RDR enlightenment

• November 2011 Update
• March 2012 Update
• April 2012 Update

NOVEMBER 2011 UPDATE

The FSA has issued its latest update on progress in relation to the Retail Distribution Review (RDR). There are a few new insights which it's useful to have highlighted, but much of this is pretty much as we might expect, given the direction of the FSA's consultative process.

We have posted this update in the public access area of the ValidPath site, partly to make it easier for our Members to engage with the key points, and partly to assist those occasional visitors who may be thinking about ValidPath as a suitable home when they set up their own financial-planning or wealth-management entity.

So here is our quick, boiled-down resume of the main issues with which you should become familiar.  Please note that some of the links will only work for logged-in ValidPath Members.

Simplified Advice
The FSA has been consulting on an advice framework which would allow streamlined advisory processes in relation to 'straightforward investment needs'. This kind of model excludes a consideration of existing provisions and appears designed for such a narrow range of contexts, that it would seem to us to be less appealing to advisers embracing a financial-planning model, and is probably more of a sop to the banks, who simply wish to sell products over the counter. Final guidance will be published in Q1 2012, but in any case 'simplified advice' will still need to comply with the usual regulations.

The Platforms Market
Be warned: this is still very much under review. The FSA are looking at business models, competition, SIPPs and also the international markets in order to better understand how they can better regulate this area. ValidPath Members should remember that our 'ValidPath Investment Proposition' suggests spreading your usage of platforms across a range identified to serve specific client groups or needs.

Product Disclosure
On the back of the new 'Adviser Charging' regime, product-providers will be required to amend their KFIs from 31/12/2012 in order to seperately identify product and adviser/consultancy charges. Where the adviser charges are paid for out of the product itself, then the KFI must disclose the impact that this has on the 'Effect of Charges' (EoC) table and also on the RIY. One can only wonder about the systems issues that will need to be confronted to make this information meaningful and accurate! The FSA will also be introducing changes to the way in which EoC and RIY information is detailed in personal pension illustrations, and there's going to be a kind of transitional provision available from October 2012 in relation to auto-enrolment.

UCIS
The FSA has clarified that firms will not be required to 'sell' (read 'recommend') UCIS to their clients in order to be deemed 'independent', primarily because such products will be appropriate for very few retail clients. It has stated that UCIS are included within their definitions of 'retail investment products' primarily to ensure that commission is not payable from them when they are sold.

The FSA makes the distinction between considering a product and actually recommending it to clients.

RMAR Implications
The FSA's half-yearly online reporting tool, the RMAR, is going to undergo some beefing up in order to cope with the new regime, post RDR. This is not something that should concern ValidPath Members, but it will raise some interesting ramifications for our data-collection processes! Post 01/01/2013, we will be required to include adviser and consultancy charging data in our RMAR submissions.

There is an interesting development here in terms of complaints reporting: at present, the RMAR system requires us to supply network-wide cumulative data, without specifying Member firms. However, after 31/12/12, this data will become adviser-specific, indicating that individuals may no longer hide behind a kind of network-induced anonymity. There will also be new reporting requirements if an adviser gives rise to more than a specified number of complaints (irrespective of whether they are upheld) or if redress exceeds a certain trigger point (£50k indicated).

The Wonderful World of Trail
Thankfully, firms or adviser with recurring incomes (trail or fund-based commissions) may continue to receive these post-RDR. The following caveats do apply, however:

 
(1) If a client chooses to move to a different adviser, then the trail income may be re-registered with the new adviser, provided that an ongoing service is provided. How this will be evidenced seems at the moment to be slightly ambiguous, but we have now for some time been advising our Members to construct a robust and transparent ongoing service proposition - ValidPartners should consult our Business Development section here for more specific guidance.

(2) Where an adviser sells his client bank to another firm/adviser (eg. a bulk transfer upon retirement), the trail income may be re-registered with the new firm without a requirement to evidence ongoing service to individual clients.

Statements of Professional Standing
We are encouraged that a steady flow of ValidPath advisers are now in a position to supply us with their SPS's. These are issued by an accredited body to confirm that advisers have completed their QCF Level 4 qualifications, including gapfill - and the deadline for issue of the SPS is the end of 2012. Thereafter, there is an annual requirement for certification in respect of ongoing CPD in order to maintain accreditation.

There is some flexibility in the FSA's approach here, in a limited number of contexts, in allowing an extension or waiver, for example in circumstances of significant ill-health. Consideration will be given on a case by case basis, and the FSA will evaluate whether or not the granting of a waiver is likely to cause 'undue risk' to consumers.

Independent vs Restricted Advice

At ValidPath, we remain convinced that the kinds of professional firm which might find us a 'natural home' are those who are going to want to continue to offer their clients genuinely independent advice.  We will continue to labour to support our Members in doing so, and in encouraging an environment where advisers may 'gap fill' in offering specialist expertise that perhaps others do not have.

Costs to Clients

The FSA is labouring under the impression that the unbundling of costs, implicit in the new 'adviser charging' model will ultimately benefit the consumer.  Setting aside for one moment the inordinately high direct and indirect costs involved in the transition to the new model, how do other pundits view the matter?  Here is an example of one perspective.  If there are lessons to be learned here which may be applied generally, then the 'ValidPath Investment Proposition' with its TERs ranging from around 1.03% to 1.33% (depending upon adviser trail) becomes even more attractive.

