Rules in the UK requiring distributors to charge investors for advice are starting to provide key lessons for Asian regulators as they consider how best to protect investors as their domestic industries develop.
Investors in the UK have responded to the introduction of the retail distribution review (RDR), in force since January 2013, by pulling back from seeking advice.
While 13% of retail investors paid for investment advice before RDR, that figure has since dropped to 7% now, according to a survey conducted by Fundscape on behalf of the Association of the Luxembourg Fund Industry (Alfi).
Bella Caridade-Ferreira, chief executive of Fundscape, said the principal lesson was that if people are not used to paying for advice – because the cost of providing it has traditionally been bundled into fund costs – they tend not to value it. “The value of advice is still largely misunderstood by mainstream investors,” she said.
RDR bans fund manufacturers from paying inducements to intermediaries to sell their funds. The only commissions paid to advisers must now come from end-investors, for the investment advice being provided.
The rules, which also require advisers to pass additional qualifications to provide advice, have seen a widespread withdrawal of retail products distributed via banks, which felt the costs of training their sales-force to meet the higher standard of qualification were prohibitive.
Many banks had been fined prior to RDR when it was judged that they had not properly informed investors of some of the risks of mutual fund products they sold.
Regulators in Asia have been following the experiences of industry participants closely in the UK, where the distribution market is dominated by intermediaries, and may well have a far wider range of examples to draw from soon.
While these rules have already been passed in the UK, they are pending approval by the European Commission. The inducement ban looks set to be adopted in the next set of Europe-wide Markets in Financial Instruments Directive (Mifid II), due this autumn.
This will see the ban extended to Europe’s other leading retail fund markets, including France, Germany, Italy and Spain, many of which have bank-dominated distribution networks.
The European industry has been lobbying hard for the regulator to abandon the ban on inducements contained in the current Mifid II draft, in favour of a move towards greater transparency where investors can see where the fees charged by funds are distributed and to whom.
“Europe is not ready for a ban on inducements,” said Marc Saluzzi, Alfi chairman at the organisation’s conference in Luxembourg last week. So far there is little indication that the European Commission will give up the inducement clause.
“If the ban on inducement is contained in Mifid it will have an impact all the way down the distribution line,” noted Henry Kelly, independent director of Luxembourg compliance experts KellyConsult.