Many years ago, my PA of the time was a ‘green’ who liked to be called ‘Leaf’. As this was the 80s, the views of the non-driving environmentalist were somewhat unfashionable. Leaf had ‘interesting views’ on a range of subjects, but one crossed my mind recently when I was thinking about risk, regulation and protection. Leaf used to espouse the view that the quickest way to reduce the number of dangerous drivers on the road was to mandate that a large dagger be inserted into the steering wheel of the car! Whilst this was not her own original thought (I have heard it expressed by others), the principle that drivers would be far more careful about the way they drive and risks that they take if the consequence of doing so was the potential dagger through the heart!

Having worked in Financial Services for many years with roles in Sales & Marketing and Regulation, I have witnessed a remorseless increase in the attempts to control the risks of inappropriate advice being given to the consumer. I applaud the principle and much of the effort, but I also share the frustration of constantly being expected to create and keep the mountain of documentation/data records that show that the right procedures and outcomes have been applied. The reason that the regulation has continued to grow is twofold – first, regulators rarely propose a reduction in regulation (especially if it is their career) and second, we have suffered with ongoing evidence that bad practice continues. Indeed, even where people follow the rules, some have done so as a sop and found ways to gain at the expense of the consumers best interests.

A major bank has had its sales practices exposed by a leaked document showing how they ‘incentivise’ (or pressurise) staff to sell riskier product choices with greater points value or commission to influence performance. The headlines do not reflect well on the bank themselves, but they also tarnish other Financial Institutions and the Financial Planning market generally. Consumers should be able to trust all advisers and can find it difficult to distinguish good from bad. However, it is made worse when the corporate culture of what should be a respected brand is driving the policy and expectations of adviser behaviour in negative ways. The bank claims that its processes adhere to the regulations and that they would assess the client’s needs along with attitude to risk etc before recommending a product. Whilst they probably do, it is also the case that skewing the rewards to offer more for one product recommendation than another is likely to drive behaviour towards a particular outcome.
Perhaps RDR will address such policies and behaviour, but if people are intent on finding ways around rules and/or choose to ignore risk, there is no absolute guarantee that consumers will be protected.

In one of my previous roles as a director of a Plc, one of the things that became a priority after we floated the company on the Stock Exchange was ensuring that we were aware of and complied with Corporate Governance standards. Most of the Combined Code is common sense, though it is interesting how many times large Corporations selectively ignore some of the standards if they don’t suite their company or personal goals. Alongside our ‘formalised’ application of the Code, we also took out Directors and Officers Liability Insurance. At the time, I didn’t even consider not doing so. However, it got me thinking about why I should feel the need to ‘insure’ the risk that my behaviour might not be up to scratch and another question that came to mind was why was it right that the Shareholders should pay for such insurance (as with most companies, it was a business expense). Ultimately, in extreme cases, we have seen some Criminal Prosecutions of Directors, but as with the dagger in the steering wheel, maybe one way of ensuring that Directors retain a focus on their own ‘moral compass’ is by not offering them protection funded by the shareholder (or maybe we should ask why they need it at all). Regulation can and does offer a degree of security and protection, insurance can provide some security in the event of failure. However, knowing what is right and wrong and applying that for the good of the consumer should severely reduce if not remove the need for such arrangements.

• 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

Platforms

• 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

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.

Written by Mark Thelwell - Visit Website

Ouch, our heads hurt at AT8 at the moment! Unfortunately not from too much partying (though the Money Marketing awards were very good!) but from working through the latest outputs from the FSA. Those lovely people from Canary wharf produced not one update last Friday but three, with a total of over seven hundred pages for people to plough through.

Luckily here at AT8 we have everyone’s favourite compliance (well ex-compliance actually) man to work through the documentation for us and outline the core findings.

In essence, the papers did what they said they would do; provide more clarity and certainty to some of the issues raised by the previous papers (especially CP09/18 and CP09/31). They don’t appear to have had too many U turns (with a few noticeable exceptions including provider decency checks) and there were very few major surprises.

I don’t propose to go through the detail of the findings of all three papers in this blog as we couldn’t do it justice in such a word constrained format, but I did think it was worth pulling out some core themes.

The first area to note is that there is no let up in the move to the new adviser-labelling regime. Independent Advice has had some clarification around the definition of ‘relevant market’ and the scope of ‘retail investment products’. It has been recognised that it was ok for some advisers to offer advice across a narrower ‘specialised’ market such as ‘ethical investments’, but they do not expect there to be many justifiable specialisms. It was also noted that it would be possible for a set of products to be excluded from a firm’s range of options if they were found to be ‘not suitable’ for their customers. These are pragmatic interpretations that should be welcomed but not confused with a dilution of intent – the FSA still appears focused on delivering the new labelling and new standards of advice for the benefit of customers.

There is also no let up in the move to fees – adviser charging – or to more professional standards across the board – independent and restricted advisers alike.

It is interesting to note that throughout the paper there is consistent referral to the use of effective systems to monitor and log RDR compliance. Those readers providing IT systems to advisers would do well to get under the bonnet of what this will mean in relation to what they currently provide as meeting this requirement represents a real opportunity to provide a clear business case for the use of IT.

One big area of clarification is in the world of Platforms in the form of DP 10/2. The paper looks at:

• How the Platform Operators are remunerated for the services under the RDR regime
• How adviser charging should operate through platforms
• How ‘Independent’ and ‘Restricted’ Advisers use platforms

The FSA leaves a clear message that they are very concerned about the potential for product bias that could arise from using a single platform (or even a small number). They clearly suggest that advisers need to ensure that the platform used does not disadvantage the client in any way. The ability to evaluate and show the relative merits of a Platform’s ability to meet the needs of customers will need the help of a new breed of platform comparison tools. We note that IFA Market Watch now has a price comparison tool for platforms while Capita has just launched a tool that includes qualitative information as well as pricing information.

As the industry digests the outputs, time marches on and people need to accelerate their RDR readiness programmes. There are few short-cuts available, but external advice could help cut through some of the planning cycle. If anyone wishes to discuss their RDR readiness plans please contact us on 0121 314 2504 or e-mail marketing@at8-group.com.