Hi there!

Last week I mentioned that Dan Waters of the FSA, had commented in a speech to a McKinsey’s Conference about Wrap and the FSA’s forthcoming explanation of their ‘deliberations’. In the same speech, Dan also talked in detail about how the FSA is looking to extend its view of the investment value chain to look at product governance and oversight.

The FSA has traditionally focused its regulatory attention on the point of sale transactions at the end of the value chain. As most of you will know, this includes things like Key Features, Adviser status and commission disclosure, as well as rules on how performance is presented. The FSA has become increasingly concerned that this focus and potential for intervention may be too late, and could leave the door open for more ‘mis-selling scandals’, which they are determined to avoid in the future.

Dan Waters has a specific interest in tackling risk management as he is the first ‘Director of Conduct Risk’ at the FSA. As a result of his view that the regulatory focus may be too narrow, he is looking at how they look more deeply and further up the value chain to include product design and oversight by the product providers (manufacturers). In doing so, the FSA intend to look at the business models of providers to see what the core strategy and drivers of income and profitability are. They will be looking up-stream of the point of sale including product development and marketing, as well as down-stream at post-sale handling and servicing. Whilst you may think that this would be covered and motivated by the obligations of TCF, the FSA seems to be unconvinced that Providers are designing products that add customer value or address real needs. Dan Waters believes that Providers are focused on designing what can be sold, or trying to beat a competitor, rather than trying to meet the needs of the consumer first and foremost.

How will this extension of supervisory scope manifest itself? Well it would seem that the FSA will be looking to test consumer outcomes (and/or see what testing the Providers have done?). They will be looking at stress and scenario testing to see what type of customer is and isn’t appropriate for the product and checking to see if the Provider has been clear about what the product does, who it is for and if certain key characteristics such as the nature and scale of risks is properly presented. The stress testing should look at a range of market conditions that could trigger certain product features that may not be immediately obvious or expected in normal conditions. The triggering of MVAs on With Profit Bonds in the past was a surprise to some customers (and advisers!) and I expect this is the sort of area that the FSA will want to expose as a potential risk. The process should be part of a systemic and objective assessment that is built into the existing supervisory framework.

Some may fear that this interest in the product governance and design is leading to a situation similar to some EU Countries which regulate product design. Dan Waters said that this wasn’t their intention. However, it is clear that whilst the spotlight on distribution is not changing, the spotlight is going to be extended to look at the products themselves and the motives and behaviour of the manufacturers. RDR is likely to cause some Providers to redesign parts or all of their product portfolios. In doing so, they should bear in mind that the FSA is going to be keeping an eye of what they build and why, as well as how it is sold.

Countdown

Well here we are, already one month into 2010 and with just under 35 months to go before the RDR deadline of December 2012! It may be that there are many out there thinking this is still a long way off and with the World Cup and the Olympic Games being ahead of the RDR deadline, some may be lulled into believing that they can put off dealing with how they should respond until a later date. However, what we shouldn’t ignore is that the FSA is not showing any sign of moving the date or ‘softening’ the requirements, and the implications of change are potentially huge. To be fair, the FSA has still got to provide the detail in a number of areas and they have been criticised by advisers and providers for not having done so more quickly. They probably deserve this criticism and whilst all parties have a tendency to be defensive, the FSA has been rightly critical of some in the industry for delaying the start of the transition process.

As we have said on a number of previous occasions, the RDR isn’t going to go away – even if there is a change of Government. And, even with 35 months to go, the size of the task should not be underestimated. From a number of our regular conversations with managers in Distributors, Providers and Technology suppliers, it is clear that some people either haven’t read, or haven’t understood the requirements and implications. Some people still think that ‘Restricted Advisers’ will be able to get some form of commission based remuneration – reasoning that with a single tie, there is no product bias influenced by commission, so it must surely be ok. Whilst it is still not entirely clear how the articulation of the charge for advice will be calculated, the FSA is still insisting that the charge will be separate from the product price, that it will not be a ‘generic’ percentage and that it will need to be explicitly identified as a monetary amount. The challenge and potential complexity will be how to account for basic salaries, bonuses (which can’t just be for selling a product), and other remuneration elements. Will large distributors (Networks and Bancassurers) be able to negotiate such significant product pricing discounts as to make it difficult for smaller firms to compete. The issue that distributors need to consider is how they will respond when the FSA provides the detail, or to consider what their preferred approach will be beforehand and then communicate that directly to the FSA or lobby their trade body now.

