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DFM dilemmas and charging quandaries: FSA answers more RDR questions

The Financial Services Authority has issued more answers to the most commonly-asked questions about the retail distribution review. This time, independent and restricted advice, adviser charging and professionalism feature. Click through to see all 22 questions and answers. 

What are you doing about providers who are stating that they will not have RDR-ready systems until the third quarter of 2013?

Providers are subject to a number of obligations under the RDR: most are focused on adviser charging and providing information to customers.

One requirement (COBS 6.1B.9R) relates to the way providers operate adviser charging facilitation services. Providers are not required to offer these services, so can choose when to offer them, if at all. If they choose to do so they must comply with our rules (e.g. around flexibility and timeliness).

Some providers have chosen not to offer adviser charging facilitation or offer these services for only some products. This is a commercial decision for these firms.

We are an advisory business and also have a discretionary investment management (DIM) arm. What will we have to show to prove that there is no conflict of interest?

There is a risk that the advisory arm of a firm may recommend that clients use the DIM firm where this is not suitable for the client and not in their best interests. This could be a potential conflict of interest. Firms should have appropriate systems and controls in place to mitigate this risk and ensure that the advisers provide suitable advice. The nature of the controls will vary depending on the business model and the level of risk.

In addition, under a new rule (COBS 6.1A.6R), advisers who recommend a DIM to a retail client and also provide personal recommendations on retail investment products to that client can no longer receive referral payments from the DIM. Instead, the adviser can only be paid through adviser charges. This applies to cases where the DIM is part of the same group as well as to cases where the firms are independent of each other.

How are you explaining the benefits of the RDR to consumers?

We use a range of channels to communicate the benefits of the RDR to consumers. This includes our website, which has a section for consumers on financial advice, our consumer guide, which we have distributed through advisers and consumer bodies and media activity with personal finance journalists. We are working with consumer bodies including Citizens Advice, Which, Age UK and the Money Advice Service to get our messages out to consumers.

Some providers have said they will stop commission on legacy business if the client switches funds, while other providers aren’t doing this. What are you going to do about this?

Providers can’t pay commission for advice on legacy products provided after December 31 2012, except in certain cases, including fund switches within a life policy. So they can’t pay commission on new funds outside a life policy bought as a result of advice on fund switching, but can only continue to pay commission on the pre-RDR investments that have been retained. Advisers will need to consider how best to explain the position to the client, and are free to offer to offset trail commission against new adviser charges if they wish (COBS 6.1A.4AAG), even though they cannot receive commission on new advice in most cases.

What controls do you expect me to have in place if my paraplanner is fact-finding for me to ensure they don’t give advice?

We would expect firms to have robust systems and controls in place to ensure that unauthorised and/or unqualified employees are not giving retail investment advice, as would be the case with any other regulated activity.

Can the FSA be clearer on the position of VAT?

Tax issues are a matter for HM Revenue & Customs (HMRC), not for FSA. HMRC has provided guidance on various tax issues relevant to the RDR, including VAT.

If I offer a holistic service to clients, do I need to show that I receive commission on protection products on my disclosure documents?

A firm which provides advice on retail investment products to a retail client and also provides the client with an associated pure protection service must disclose the commission it receives for the pure protection sale in accordance with ICOBS 4.6. There is more information about when a pure protection service is associated with an adviser charge in the Handbook.

Can I exclude venture capital trusts (VCTs) from my offering and be independent?

VCTs are retail investment products (RIPs) Therefore firms that are holding themselves out as independent must be able and willing to advise on VCTs if that product could potentially meet the investment needs and objectives of its new and existing clients.

Are pensions classed as a relevant market in the same way as ethical investments are?

No. COBS 6.2.A.11G says that a ‘relevant market’ should ‘comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client’. As we note in FG12/15, ‘investment needs and objectives need to be carefully assessed on an individual client basis. We do not consider it possible that many firms will be able to say unequivocally upfront what products may be capable of meeting the needs and objectives of their clients.

