service having not found a model which balanced the regulatory requirement that the service be profitable in its own right, whilst setting advice fees at an affordable level.”

This issue suggests two fundamental concerns – one of form, and one of substance.

Access to advice?

The point of substance was neatly expressed in the FCA’s (Financial Conduct Authority, successor to UK regulator the Financial Services Authority) recently published Risk Outlook for 2013:

“…there is another side to the risks we are concerned with: … withdrawal of sales forces … and the detriment to society of people not being able to get access to the right products.”

This is no small matter. In one of its early RDR discussion papers, the FSA flagged that one of the “features of the retail investment market” they “want[ed] to address through this Retail Distribution Review (RDR)” was as follows:

“Many consumers who have the means to save are simply unable to afford advice relating to their financial situation. Moreover, some consumers may not be able to access advice because the costs of regulatory requirements, and the ways in which many firms apply these requirements, limit the number of firms willing to serve certain types of consumer.”

And later in the same paper:

“We want the RDR to stimulate delivery of a number of specific outcomes. These include [among other things]: … a market which allows more consumers to have their needs and wants addressed …”.

This was a laudable objective, and remains a valid focus for regulatory action. But what is the prognosis for RDR assisting on this front? At present, it is grim.

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