Adviser > Your business > RDR > March 2010 update > RDR – PS10/6 and other animals
RDR – PS10/6 and other animals
An update on the FSA's proposals on Adviser Charging, remuneration transparency and regulation of platforms.
The following is a summary of the FSA's RDR paper, Policy Statement 10/6, published on 26 March 2010, together with an analysis of how this is likely to affect financial advisers. We also take a quick look at Discussion Paper 10/2 and Consultation Paper 10/8 which cover platforms and pure protection respectively.
Key points of PS10/6
The scope of the RDR is to be extended to all retail investment products. Due to the problems of keeping it up to date, the FSA are not intending to provide a list of in scope products, but have confirmed that it will be based on the likely European Commission definition of Packaged Retail Investment Products (PRIPs).
Scottish Life's view
Once again we have a lot of detail on what "independent advice" will entail but very little on the other end of the scale. It does mean that advisers who intend to remain independent can continue their preparations. However there still is no clear picture of what the competition from other sectors will be like.
The statement removes any lingering doubt (or hope) that provider-driven commission will survive RDR. Scottish Life has long been a supporter of the clarity, fairness and sustainability offered by Adviser Charging. Our Financial Adviser's Fee and Group Financial Adviser's Fee remuneration options represent a major stepping stone towards the Adviser Charging and Consultancy Charging world.
There is very little on the VAT treatment of Adviser Charging. The FSA say it is a matter for HMRC. Our understanding is that where an advice service leads to a product sale this will not incur VAT, even if the client pays from their own funds. There is no reason to think that HMRC will change this position but clarification of this would be welcome.
There is not very much information on "soft commission" and inducements. The rules will prevent advisers "from accepting any other commission remuneration or benefit of any kind in relation to a recommendation". We believe the market needs to see more detail and confirmation that these practices will be prevented.
Adviser services
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Advisers will have to describe their services as independent or restricted although there will be no mandatory wording for restricted advisers to use.
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The FSA is sticking with its definition of independent advice, which is that firms must make recommendations "based on a comprehensive and fair analysis of the relevant market".
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Ownership of an IFA firm by a provider will not prevent advisers from describing themselves as independent but the parent company cannot offer greater rewards for recommending its products.
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Firms may operate a panel providing this is continually reviewed.
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All advice that is not independent is restricted advice and the nature of the restriction has to be disclosed. Restricted firms are still bound by suitability requirements and advisers providing restricted advice must have the same level of qualifications as independent advisers.
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The FSA have not found a consistent single model for Simplified Advice and cannot give further guidance at this stage. They are still welcoming suggestions from firms on how they might operate in this space.
Adviser Charging and inducements
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The FSA will "ban commission" from 2012 and Adviser Charging will apply to the sale of all retail investments.
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They have also clarified that where there are ongoing charges there must be ongoing service/advice provided. This does not apply to legacy business, for example where trail commission is currently being paid (4.17).
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Adviser firms will not be able to set higher charges for recommending Distributor-Influenced Funds (DIFs) where there are substitutable products, for example Collective Investments.
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The requirement for providers to monitor Adviser Charges has been dropped. Providers must however obtain clear instructions from the client about the level of payment to be taken from the product.
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There will be no factoring of Adviser Charges even on an industry standard basis. The FSA say they have discussed this with the Office of Fair Trading and it raises "competition issues".
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No allocations over 100% will be allowed.
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Commission will be permitted on individual (but not group) stakeholder products sold through Basic Advice.
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Adviser Charging will not apply to non-advised services at this stage, but the FSA will take action if there is evidence of consumer detriment.
DP10/2 Platforms: delivering the RDR and other issues for discussion
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Following their thematic review into platforms, which identified instances of unsuitable advice, the FSA will make platforms a supervisory priority. A major area for concern is the transparency and disclosure of charges.
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The FSA have suggested three possible options for future remuneration. They are still taking feedback, however their preferred option is to stop all payments from providers to platforms.
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The FSA believe that it is unlikely that a firm will be able to find a single platform that is suitable for all their customers, and advocate segmenting clients into groups which share similar needs.
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The FSA are considering making it compulsory for platforms to allow assets to be re-registered off their platform from 31 December 2012.
CP10/8 Pure protection sales by retail investment firms
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Firms can elect to sell pure protection under ICOBS or COBS. In both cases they can take commission and there is no requirement for Adviser Charging.
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However if an adviser is advising on investment and protection they must explain how they are remunerated for each type of product before advice services are provided.
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Advisers must disclose the amount of commission on the protection sale where it is "associated" with investment advice.
Next steps
The FSA is welcoming responses to DP10/2 by 26 May 2010 and to CP10/8 by 28 June 2010. Following DP10/2, the FSA promise to issue a Consultation Paper on the future of platform regulation in summer 2010, including a timetable for making any rule changes to implement their proposals. Following CP10/8, the FSA expect to issue a Policy Statement with final rules in September 2010. We will be giving you our reactions to each paper as soon as we can.
Reference:
FSA publishes rules on adviser charging, FSA.gov.uk, 26 March 2010.
For professional advisers only
