The Financial Services Authority’s (FSA) review of advisers’ progress in adapting to the retail distribution review (RDR) will go far beyond checking how IFAs get paid; it will scrutinise every aspect of their business models, compliance consultants have warned.
Last week the regulator sent a questionnaire to 50 firms asking how they described their services, whether independent or restricted, and how they charged clients.
The focus and structure of the questions, however, showed the FSA was interested in more than these two topics, according to Malcolm Kerr, executive director in Ernst & Young’s financial services division.
Many of the questions asked for information about firms’ systems and controls, centralised investment propositions (CIPs), platforms and joint ventures with providers.
‘There’s a whole section on CIPs,’ said Kerr (pictured). ‘The FSA did a review on CIPs [in October 2011] and was quite disappointed about the number of cases where the advice was unclear or unsuitable. So there are lots of questions about that.’
Ian Stott, client services director at outsourced compliance firm The Consulting Consortium, agreed.
‘[The questionnaire] is about RDR implementation and adviser charging but also internal governance, and systems and controls,’ he said. ‘The two are absolutely hand in hand here.’
Kerr said if the FSA was not satisfied with the responses to its questions on CIPs and joint ventures, it could result in more regulatory action.
‘The responses to this will inform the FSA to look again at these areas if it seems that a huge number of organisations are using [CIPs and joint ventures],’ he said.
‘If it saw a large number of firms doing joint ventures, it would probably want to understand whether they have appropriate permissions and competence.’
The FSA said once it received the 50 firms’ responses, it would choose 20 to be the subject of visits, interviews and file assessments.
Support and compliance reviews
The regulator is undertaking the adviser charging and description of advice review in three cycles, each lasting six months, alongside thematic reviews on professionalism and non-advised sales.
FSA technical specialist Rory Percival (pictured below) said the survey and any follow-up work with advisers was part of the regulator’s first cycle of RDR reviews, which were aimed at giving support rather than questioning compliance, which would be its focus later in the year.
‘This first cycle is about being supportive of the industry,’ he said.
‘Once we’ve done the first cycle, we will then have had the rules in place from the end of last year plus six months and we’ll have provided good and poor practice examples to help advisers further.
‘The focus of cycles two and three will move into “are firms complying with the rules?”’
Spotting the laggards
Percival’s acknowledgement that many advisers are not yet running every aspect of their business in line with the RDR is reflected in the questionnaire. One question asks whether firms have produced a standard adviser charging structure document and, if not, whether it would be produced in one or two months.
‘It’s a very searching questionnaire and it will confirm how many firms have genuinely got themselves ready for the RDR and who is still working towards it,’ said Roderic Rennison, director of consultancy The Ideas Lab.
‘Technically firms should have been ready by 31 December 2012. OK, there’s a six-month [grace] period, but this will show how far [firms] are from having a thorough investment proposition, how far they have thought through a proposition for adviser charging and whether they have an investment process.
‘It will be an excellent means of determining how successfully firms have implemented the RDR.’
Rennison and Stott predicted the FSA would discover a large number of firms were not up to speed.
‘Out of the 50 firms [sent the questionnaire], there will be a small percentage that look at this and say “we’ve done that”,’ said Stott.
Alistair Cunningham (pictured above), director of Caterham-based Wingate Financial Planning, said the FSA’s announcement that 15% of advice firms had not submitted their professional standards data by the 29 January deadline (a breach of regulatory rules) showed many were struggling to stay in line with RDR demands.
‘If 15% [of firms] haven’t notified the FSA about their professional standards data, then I imagine a greater number would not be able to complete this [questionnaire] adequately,’ he said.
Expecting action on failures
Despite Percival’s reassurances that the regulator’s purpose was to support, not to punish, Duncan Parkes, head of compliance at Somerset-based Old Mill, said the FSA would have to act if it discovered serious failures.
One survey question is: ‘Where adviser charging is used, do adviser charges payable by a client vary from where this is not used?’
Parkes said if an adviser answered yes, they ‘could probably expect a visit’ from the regulator.
‘I was quite surprised to see that in there,’ he said. ‘You shouldn’t be paid more money if you’re taking adviser charging than if your client is paying direct. At the end of the day, your client is paying for advice irrespective of where [the payment] comes from.’
Heralding greater intrusion
Kerr said the survey was an indication of how incoming regulator the Financial Conduct Authority (FCA) would work. It would be more hands-on and was building up a growing store of information on adviser firms, he said.
‘We should expect the regulator to be increasingly intrusive because it’s really keen to understand and to see if [the RDR] is being taken seriously and being implemented with the appropriate robust control; and if consumers are going to get better outcomes because of it,’ said Kerr.
‘If you combine this questionnaire with the Retail Mediation Activities Return, those two sources will be very helpful to see what’s going on out there.’