FSA Regulated Firms And The Retail Distribution Review

By Tony Scott

The Retail Distribution Review (RDR) is central to the FSA’s agenda of customer protection and will affect firms across the market including the product providers (e,g iinsurers and asset managers) and distributors (eg banks, wealth managers and IFA’s).(including firms of accountants directly regulated by the FSA.).

The RDR aims to drive structural change throughout the retail investments industry, in order to give consumers confidence that the advice they are given, and products they are sold, are best suited to their needs.

The regulations come into force on 31 December 2012

Main changes

The regulatory changes focus on several key aspects of the distribution of both retail investment products and corporate pensions including:

• Status of advice;
• Standards of professionalism
• Adviser charging, and:
• Platforms.

Such regulatory change is affecting the shape of the intermediary market and distribution models, while the removal of commission from new retail investment products is creating a shift in the value chain and market economics.

The changes required as a result of the RDR are likely to have wide reaching impacts across organisations. Strategic responses will vary significantly in the degree of change involved, but all require significant changes to business.

Status of Advice

Independent advisers

• will need to consider a broader range of products (beyond packaged products)
• independent advisers will need to provide unbiased, unrestricted advice based on a comprehensive and fair analysis of the relevant market; and
• all advisers will have to inform their clients before providing advice, whether they provide ‘independent or ‘restricted’ advice’.

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of a genuinely independent adviser being free from any restrictions that could impact on their ability to recommend whatever is best for the client.

Restricted Advice

Advice which is not independent will need to be labelled as restricted advice, for example, advice on a limited range of products or providers. Restricted advisers are still required to meet the FSA’s suitability requirements even if they offer restricted advice.

Where restricted advisers choose to limit their product range to certain range of investments, or providers there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.

Disclosure of the type of service

All firms providing advice should disclose to each client, what type of advice they will receive: independent or restricted advice. This will enable consumers to know upfront whether they are being offered independent advice or restricted advice.

Standards of professionalism

From 1 January 2013, advisers will be required to possess and maintain a QCF Level 4 qualification to provide advice on retail investment products. An example of the required qualification is the Diploma in Regulated Financial Planning awarded by the Personal Finance Society (A component organisation of the Chartered Insurance Institute).

There are two assessment methods open to candidates:

• Examination – 5 multiple choice online exams and 1 written exam; or
• Alternative Assessment – a single, intensive assessment day. This is available for experienced practitioners

Other professional bodies providing QCF Level 4 RDR compliant qualifications include the Association of Independent Financial Advisers (AIFA) and the Chartered Institute for Securities & Investment (CISI).

They will also be required to keep knowledge up to date by carrying out high quality and regular Continuing Professional Development (CPD) activities of 35 hours per year, with at least 21 being structured learning.

Statement of Professional Standing (SPS)

Advisers will be required to hold an annual Statement of Professional Standing from their professional body.

The FSA has granted ICAEW accredited body status under the FSA Retail Distribution Review (RDR).To obtain an SPS from ICAEW applicants will need to provide verifiable evidence they have met the new RDR qualification standards by holding a fully compliant RDR financial services qualification or that they hold approved RDR transitional qualification and have completed the required 'RDR gap-fill'.

Adviser charging

The key requirements are:

• Advisers will have to set their own charges for their services, since they will no longer be able to receive commission set by product providers;
• Advisers should have charging structures based on the level of service they provide, rather than the particular provider or product they recommend;
• Advisers should disclose those charges to consumers up front, using some form of price list or tariff (confirming the specific amount to be paid later on);
• On-going charges should only be levied where an on-going service has been agreed with the client (except for charges for advice on regular contribution products); and
• Product providers will be banned from offering commission to advisers and will also face other requirements if they offer to deduct adviser charges from their products.

Ongoing charges

Ongoing charges should only be levied where a consumer is paying for ongoing service, such as a performance review of their investments, or where the product is a regular payment one.

If an ongoing service is provided, the adviser will need to clearly confirm the details of the service, any associated charges and how the client can cancel the service. This can be disclosed in writing or orally.

The FSA wants consumers to be clear on what services they are entitled to in return for the ongoing payment.

Advisers will need to ensure that they have robust systems and controls in place to ensure that their clients receive the ongoing service that they have committed to provide.

Ban on receiving Commission

The rules do not allow advisers to receive commission offered by product providers, even if they intend to rebate these payments to the consumer. The FSA do not believe that the potential for commission to bias the adviser, or to undermine trust, can be properly dealt with while product providers continue to set commissions receivable by advisers.

Platforms

The rules will require:

• Platforms to disclose any fees or commission they accept from third parties in relation to retail investment products and disclose them in advance of the platform providing services to those clients;
• Adviser firms using a platform service to take reasonable steps to ensure that they use platforms that present the retail investment products without bias;
• Allow payment of adviser charges through platforms - for instance, if a platform has client cash accounts, it could enable payments of adviser charges out of such accounts; and
• Nominees to respond to information requests by authorised fund managers for liquidity purposes

Trail commission

The adviser charging rules will only apply to business conducted after the end of 2012. Where a client bought a retail investment product before the RDR implementation date, the adviser can continue to receive ongoing "trail" commission in relation to his pre-RDR advice until the product matures or is terminated.

If the client chooses to move to a different adviser, the trail commission can be re-registered to the new adviser, but only if the new adviser provides an ongoing service in return for the commission. The new adviser must disclose the actual amount of commission to the client "as soon as reasonably practicable" after the adviser has told the client of its intention to seek re-registration.

Trail commission may also be re-registered to a new firm if the original adviser retires or sells his business. In this circumstances, an ongoing service to the client does not need to be provided.

The new rules also allow trail commission and re-registration of this commission for group personal pensions (GPPs). The requirement for the new adviser to provide an ongoing service only applies where the employer has chosen to move to a new adviser and not to bulk transfers of business by the original adviser.

For the detailed rules on train (legacy) commission refer to the FSA Policy Paper PS12/3

May 2012 

Disclaimer
This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.