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The overhaul of the UK’s retail distribution landscape, as put forward in the FSA’s recent retail distribution review interim report, will not only signal a drastic alteration in the business models of many advisers, it will also impact significantly on the operations of both providers and banks.

In the drive towards creating a simpler regulatory landscape, the regulator has called for a clear distinction to be drawn between advice and sales, which will be the two main spheres of retail distribution, supported by a third sphere, namely the new money guidance service.

According to the interim report those individuals who wish to be classed as advisers will have to bring in a step-change in standards, provide whole of market advice and adapt their business model to ensure that they are, in the regulator’s words, “acting as the agent of the customer”. While many advisers operating under the current advice regime may feel that they are already doing this, the FSA is also calling for appropriate minimum professional standards to be imposed and the end of provider-paid commissions.

On the other end of the retail distribution spectrum will be sales, which in legal terms will refer to any service which is non-advised. The two forms of sales, which the FSA is proposing, will be execution-only – where the customer knows precisely what they want to buy and does so – and guided sales, which refer to customers who go through an information-provided process that is non-advised and then leads to some customers choosing to buy a product.

The final pillar of the FSA’s new simpler regulatory regime will be money guidance, as stipulated in the Thoresen Review of Generic Financial Advice published in March, which will be a service offering impartial information and guidance on money matters.

Money guidance, which will not be a commercial service and will not be regulated by the FSA, will be a model geared at educating the lower paid public on money matters, including their savings and protection needs. The interim report stipulates that it will be important that the savings and investment market comprises a variety of clearly signposted services, including opportunities to self serve through non-advised services, and that consumers, which could include the likes of single parents or those in debt, trust in these services.

At present, the FSA and the Treasury is leading a pathfinder programme to set up this service and should money guidance take-off, the idea is that it eventually develops into a national service, provided by guidance counsellors.

The watchdog suggests in the interim report that should money guidance develop in the way it is intended to it will be a crucial pillar underpinning the future of retail distribution, as it has the potential to stimulate consumers to seek out regulated advice and sales services. So, in its essence the money guidance model should feed the advice and sales sectors with new business.

Those who wish to bear the title of adviser will have to look towards developing a business model geared at the public who fall in the realm of the mass affluent - this could include individuals who have come into inheritance, won the lottery and who are reasonably debt free – in a nutshell those with enough money to warrant signing up for specialised advice and able and willing to pay a fee out of their own pockets.

Some advisers have, however, raised concerns that this will put them into direct competition with banks. Banks will be able to offer the so-called guided sales through their salespeople, which will be free of charge and enable them to flog their products, which may not necessarily be of a higher quality.

While advisers will be increasingly turning their focus to the higher end of the market, the constant stream of newly launched wealth management arms by both banks and providers, will also pose competition in the sector, especially considering that banks have direct access to customers’ records, enabling them to pick out wealthy clients and target them.

So will smaller one-man bands be able to compete in such an environment, or will they, according to the FSA’s stipulations, be forced to resort to calling themselves sales people?

As the interim report stipulates, those players who wish to continue operating under the current regime – in other words, continue to receive commissions from product providers – will fall into the category of sales and legally will not be able to give advice. The sales pillar will very much be a business model aimed at Joe Public who is debt free and moderately paid, and under the current retail distribution landscape this is the profile of any of advisers’ existing clients. However, the players who are expected to operate in the proposed ‘sales sector’ are the likes of banks, life offices and wholesalers.

The interim report also calls for product providers to change their business models to compete for distribution, urging them to focus more on quality and the price of their products, than currently, which could significantly affect the design of their products. But if you take a glance at what is currently happening in the mortgage industry, whereby providers are cutting out intermediaries, going directly to clients themselves and offering more competitive deals, the question which has inevitably been asked is if the FSA cuts the umbilical chord between providers and advisers, will this inevitably lead to these two former dependants becoming fierce competitors?

While many have welcomed the interim report and the moves towards a simpler regulatory market, some advisers feel that there is still a huge gap in the RDR which is just a recipe for further confusion down the line.

Alan Lakey, a partner of Highclere Financial Services, said: “The real problem is the bleed-through. The RDR is not dealing with protection, mortgages or general insurance and fails to acknowledge that in taking this route it immediately fails in its stated aim of reducing confusion. Imagine the client who wishes a mortgage supported by an Isa plan and protected by a life or critical illness policy. The RDR suggestions will only apply to the Isa. Will the consumer be confused? Of course he will, even I am.”

Mr Lakey added that the RDR proposals have been ill-thought out and will not achieve any of the stated aims – reducing confusion, boosting confidence and bridging the savings, retirement and protection gaps. He said: “It will result in many IFAs leaving the industry because they do not want to pursue additional qualifications. It will also result in many IFAs turning to the tied side, to the detriment of their clients and finally it will result in banks being enabled to offer ‘guided sales’ where the plans offered are highly profitable for the banks and their salespeople, but of much lower quality than currently available.”

However, not everyone shares these critical views of the RDR.

Martin Bamford joint managing director of Informed Choice, a business which is 100 per cent fee based, said that the extent to which the RDR will impact IFA businesses, depends on how the individual business model is already structured. He said: “Within our own firm, for example, we do not feel that too much would need to change if the RDR is implemented as suggested in this interim report. We have already obtained higher professional qualifications and work on an agreed fee basis with our clients. Where the RDR could require massive change is for the IFA business model that has ignored the ‘writing on the wall’ for the past decade. Those poorly qualified practitioners who still work on a commission and product sales basis are going to need to make radical changes to stay in the game.”

Mr Bamford, however, also foresees a possible exodus from the industry by IFA firms that may decide the level of change is simply too much to handle. He said: “We could either witness retirements or a movement from the IFA sector to the sales sector, as defined in the interim report. If an IFA firm does not want to run their business in the new way then a movement out of the industry or into the sales sector will result in a much more professional advice sector.”