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The structure of the distribution market
The most important feature of the Interim Report was a significantly revamped picture of how the distribution market might look in the post-RDR world. The RDR’s previous complicated suggestions were almost universally seen as being far too complex and went down like a lead balloon. The original proposal was that the market would be broken down into:
Professional Financial Planners:
This would be the top advice tier, comprising advisers who were remunerated by Customer Agreed Remuneration or “CAR” (which we’ll come to in Remuneration) and exam-qualified to a prescribed minimum level. This tier would have access to a full range of products across the whole market.
General Financial Advisers:
This tier would have no requirement for CAR remuneration and a lower level of qualification. However, these advisers would not be able to call themselves "independent" and would be subject to a more stringent regulatory regime.
Primary Advice:
Advisers in this channel were expected to meet simple advice (for want of a better word) needs of consumers but could only sell a restricted range of products. In effect, this was intended to be a process involving minimal information from the client on circumstances and simple guidance to a product/solution. This tier was widely viewed as suited to direct salesforces and bancassurers.
So that’s what the Discussion Paper proposed. The chart below illustrates how the DP, RL’s response to the DP, and the Interim Paper, have variously envisaged the future of the distribution sector (these are not necessarily paths that firms or advisers would follow).
Scottish Life's view
Firstly, we should declare our own interests: Scottish Life only works with independent advisers and EBCs.
From that starting position, we have some sympathy with the FSA’s notion that advice should be independent and that tied and multi-tied advisers are not truly “independent”. By restricting the provider range they can be seen to be serving two masters, whereas an independent adviser will only serve one - the client.
However, we do have concerns. If the definition of advice is too narrow then, along with the remuneration and qualification hurdles to be jumped, it could substantially reduce the availability of advice. This is not desirable for consumers, or the industry generally.
We are comfortable that tied and multi-tied advice should not be called “independent”. However, we are not convinced it can’t be called “advice”, so long as it conforms to the same standards of qualifications and remuneration practices as independent advice.
A suitably defined Sales channel can work well for simpler packaged products but a grey area surrounds the use of open architecture. Having a majority of clients on the same investment platform doesn’t necessarily contradict “whole of market” from an investment fund angle but from a product angle (e.g. best charges, best administration) it seems a trickier issue.
One area that will define the Sales sector is the product set available under ‘Guided Sales’. We believe only “non-toxic” products (in other words, those that are lower risk and can cause minimal financial damage) are suitable for this channel. Other products require a fuller service from the Advice sector.
Equally, safeguards are required to protect consumers from provider bias in execution only business.
So, the Interim Paper proposes Advice and Sales as the future for distribution in the Financial Services industry. This seems like a straightforward distinction but what did the FSA say about each of these categories?
Advice
This group is seen as being truly independent, both in terms of ownership and in terms of how it is remunerated. On the basis of much of the feedback they received to the DP, the FSA propose that the terms “advice” and “adviser” should require a whole of market approach (as well as a minimum professional qualification and the use of a fee or CAR approach). The Interim Paper suggests that services provided by tied advisers and multi-ties should not qualify as ‘advice’.
You’ll have seen an understandable outcry from some multi-tied firms whose business would effectively being downgraded to ‘sales’. Surprisingly, the bancassurers haven’t yet said a lot. The one thing that can be surmised from the Interim Paper is that it has moved some distance away from the Bancassurer utopia that the original Discussion Paper was perceived as.
The position of wrap platforms is not particularly clear. Having a “predominant proportion” of investment business on a single platform could still meet the requirements for independence but it seems that further discussion and consideration is planned.
In common with the original Professional Financial Planners tier, two bars that advisers would need to clear are qualifications and remuneration. We’ll come on to both of these in more detail in the following two pages but these two factors, rather than the Whole of Market criterion, could well form the key distinction between what an adviser represents and what sales staff represent.
Sales
This is the greenest and least certain part of the Interim Paper. There are two pages on what this Sales channel might look like, compared with six pages on advice. However, the Interim Paper is as clear as it can be that the Sales channel is “strictly non-advised”. It goes on to separate the concept of Sales into “Guided Sales” and “Execution Only”.
Given the short space devoted to describing the Sales channel, many people appear unsure whether they are for or against it. A case in point is that the Interim Paper does not mention limiting the product range within Sales whereas this was a fundamental feature of Primary Advice. This issue will clearly shape what the channel will look like.
Although not explicitly mentioned, it seems certain that the standards of qualification and remuneration practices will be set much lower for Sales than they are for Advice.
Money Guidance
This is what, in old money, we called “Generic Advice”. This is the FSA-led implementation of the Thoreson Review and largely covers the provision of impartial information and guidance on money matters. The Interim Paper points out that Money Guidance is not a commercial service.
In many respects, it may turn out to be something akin to an easily accessible form of Citizen’s Advice Bureau. The objectives could be (a) that the public becomes more financially literate and (b) they are more likely to enter the Sales part of the market when they realise there are products for their needs and where to get them.
Whatever the final outcome, Money Guidance is likely to happen, with or without the RDR.
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Remuneration
For professional advisers only