On this basis, we consider that pensions are not a ‘relevant market’ as we consider ‘relevant markets’ to be defined by a client’s investment needs and objectives (e.g. ethical or Islamic financial investments) and not by product or service type.

However, as stated in FG12/15, we do consider a relevant market to be annuities and drawdown products offered to clients who want to take an income from their pension.

How can I prove to you that I’m retaining the ability to advise on all retail investment products within my scope of advice?

To act as a retail investment adviser, an individual must hold an appropriate qualification (set out in TC App 4E), including any required gap-fill, for this activity. This must have been verified by an Accredited Body so the adviser can be issued with a Statement of Professional Standing (SPS).

Firms must be able to demonstrate that an adviser is competent to advise on all products they advise on, and they must complete 35 hours of CPD on an annual basis.

In addition, we would expect firms to have the ability to advise on all retail investment products of the relevant market within its scope of service. For example, we may question a firm that was holding itself out as independent where the firm did not have any mechanism for assessing certain retail investment products and didn’t sell them in practice.

I am an advisory firm with a discretionary arm – can we refer clients to our in-house discretionary arm and remain independent?

The rules on independent/restricted advice only apply to personal recommendations on retail investment products (RIPs). Purely recommending a discretionary investment service (DIM) as such (whether the discretionary arm is in-house or a third party) would normally not be considered a ‘personal recommendation’, if it does not relate to one or more retail investment products (RIPs). Therefore, an advisory firm could recommend a discretionary investment service to clients without having to demonstrate that it has picked the DIM based on a comprehensive and fair analysis of the market.

However, the advisory firm would still need to undertake sufficient due diligence on the DIM it is recommending.

You also need to bear in mind that if the advisory firm explicitly or implicitly recommends particular funds offered by a DIM, the advisory firm is in effect recommending a particular investment and the independent/restricted advice rules would apply in this case.

My firm is a discretionary fund manager (DFM). Can I still hold myself out as independent?

As we have stated in COBS 6.2A.11G, if a firm is giving independent advice, the relevant market should ‘comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client’.

The relevant market is defined by the client’s needs and not by the boundaries of the service that a firm chooses to provide. Therefore, we do not believe it possible that many firms can say unequivocally upfront what products may be capable of meeting the investment needs and objectives of their clients. We expect, therefore, that the majority of firms providing independent advice will need to be able to provide advice on all types of retail investment products. Therefore, DFMs that say upfront that they will not provide advice on certain products such as life policies or pension schemes, for example, will not be able to hold themselves out as independent.

Can I charge clients with a lower investment amount more and still treat my customer fairly?

The cost of advice will be determined by the firm. We understand that the time taken to provide a recommendation can vary regardless of the sums of money involved. We can see circumstances where it would be feasible to charge somebody with less to invest, a proportionately higher fee.

You are also able to set your costs at a certain level for an individual case to keep a client or attract a new one.

When do we need to tell clients about our charges?

The rules (COBS 6.1A.17R and COBS 6.1A.24R) require you to give the client your charging structure before you provide advice, and to disclose the total adviser charge for the service you provide to that client ‘as early as practicable’. Disclosure of the total charges must be in cash terms or convert non-cash terms into illustrative cash equivalents, if the charges are in non-cash terms such as percentages (COBS 6.1A.24R).

Can stockbrokers facilitate the adviser charge on behalf of the financial adviser?

The rules on facilitation apply to product providers and platform service providers (COBS 6.1B.1R and COBS 6.1B.9R). Other firms can continue to facilitate payment of adviser charges by operating client money accounts from which investors can ask for their advisers to be paid, subject to the safeguards necessary to ensure that the firm is only carrying out the customer’s instructions, as required by the client money rules in CASS 7 and 8. The advisers will of course only be able to accept payments that comply with the rules in COBS 6.1A.