Given that providers cannot offer ‘factoring facilities’ will the Networks try to do so, or will we see lending facilities being made available to customers to pay the fees in the same way as we have seen the GI market use these arrangements to fund the monthly cost of premiums.

With so much attention being focused on the distributors, it is easy to forget the Providers – manufacturers – of the products. Is the ‘factory-gate’ price as simple as ‘zeroing’ the commission? Some seem to think it is… However, Providers will need to look at what options they allow for offsetting the Adviser Charge against the product. Do they offer a wide or narrow range of options – the latter could be construed as Provider influence? How are illustrations going to show the effect of the options on benefits over time? What will they do, or be expected to do when a client cancels a plan or changes adviser? How will providers identify, monitor and report against the ‘decency’ test of Adviser Charging (especially when they don’t have all the facts in relation to what has been agreed between the customer and adviser)? Will the current number of Providers be able to compete in a more transparent world of ‘factory-gate’ pricing or will we see significant consolidation? Will they focus on niche products or will they be more generalist and use their brand to support either a single or multi-tied model to distribute their products? Will it just be a case of selling existing products with minor tweaks, or will a major redesign be needed? Will different products be used via different distribution channels… less ‘bells and whistles’ for Simplified Advice routes to market? Will anyone seize on the opportunity to manufacture more Stakeholder products?

What software will be needed to support truly holistic advice, what will be the role of Platforms – something still awaiting an FSA response (commented on by Dan Waters this week). What systems will be needed to try to cater for Simplified Advice and what opportunity is there for technology to support Basic advice business distribution?

There are lots of questions and the answers are not always known or obvious. AT8 is helping a number of providers, distributors and technology companies navigate through these issues. We believe that all parties should be considering them now and not just looking at the ones they think affect them most… the decisions of others may affect the conclusions that different parties reach at a given point in time, so there is some iterative ‘what if’ thinking to take place if it hasn’t already started.

Last Thursday I had the pleasure of attending the Professional Adviser awards at the Park Lane Hilton. The event was well attended, especially considering the difficult times we are living through.

As always the food was fantastic, the entertainment (a lady with a Monkey!) was good and the networking opportunities invaluable. The focus of the night however were of course the awards themselves. These were many and varied but I thought it worth mentioning a few that stood out from a technology perspective.

The first award worth mentioning was the award for Best Software Provider. Shortlisted for this award were 1st The Exchange, IntelliFlo, Prestwood and CCL. While I have written much about Prestwood and their software Truth in the past this was always going to be a battle between the two giants of the IFA Software market, IntelliFlo and 1st The Exchange. The battle has been going on for some years and feels a bit like the best soap opera awards at National Television Awards where the winners oscillate between Eastenders and Corrie. This year the honours at the Professional Adviser awards went to IntelliFlo, with 1st The Exchange getting an honourable mention.

IntelliFlo has made big strides in the last couple of years and grown their user base considerably. As one of the first IFA software solutions to embrace the world of SaaS (Software as a Solution) and still the leading SaaS world, their award is well deserved.

The award for best Online Tool was another battle involving IntelliFlo and 1st Software. This time however they were both pipped to the post by MorningStar. I have always found the Morningstar team professional and helpful and their application is gaining some major traction in the market at the moment. Other online tools consider were the TCF Centre from FinQS, a nice customer surveying tool, Trustnet and tools from Scottish Widows, AEGON and Skandia.

The award for best data provider saw 1st The Exchange go up against Assureweb, Morningstar, Trustnet and Lipper. This time 1st The Exchange came out winners with Assureweb getting an honourable mention. AT8 are just completing our annual survey of the portal market and while we continue to be impressed with the progress Assureweb are making, it is clear that Exweb from 1st The Exchange still leads this market providing the widest coverage of products and dominating in terms of market share.

AT8 have Infoblogs (factsheets) on Assureweb, Exweb, IntelliFlo, 1st The Exchange are available in or library section.