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IFAs' 10 toughest regulatory challenges

The retail distribution review is just over a month away but advisers’ work does not end there. Ian Stott, client services director at The Consulting Consortium, outlines 10 of the toughest regulatory challenges IFAs will face in 2013.

Qualifications and professional standards

With the majority of advisers having passed QCF level four, the biggest challenge on the professionalism front will be staying on top of continual professional development (CPD) demands in 2013.

The Financial Services Authority (FSA) will require IFAs to clock up 21 hours of CPD a year, which will need to be demonstrated to an accredited body in a clear format.

Conservative clients

Revamping a client proposition can present its own challenges, especially for mature firms with large legacy books, but the biggest difficulty could be convincing clients to accept the changes.

Firms often redesign their proposition based on what they feel they can deliver profitably for the majority of their existing clients. They do not always consider the extent to which clients will accept the proposed changes as well as their reluctance to pay more, or at all, for something they previously received for less or even free.

Adviser charging

As a result of misguided interpretations of the FSA’s requirements, adviser charging is still the big thorny issue for many IFAs. The regulatory requirements aim to enhance transparency and deliver positive customer experiences and outcomes that represent fair value.

Previous ‘soft disclosure’ arrangements, where commission is taken on the basis of disclosures from key features documents and suitability reports, have not always provided certainty that clients have understood the arrangement.

Post-retail distribution review (RDR) an IFA may arrange to be paid the same amount as it was previously but not directly from a product provider. Adviser charging needs to be agreed with the client. If a firm is going to charge its clients for a service, it will need to make sure they clearly understand what they are paying for and how much they are paying.

Platforms and centralised investment propositions

Centralised investment propositions (CIPs) cover portfolio advice services, discretionary portfolio management and distributor-influenced funds, often accessed through platforms.

All too often the introduction of CIPs seems to have been driven by commercial objectives rather than clients’ financial planning needs. Many firms have simply developed a CIP to facilitate adviser charging and therefore a perceived compliance with the RDR.

The FSA has proposed a ban on platforms being funded by product providers and argues the current system, whereby the consumer pays for the platform service, hinders transparency.

The FSA has now begun a new phase of thematic work and will be making judgments on suitability of client outcomes, especially related to replacement business and CIPs, and including a direct assessment of firms’ systems and controls.

Legacy conduct risk

Firms should review the design and use of their propositions against FSA guidance and ensure advisers are not storing up future legacy risk.

They should review a representative sample of past business that would be considered high risk were it to be written post-RDR, and make sure a clear comparison of charges is shown on file.

Firms should evaluate the benefits and drawbacks to clients of moving from ceding arrangements to a CIP and make sure systems, controls and management information is sufficiently robust to be able to justify and evidence suitability and disclosure.


As part of the RDR, the incentive trade-off between commission payments and suitability will be removed.

Suitability, disclosure and conduct risk are high on the regulator’s agenda and IFA firms need to ensure the introduction of adviser charging has not resulted in unsuitable advice in the period leading up to the change.

The FSA/Financial Conduct Authority (FCA) will review the implementation of the new adviser charging rules as well as monitor changes in the market leading up to the end of 2012.

Once the RDR rules have come into force, the FSA/FCA will take action where it can identify firms acting in a way that could lead to consumer detriment; for example, recommending the retention of higher charging products so IFAs can continue to receive trail commission.

Investment risk profiling

The RDR introduces the need to ensure the suitability of any investment strategy in terms of risk. This means any investment proposition must align with the IFA’s chosen attitude to risk assessment. This should span a risk-and-return analysis. IFAs must define after-tax return requirements and map them with acceptable risk tolerance and clients’ financial goals.

However, clients often have different risk-return requirements or profiles for different goals, and IFAs should be able to define the return requirements to reach critical and discretionary goals, as they will differ both in priority and time horizon.

Sipps and decumulation

The FSA’s Retail Conduct Risk Outlook 2012 paper listed Sipps and enhanced-transfer-value pension transfers as emerging risks, and decumulation as an area of potential concern.

The regulator’s three main worries are: poor controls over Sipp advice, the risks associated with investing in illiquid assets and the sale of Ucis to retail investors.

If IFA firms have been moving clients systematically from legacy personal pensions into more expensive Sipps on the premise of wider investment opportunities and then leaving them in a fund of funds, the first question they should ask themselves is: where is the client deriving value and how can I validate this? If this is tricky to answer, the chances are there are some suitability issues.

Rise of the machines

It is becoming clear that execution-only platforms are set to flourish, facilitated by technology improvements and the development of the market that will result from the widening advice gap and changing customer behaviour.

Some analysts argue an execution-only proposition is so different from the traditional bespoke, small scale, relatively high-cost advice model that many advisers will not even consider it. But some IFA firms have already developed an execution-only platform for the mass market and have been using them for many years. There are implications, however, including the need to consider low operating and profit margins.


Pictured: Martin Wheatley, chief executive of the FCA

One of the building blocks underpinning the transition to the FCA is the FSA’s revised conduct strategy, which was launched in 2010. This sets out the key change in approach that the FSA wanted, which was to move from a reactive to a pre-emptive style of supervision.

The FCA intends to replace the Arrow framework with a new process that is easier to communicate to bosses and boards of firms so they can align good business practice with good regulatory practice. The intensity of this will depend on the FCA’s firm categorisation, which is currently being decided.

Central to the FCA conduct risk assessment for firms will be the use of management information, which it will use to study sales to see whether firms have appropriate systems and controls in place.