Can we charge for not recommending a product, i.e. advising the client to stay where they are?

The nature of your charging structure should be disclosed clearly to the client in advance of providing advice. It is entirely acceptable for you to charge for your service, irrespective of the outcome – for example, whether a pension switch happens or not, whether or not an investment bond is purchased or where the client doesn’t accept your recommendation to buy a product.

Does a single premium into an existing Sipp constitute new advice in terms of adviser charging?

Yes. Trail commission can continue to be paid for pre-RDR advice – COBS 6.1A.4AR. However, new advice leading to additional investment into the product requires adviser charges to apply as the only means of remuneration for the advice given in relation to the additional amount – COBS 6.1A.4AAG(3).

How are you going to supervise adviser charging?

We will monitor the adviser charging rules as business as usual during visits, reviews and thematic work.

We are undertaking a thematic project to assess how firms are devising, disclosing and delivering appropriate adviser charging and advice services (including their scope of service, i.e. independent or restricted). The project will be conducted in three cycles of about six months each. In the first cycle, we are aiming to see how firms are implementing the new rules and provide additional guidance to the industry by publishing our findings along with examples of good and poor practice.

Can I keep my T&C records in paper format?

Our rules require the firm to keep a record of the continuing professional development (CPD) carried out by each retail investment adviser and the firm must not prevent the adviser from obtaining a copy of their record.

Each accredited body is expected to verify the CPD records of no less than 10% of the advisers who have used its services to check that the records are accurate and the CPD carried out is appropriate. We do not specify how the firm should record the adviser’s CPD or how the record should be provided to the accredited body for verification. This is for the accredited body to decide and it is likely that different bodies will prefer different approaches.

Can I still talk to clients about the cost of my firm’s services even though I have not yet achieved the appropriate level four qualification?

You are still able to meet with clients and discuss any aspect of your firm’s services, provided you are not acting as a retail investment adviser where you are not appropriately qualified to do so.

  • If you were a competent adviser (including with any previous employer) on 30 June 2009 you will need to have stopped giving retail investment advice from 31 December 2012, and you should not start this activity again until you have achieved an appropriate qualification, including any required gap-fill.
  • If you were signed off as competent between 1 July 2009 and 1 January 2011 then you have 30 months from 1 January 2011 to complete an appropriate qualification.
  • If you were signed off as competent after 1 January 2011, or are yet to be signed off as competent, then you have 30 months from the date you started to advise to complete an appropriate qualification.
  • If you fall into any of these categories, then provided you hold the regulatory module of an appropriate qualification, you may continue to give retail investment advice, although this should be under appropriate supervision.
  • Once this 30-month period has expired, if you do not hold a full appropriate qualification, you must then stop giving retail investment advice.
  • In what areas can an adviser deal with a client without the necessary qualifications post RDR?

    The full list of regulated activities with details of whether an appropriate qualification is required to carry out that activity can be found in our handbook under TC App1.1.1R. Tables showing which qualifications are appropriate for each activity can be found in our handbook.

    As a result of RDR, the qualification requirements for advising on, or advising and dealing in securities, derivatives and also for advising on RIPs have changed, but the requirements for all other activities remain the same as before.

    Why do we now have to report complaints on individual advisers?

    As part of the RDR, we are placing more emphasis on the standards expected of individual advisers and our monitoring of those standards. This data, combined with other insights and information will help us to focus our supervisory efforts on individuals that do not meet the standards expected of them.

    Ongoing complaints notifications will provide us with a more timely/earlier notification of complaints issues with the adviser – either because the redress amount is at a high level or where the volume of complaints is at a high level.

    A ‘triage’ team in the FSA will receive information about individual advisers, assess individuals in terms of their risk level and, in collaboration with our firm supervision teams, investigate higher-risk individuals. We recognise that the individual adviser may not be at fault even where the complaint is upheld but where appropriate, supervisory or enforcement action will be taken against individuals and firms.