Where the industry is going - FSA Retail Distribution Review
The FSA originally announced their review of the UK retail distribution market in the summer of 2006.The FSA’s intention is that the RDR will modernise the industry and address root causes of problems with how the market operates. The main aims of the current iteration of the paper are:
· Improve clarity with which firms describe their services;
· Remove the potential for adviser remuneration to distort customer outcomes;
· Increase the professional standard of advisers
What is being proposed now?
The recent Consultation Paper (CP18) produced no real shocks when compared to the previous paper we saw in November 2008. However, The FSA has extended the scope of the original review and in places taken a tougher stance on a number of key issues. Such as:
An altogether broader definition of “retail investment products”.
It has also confirmed that protection products may come into scope, but that the results of a separate review will be issued in Q1 2010.
There will be an effective “ban” on commission with effect from December 2012. In line with our assumptions and move to a “Wealth Management Model”. This also extends to “factoring” - factoring is the process which creates upfront indemnity commissions.
The FSA has clearly said no to “grandfathering” - Grandfathering is where no further exams/assessment would be required by the existing adviser population, in effect an exemption from having to achieve any further qualifications.
The particular challenge for the FSA in shaping the RDR has always been to ensure that it responds effectively to the famous (or perhaps infamous) Gleneagles speech in 2006, and proves that any proposals will actually improve both the quality and quantity of financial advice available to consumers. With little if anything having been done to increase the quantity of advice being provided to consumers, quality seems to have been addressed and the clear distinction between “independent” and “restricted” advice is a clear victory on our behalf by AIFA. So, as expected, QCA Level 4 will become the qualification benchmark; grandfathering and factoring will not be permitted and a new Professional Standards Board and Code of Ethics will be introduced. However, until 2012 the FSA will permit “work-based assessments” as an alternative to exams for experienced advisers who do not wish to take the requisite qualifications. The FSA has stated that these assessments will not, be an easy option but we need to see the actual proposals from the relevant examining bodies before we can comment as to the extent that this may help IFAs rather than be another money making exercise by the examining bodies.
Advisers can offer Independent or Restricted advice.
To be ‘Independent’, advisers must carry out fair analysis of relevant markets they operate in and must be unbiased and unrestricted.
‘Restricted’ status will cover single tied, multi-tied, simplified advice and basic advice.
The same standards for Remuneration and Professionalism will apply to both Independent and Restricted advisers (see below for Basic Advice exemption).
The FSA has decided to retain the Basic Advice regime where advisers can sell stakeholder savings and investment products with a streamlined sales and advice process. The same Remuneration and Professionalism standards do not apply to Basic Advice as they do for Independent and Restricted advice models.
All advisers (Independent or Restricted) are to be remunerated through ‘adviser charging’. These charges are agreed with the customer and can be paid as fees or the process can be facilitated by the provider i.e. charges deducted from the product.
Setting of commission by providers and taking of commission by advisers is to be banned, even if the commission is to be fully rebated.
All provider facilitated payments will have to be entirely matched on a 1 for 1 basis i.e. factoring is banned.
Ongoing charges by advisers can only be levied where there is an ongoing service. The exception is where customers are expected to make additional contributions and the advice cost can be spread over these payments.
Advisers will be expected to set out up front their charging structures before giving advice and explain what this means in cash terms as soon as practical.
Product prices may vary by distributor, though the adviser must pass on 100% of any product price discount they achieve to the customer.
Allocation rates above 100% will be banned as they FSA believe they disguise non-transparent charging
All advisers (Independent or Restricted advice) need to achieve a QCA level 4 qualification by the end of 2012.
The FSA is considering equivalent oral assessments for experienced advisers as a transitional process but there will be no grandfathering.
The FSA are bringing forward the decision on the structure of the professional body to 2010; there will be consultation before this in Q4 2009.
• Scope:- The scope of the RDR is widening beyond packaged products and includes collective investments, investment trusts, ETFs and structured products.
• Provider ownership:- Firms can still refer to themselves as Independent even where a provider has a stake in their firm or 100% ownership.
• Group Personal Pensions:-
o The FSA has included draft rules that also cover GPP. These will apply when individual members are given individual advice on the merits of joining a GPP scheme.
o However, the FSA is also looking at ways for applying the principle of adviser charging where a GPP is sold without advice to individuals. One possibility is “arranger charging” where advice is not given to employees.
Next Steps for the RDR
Policy Statement containing final rules – Q1 2012
Implementation date - end of 2012.