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The "Need to Know" RDR Facts

The Financial Services Authority (FSA) released a new Retail Distribution Review paper on 25 June 2009. This short update gives you the key facts. It's important to remember that these are proposals for consultation, and are not finalised.

Improving the clarity with which firms describe their services to customers

In depth

Visit the FSA's website on delivering the RDR

  • for a copy of the CP09/18 consultation paper
  • to submit responses to the paper
  • and to view other FSA reports on the Review.

1. Advice will be either 'independent advice' or 'restricted advice'. The former will be "unrestricted and unbiased". 'Restricted advice' will apply when offering a limited range of products (e.g. single tied, multi-tied advisers, simplified advice and basic advice). The advice type must be explained to customers.

2. The concept of Guided Sales is to be dropped recognising the difficulty in making this work when there is no personal recommendation i.e. advice. The FSA will consider ways to improve market confidence within the existing rules concerning Simplified Advice processes.

3. 'Basic Advice' will remain. The qualification requirements will be lower, as will remuneration restrictions. The product range will be limited to stakeholder-style investment and savings products. Execution-only services are unaffected.

4. The scope has moved beyond packaged products. If something serves a comparable purpose for the customer, it will be subject to the rules. This brings in structured products, unregulated collective investment schemes and investment trusts.

5. 'Panels' are compatible with independence only if they are broad in their coverage and reviewed frequently. If a firm uses a third party for research, the firm must ensure the output is robust.

Addressing the potential for adviser remuneration to distort consumer outcomes

6. Advisers will be banned from recommending products that automatically pay commission. Investors must be told upfront how much advice will cost and will be able to choose whether to pay a fee or have the cost deducted from their investment. The charge must be clear, as must the services it is paying for. If charged for through the product, it must adhere to a matching principle i.e. £1 remuneration matches a £1 product charge. 'Commission offsetting' will not be possible.

7. Providers will not be able to indemnify commission ('factoring'), though flexibility is possible in terms of when the advice charge is taken and how (e.g. a percentage of funds or fixed amount). Advisers can access credit but only through a third party.

8. Legacy business and their subsequent increments are not affected by Adviser Charging. The FSA will seek out those who try to exploit this in the run-up while not adapting to the RDR.

9. Inducements and 'soft commissions' from provider to adviser must be for the client benefit. Any significant benefit e.g. training, must be widely available and not just for target accounts.

10. For group pension arrangements (non-occupational), change is firmly in the FSA's plans. 'Adviser charging' is possible when some form of personal advice is given to members. 'Arranger charging' is being looked at, where a GPP is sold without advice and remuneration is agreed with the employer. This seems close to Factory Gate Pricing options already available.

11. 'Ongoing charges' (i.e. trail commission) will only be allowed when there is an ongoing service to the client, except for where a client has an investment to which regular contributions are made.

Increasing the professional standards of advisers

12. A Professional Standards Board – independent from the FSA – will be set up to implement and oversee higher standards in areas of qualifications, ethics and CPD.

13. Minimum qualifications for advisers will be at QCF Level 4 or equivalent as before (equivalent to the first year of a Bachelors degree). For existing advisers, an oral version of the examinations will be allowed but will cover the same content. The FSA does not intend this to be a "soft option".

14. A new code of ethics is being introduced and will be consulted on. Also to be given an airing are possible principles for an annual Continuous Professional Development standard.

15. The FSA is looking closely at how firms will measure adviser performance. They are suggesting it should not be based on appointment to sales conversions or reward for selling one product over another.

What is not clarified

  • Nothing new on long-stops.
  • For capital requirements, the FSA will "continue discussions with the industry".
  • No decision on extending to general insurance and mortgage markets, but both have reviews underway.
  • How platforms sit with "unbiased, unrestricted advice". A thematic review is underway though.

Next steps

The FSA will consult over the next few months with rules being drafted for early 2010. Full implementation is targeted for the end of 2012. The FSA has a list of questions and is encouraging feedback by 30 October 2009. The one exception is item 10 above where feedback is requested by 31 July 2009. We strongly encourage you to take the time to reply to ensure the FSA hears from the Independent Advice sector.

We'll be sifting through the detail in this paper over the next few weeks and will publish another update soon, telling you what the FSA is doing along with what our views are and most importantly, what we think it means for you.

For professional advisers only