MARCH 2012 UPDATE

This reflects on the Policy Statement issued by the FSA on 27/02/2012, covering the treatment of 'legacy assets'.

The FSA’s Policy Statement 12/3 does actually now constitute the rules which will be applied to legacy business which currently generates commission revenues. This is not another consultative document, although it seems to us that there is still room for further clarification. It is, for instance, hardly helpful when a Policy Statement continually refers to COBS 6.1A - which has not been published yet!

This brief article is intended to help clarify how you are likely to be affected by these new rules, post December 31st.

(A) WHERE MAY TRAIL COMMISSION (on a pre-RDR investment product) CONTINUE TO BE PAID?

1. Where there is no change to the product;
   
2. Where there are reductions to the investment amount or to the level of regular contributions;
   
3. Where there is a change between acc and inc units;
4. Where fund switches occur within a ‘life policy’ (eg. Investment bonds);
5. On the original (pre-RDR) life policy or unit-trust only, when a new investment is made to the same product. The increment will be dealt with under adviser charging, but trail commissions may continue for the original policy.

[Our view is that scenario (5) is highly ambiguous, and may well lead to a need for further clarification].

(B) REPAPERING PRE-RDR TRAIL COMMISSIONS AS ADVISER CHARGING

1. Additional commission may not be paid for new advice;
2. It is not acceptable to the FSA that the adviser simply agrees with the client to ‘repaper’ existing trail commissions as ‘adviser charges’, post-RDR;
3. The FSA will want to see that the adviser has a standard charging structure which is given to the client prior to advice, and where ‘adviser charges’ do not vary simply according to the different levels of commission that pertained pre­-RDR.

(C) RE-REGISTRATION OF ASSETS BETWEEN PLATFORMS

1. The FSA believes that re-registration on its own does not constitute advice because it will not usually involve selling and then rebuying investments (but what if it does?). This means that the bare fact of re-registration would not threaten trail commissions;
2. Where any advice is focused on switching some or all of the client’s existing funds into new funds, then that would trigger the loss of legacy commission, and would require an adviser-charging model;
3. If dividends are reinvested into an investment without advice being given (a la Parmenion DFM model) then trail commissions are safe - otherwise, when advice is given on dividends, this would trigger adviser-charging;
4. Where assets are re-registered, if the new adviser wishes to retain existing trail commissions, then he/she must provide an ongoing service (which means you need to formally document what that looks like). In such a situation, there will need to be a new adviser-charging agreement in place, but the adviser will be able to disclose re-registered trail commission, and offset that against adviser charges.

A Few Conclusions
There is much to be worked through here. Our initial view is that Member Firms which have elected to hold client portfolios on ‘pure Wraps’, where they periodically rebalance those portfolios manually, may well fall foul of the FSA’s rules on buying and selling. Clearly, for professional firms, who have geared themselves up for RDR, it may not cause them too many headaches to implement a new adviser-charging agreement with each client individually, in order to resolve the issue.

Otherwise, it is our view that something like the Parmenion solution, which rebalances portfolios under a separate DFM agreement, effectively protects legacy trail commission from this threat.

ValidPath are working closely with some of the better-quality service providers to deliver an ‘RDR Proposition Document’ which you can use with your clients to cover these sorts of practical issues. Please bear with us!

APRIL 2012 UPDATE

• Whatever you do, document it.  The result may be something that looks strangely like our 'Investment Advice Process' guide;
• Cost is important, but it's not the be-all and end-all.  Thus, you should not find yourself engaged in an endless cycle of transfers between platforms, in pursuit of a percentage-point saving in charges.  On the other hand, it is reasonable to expect the IFA to have a solid grasp of comparative costs at the inception point of a new investment solution;
• And, if it is reasonable to expect the adviser to have that clear understanding of comparative costs, and given that cost per-se is going to be one of the few 'knowns' to underpin your recommendations, then this does reasonably set the scene for some kind of stratification in terms of the investment solutions you want to deploy;
• And, if you're going to stratify the investment solutions you offer to clients, then it is reasonable (in turn) to be able to stratify those clients - or 'segment' them, as the current buzzword would have it.  The FSA is hot on 'segmenting' your client base, but you do need to take some care when you do it - no client, for instance, would like to feel that they have been slotted into a 'Category C' (or 'Z') pigeon-hole, and thereby proffered some kind of cheap-and-cheerful solution that they may find demeaning, and which might be no less unsuitable to their aspirations than anything else you might want to recommend.  'Segmenting', in the wrong hands, could be a very quick way of losing clients (unless, of course, that is part of the objective);
• 'Segmenting' may not be a very constructive exercise if it is driven by the IFA's perception of how much the client can afford to pay him or her.  It is a more meaningful process, when it is conducted in relation to the likely kinds of needs that are likely to arise.  Thus, our own 'ValidPath Investment Proposition' suggests the approach of stratifying your investment proposition across (say) three platforms, offering an ascending range of options or facilities which you can then access according to client need and objectives.  All of us know, that there is no point in putting the client into a SIPP when a low-cost PPP or Stakeholder Pension will do the trick quite adequately - and precisely the same principles apply when utilising platforms;
• Practitioners should remember that the choice to put a client into a higher-priced platform solution does need to be justified in comparison with the lower-cost alternatives.  What is it, precisely, about the more costly offering which is justified in this instance?  If the answer is "wider fund choice", then that's not the right one;
• ValidPath Members already have access to a page of guidance on platform selection which they can access by clicking here.