Why is the American RDR set to fail where the UK succeeded?

Donald Trump has scrapped the American RDR. Well, he’s trying to as he settles into life in the Oval Office.

The US Department of Labor rule is proposing a fiduciary duty on broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries when advising on US retirement plans – ERISA and individual retirement accounts (IRAs).

It ensures advisers must act in the client’s best interest. If advisers want their clients to use fund managers with high paying fees then it must be justified explicitly, effectively making it near-impossible. It significantly raises disclosure requirements.

In some ways, it goes further than the RDR by imposing a fiduciary duty on all advisers, which goes beyond the FCA’s Treating Customers Fairly.

Labour peers and MPs have pushed the idea of a fiduciary duty for all FCA-regulated staff only to be rebuffed by the last government.

The Department of Labor rule is due to come into force on 30 April until President Trump signed a presidential memorandum asking for the department to come up with an alternative.

The new government’s argument is that the rule restricts consumer savings choices and imposes expensive compliance burdens on affected firms.

The RDR was introduced in the teeth of opposition from advisers and MPs but still managed to be pushed through.

It also saw a change of government – from Labour to Tory/Lib Dem coalition in 2010 – while it was in the middle of its proposals. Just as the US saw a change in government last month.

How has the American lobby succeeded where the UK opposition failed?

Firstly, there was more money at stake for bigger companies. The US rule would have cost asset managers and banks more than $31bn over 10 years.

This was direct threat to large allocations to US mutual funds as well as advisers. That meant the banks were ready to throw cash at the problem in a big way including court cases and political influence.

It also meant the opposition was united and there were very few industry participants who broke away from the pack to claim this was a good idea. Conversely, there were some advisers supporting ideas behind the RDR of high qualifications and more transparent payments.

Secondly, the rule was introduced by President Obama’s government. The proposals for a fiduciary rule have been in the pipeline for years at the US regulator, the Securities and Exchange Commission.

But the regulator was reluctant to move forward. The Department of Labor, which is responsible for US retirement savings, stepped into the breach.

Using a direct government department politicised the matter irrevocably. In the unforgiving pit of US politics, this became Obama’s rule and thus a target for repeal by Republicans.

The Department of Labor rule became a totem of ideological conviction. You are either for de-regulation or you are against it, especially Obama regulations.

The RDR was never politicised along party lines. When the Treasury select committee recommended a one-year delay to the RDR in 2012, it was instantly dismissed.

It showed, counter-intuitively, the limits of bipartisanship. Without a government or potential government opposing it then the pressure on the FCA was minimal.

Even the parliamentary debate on the RDR – organized by Mark Garnier and Harriett Baldwin in autumn 2010 – did not force a change of course.

The RDR had the tacit support of all parties, except Ukip which called for a full repeal when the colourful Godfrey Bloom was its financial services spokesman.

Thirdly, it is the luck of timing. The RDR was introduced at a time when financial service regulation was all the rage. Banks were the baddies and the FCA was rampant.

Politicians and consumers wanted to hear what the government was doing to prevent scandals of the past from PPI misselling to the collapse of the UK banking system.

There wasn’t much space for a fierce debate on the merits of financial regulation in the pre-2013 atmosphere.

But not anymore. De-regulation is all the rage on both sides of the Atlantic with UK banks eyeing up Brexit as major opportunity to shed red tape.

In the US, banks and financial services are emboldened with so many of their number serving in the current administration.

Shedding the Department of Labor rule neatly fits with the narrative that the state and regulation has been got too large and it makes it less politically toxic to cut back.

As advisers, regulators, consumer groups, government and banks try to reshape a post-RDR advice market in the UK then it is worth heeding some lessons from across the pond. They are different financial services markets and comparisons only go so far.

But major political and regulatory change is dependent on powerful lobbies, political support and accidental timing.

1 Comment
  1. Profile photo of Phil Melville
    Phil Melville 2 months ago

    I don’t think you can say that the UK attempt at RDR has actually succeeded just because there are new words being used within the provider and advisory community.
    The regulator seems to have satisfied it’s ambitions for change with the imposition of Level 4 type qualifications from which it thinks it has been seen to improve consumer outcomes.
    The reality is that the provider and adviser community have simply adopted new vocabularies to dress up commission as something else. Products remain the dominant source of income through adviser charging.
    Pensions freedoms demonstrate how little things have changed with the nonsensical attempts to impose exorbitant charges on consumers based on historical commission levels morphed into hourly rates.
    The provider and other vested interest lobbies have done their work very well yet again.

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