- Three Papers were issued at the end of March 2010 and now that the ‘dust has settled’, we thought a quick bullet point summary of some of the points might be quite useful…
- Policy Statement PS10/6 with Final Rules following what was proposed in CP09/18 (June 2009)
- Consultation Paper CP10/8 with proposals for how commission and remuneration are disclosed in respect of Pure Protection business – reconciling differences between COB and ICOB rules
- Discussion Paper DP10/2 with much anticipated proposals for how Platforms will be regulated
Key points (summary of the summary)
- Most of what was proposed by the FSA in the June 2009 Consultation Paper CP09/18 relating to adviser labelling, non-advised services and adviser charging are being taken forward
- The final rules have removed the proposed requirements for Product Providers to monitor adviser charges – the so called ‘decency test’
- ‘Restricted Advisers’ will no longer be required to use a ‘mandated’ form of wording when disclosing their advisory status (but status disclosure will still be required)
- The FSA has set out proposals for Product Provider commissions to be disclosed where Pure Protection products are sold alongside investment advice
- Where advisers elect to sell Pure Protection products under the COBS rules, rather than under the ICOBS rules, they will not be required to apply adviser charging requirements
- A strong and consistent emphasis on establishing and maintaining systems and controls – we believe that technology will be a key mechanism to support this requirement
- The FSA acknowledges that changes to some of the rules and proposals may be necessary once the outcome of the European Commission’s work on Packaged Retail Investment Products (PRIPs) and the review of the Markets in Financial Instruments Directive (MiFID) are known
- No factoring will be allowed for Adviser Charges
- No dilution of Professional Standards (including QCF level4 threshold) being applied to independent and restricted advisers (with the only exception being Basic Advice)
- The FSA’s conclusions on whether increased professional standards should be applied to pure protection advisers will be published in June.
Market and Distribution
- As expected ‘Adviser Labelling’ will require advisers to describe their services as either ‘Independent’(unbiased and unrestricted) or ‘Restricted’ (single-tie, multi-tie, simplified, or basic advice)
- The definition of ‘Retail Investment Products’ now extends beyond ‘packaged products’ to be much more wide-ranging and this may be amended further depending on the PRIPs review
- ‘Relevant Market’ comprises all retail investment products that are capable of meeting the investment needs and objectives of a retail client… it is possible for this to be focused such as on ‘ethical’ investments or maybe on what products are suitable to meet the needs of charities or trusts – but it is felt this will be the exception not the norm
- It is not proposed to introduce a new regime for regulating ‘Simplified Advice’
- There will be no ‘safe harbour’ from how the Financial Ombudsmen (FOS) may deal with customer Complaints under Simplified Advice, the FSA has said that the best way of avoiding problems will be to ensure that advice given to customers is ‘suitable’ to their needs
- ‘Basic Advice’ will continue for ‘Simplified Stakeholder’ products
- Money Guidance was not specifically covered, but the timing of the recent publications coincided with a national roll-out of Money Guidance following pilots in the NE &NW of England
Adviser charging
- As expected, Adviser firms should only be remunerated through adviser charges for any investment advice on retail investment products that they provide to retail clients
- The final rules will require firms to disclose charging structures for services (‘menu’ of charges) and total specific adviser charges (price of the meal chosen)
- The FSA does not intend to set expectations of firms’ charging structures. However, it has said that it may publish examples of good and bad practices following further discussion with the industry (most likely when it has more experience/evidence of what is being done)
- Ongoing charges may be made for ongoing services. However, firms must provide:
- details of the ongoing service and associated charges, along with how clients can cancel the service
- a clear explanation of the ongoing service and charges in way that is fair and not misleading
- monitoring systems and controls that ensure clients receive the ongoing services they have agreed to
- Advisers will not be able to receive additional income outside of adviser charges in relation to Distributor Influenced Funds
- When determining whether product provider commission can continue to be received on ‘old business’ sales made before the new adviser charging rules apply, firms will be have to assess whether the product is essentially unchanged (commission can continue to be received), or if the change has materially resulted in the product becoming a different product (the new adviser charging rules will apply)
- Adviser Charging for vertically aligned businesses applies in a similar way to other distribution models with a clear separation of product and adviser charges with no cross subsidisation
- Debate about Fund manager charges revealed complexity and potential for tax charges when looking at issuing different share classes to enable charges to be recovered. The FSA feels that it is better to deduct charges before the investment allocation is made (Wrap Platforms often use Cash Account)
- Non-advised services will not be subject to adviser charging rules at this stage
- No inducements that conflict with adviser obligations to act in the customers best interest and that do not enhance the quality of service for the client
- It was proposed that ‘Factoring’ services would not be allowed by Product Providers, but following discussions with the industry and OFT, the FSA has decided they should ban factoring and loan funding of adviser charges from whatever source
- The FSA has raised a number of issues that are likely to result in changes to the way Platforms are regulated under RDR
- They have re-labelled Plaform Providers as Platform Operators
- They want to look at how Platform Operators are remunerated, how adviser charging should operate through the Platform and how independent and restricted advisers use Platforms
- They want to improve transparency of charging so that it is clear to the customer what they are paying, for what service and what value they get as a result of using a Platform
- The FSA acknowledges Platforms are a service, but says they have product characteristics and ownership relationships that could cause potential issues and conflicts
- The FSA is proposing to prohibit payments from Product Providers to Platforms in respect to advised retail investment business.
- Platforms will be expected to obtain and validate instructions from a customer to pay adviser charges.
- The FSA emphasises the importance of the transparency of cash account charges and the way in which cash accounts are managed and funded.
- The FSA has proposed to prohibit product providers from deferring, discounting or rebating product charges in a way that could appear to offset any adviser charges
- There are mixed views about whether using a single Platform can be independent
- ‘Vanilla Wrappers’ not necessarily being a Provider Product was also raised
- Platforms will not necessarily be expected to offer all Product choices or all funds
- The issue of assessing need, choice, value and both current and ongoing suitability as well as best execution will most likely create a subsidiary need for ‘research and selection review’ functionality/software services and we are aware of developments being at an advanced stage for such services
Platforms
This is a very brief (believe it or not) summary and there is much that we have not included or expanded upon. There are significant implications for Providers, Distributors and Services and Technology suppliers. All have major interdependencies and so need to consider not just how they are directly affected but how other parties will be and how they might respond as a result.
