Distributors
• Have you read the RDR papers and understood the implications – not just what the journalists say or some of the rumours and interpretations of others?
• Do you understand the differences between ‘independent advice’ and ‘restricted advice’ – which best suits your current/future business model (the scope of what an IFA does today, may not be sufficient for post 2012)?
• Do you realise that ‘Adviser Charging’ applies to ‘independent’ AND ‘restricted advice’ (Bancassurance is not ‘getting away with it’ as someone recently claimed)?
• Do you already charge fees in the way you will post 2012… if not, do you have a plan for how you will do so… how will your customers respond?
• Do you realise that Restricted Advisers – including those offering ‘Simplified’ advice are required to have the minimum threshold of QCF level 4 that Independent Advisers do (some think Simplified Advice has a lower threshold)?
• Existing Advisers must have achieved QCF level 4 by the end of 2012, otherwise they cannot advise – even if they are supervised! New Advisers after 2012 may be able to advise – supervised – once they attain QCF level 3
• Will you segment and focus on Wealth Management or offer a mass-market service – can you do so profitably – what will you do about non-profitable customers (do you know who they are)? Will you ignore them, outsource servicing or try to offer an automated/call centre Simplified advice service?
• Will distributor scale (Networks/Nationals/Bancassurance) prevail – obtaining discounts to pass onto customers, thereby offering potential savings to customers – or will small specialists build better relationships and trust?
• Have you looked at how you can optimise efficiencies to ensure that your business model will be commercially viable in what is likely to be a more price competitive market?
• Failing to plan is planning to fail… this applies to business as it does to customers
• How will you collect fees – Cheques (being faded out), Standing Orders (lack control), Direct debit (you have to have scale), via providers (fee offset)

Manufacturers
• Are you putting off acting on the RDR proposals until they are more clear?
• Do you know how your business will survive and grow under the RDR regime (strategic view and operational view)?
• Do all your key managers know and understand what RDR will require of your business?
• Are you aiming at broad product segments or niche dominance?
• Will you be competitive… looking at product segments – distribution channels – brand strength – price – cost efficient?
• Which companies do you expect to survive/disappear?
• What is your M&A strategy (aquire or be aquired)?
• Are Platforms an opportunity or a threat to your business model?
• Will ‘Product Wrappers’ displace Provider Products?
• How many Platforms are needed and will there be expansion or consolidation?
• Do you rely on independent adviser distribution or choose to ‘own’ distribution?
• How many Product manufacturers will survive the next five years?
• What flexibility of options for ‘Fee Offset’ against the Product will your systems need to allow?
• Which fees can come from the products?
• Will the Distributor have to run multiple illustrations to show different scenarios for how fees can be taken?
• How will you manage ‘Decency’ checks?

There are many more questions than we have set out above and both manufacturers and distributors need to consider how they would answer them and what the implications are for their business. The market will change for all parties over the next five years… the survivors will most likely be those that are evaluating their position and responding now. There is no simple or right answer and the only constant will be change, but those that do not see the need to adapt, will most likely not survive.

I was recently criticised by one software supplier for describing them as small in our Professional Adviser technology column. I hadn’t done this to insult or demean them, in fact quite the opposite. In the context of the article I was trying to convey that they were nimble and that all their clients really mattered to them and received responsive attention and service. However, the comments did start me thinking.

The big companies have deep pockets and can, if they choose, weather difficult market conditions. They also have access to wider resource pools to help on big deliveries and have the ability to pour substantial R&D budgets into new solutions. The benefits are significant if large corporate projects with substantial amounts of bespoke development are being considered.

It would be a mistake however to think size brings with it certaintly of stability. The cost bases of larger companies are frequently a lot higher and when markets move against a company or product, then these companies may have less scope to reduce them and can quickly become vulnerable. It is particularly true when discussing a division of a larger company where the relative size compared to the overall organisation is very small. I once worked for AT&T, a huge global company, which had a reasonable presence in financial services in the UK (owning a third of The Exchange at the time). However, the relative size of the UK business compared to the US was so small that it closed the UK operations virtually overnight without batting an eyelid and leaving some clients poorly served.

Some of the smaller companies – if focused on a niche area, may actually have more domain knowledge than exists in much larger organisations and may be closer to the clients and more nimble in how they respond to market opportunities. In terms of financial longevity, some relatively small firms have a substantial user base and therefore will always be of value in the market and even if they hit hard times, a competitor may buy them to access the user base.

The bottom line is for product-based companies, I think size is not of over-riding importance, as long as a critical mass of clients is reached and as long as the company is in good financial health. If the companies product and service is compelling and the management team is sound, then success and longevity should follow. For service delivery organisations, size does become important and prospective clients would do well to check that the resources of development partners are not going to over stretched before they contract with them. So, back to the company that took offence at my comment about them being small, perhaps their repost should have been – ‘they don’t make diamonds as big as bricks’!

Last week I mentioned that Dan Waters of the FSA, had commented in a speech to a McKinsey’s Conference about Wrap and the FSA’s forthcoming explanation of their ‘deliberations’. In the same speech, Dan also talked in detail about how the FSA is looking to extend its view of the investment value chain to look at product governance and oversight.

The FSA has traditionally focused its regulatory attention on the point of sale transactions at the end of the value chain. As most of you will know, this includes things like Key Features, Adviser status and commission disclosure, as well as rules on how performance is presented. The FSA has become increasingly concerned that this focus and potential for intervention may be too late, and could leave the door open for more ‘mis-selling scandals’, which they are determined to avoid in the future.

Dan Waters has a specific interest in tackling risk management as he is the first ‘Director of Conduct Risk’ at the FSA. As a result of his view that the regulatory focus may be too narrow, he is looking at how they look more deeply and further up the value chain to include product design and oversight by the product providers (manufacturers). In doing so, the FSA intend to look at the business models of providers to see what the core strategy and drivers of income and profitability are. They will be looking up-stream of the point of sale including product development and marketing, as well as down-stream at post-sale handling and servicing. Whilst you may think that this would be covered and motivated by the obligations of TCF, the FSA seems to be unconvinced that Providers are designing products that add customer value or address real needs. Dan Waters believes that Providers are focused on designing what can be sold, or trying to beat a competitor, rather than trying to meet the needs of the consumer first and foremost.

How will this extension of supervisory scope manifest itself? Well it would seem that the FSA will be looking to test consumer outcomes (and/or see what testing the Providers have done?). They will be looking at stress and scenario testing to see what type of customer is and isn’t appropriate for the product and checking to see if the Provider has been clear about what the product does, who it is for and if certain key characteristics such as the nature and scale of risks is properly presented. The stress testing should look at a range of market conditions that could trigger certain product features that may not be immediately obvious or expected in normal conditions. The triggering of MVAs on With Profit Bonds in the past was a surprise to some customers (and advisers!) and I expect this is the sort of area that the FSA will want to expose as a potential risk. The process should be part of a systemic and objective assessment that is built into the existing supervisory framework.

Some may fear that this interest in the product governance and design is leading to a situation similar to some EU Countries which regulate product design. Dan Waters said that this wasn’t their intention. However, it is clear that whilst the spotlight on distribution is not changing, the spotlight is going to be extended to look at the products themselves and the motives and behaviour of the manufacturers. RDR is likely to cause some Providers to redesign parts or all of their product portfolios. In doing so, they should bear in mind that the FSA is going to be keeping an eye of what they build and why, as well as how it is sold.