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RDR review: what the regulator wants to know about your firm

The Financial Services Authority has kicked off its thematic review into independent/restricted advice and adviser charging by sending out a survey to 50 firms. Click through to find out what questions the regulator is asking.

Target market

The regulator wants to know what a firm’s target is, how it chose this demographic, and whether its client bank will be different to the types of clients the firm looked after before the RDR.

If a firm says that it has changed target markets, the regulator wants to know why.

Presumably the FSA is interested to know whether the RDR has forced advisers to chase high-net-worth clients at the expense of the mass market and mass affluent clients.

Scope of service

The regulator asks advisers to describe the scope of their service from the eight options below:

  • Independent advice (unbiased and unrestricted advice on the full range of retail investment products)
  • Independent with a narrower relevant market (e.g. ethical)
  • Restricted advice: limited types of products (e.g. pensions only)
  • Restricted advice: the products of one provider
  • Restricted advice: the products of a limited number of providers
  • Basic advice (a specific way of giving advice on stakeholder products)
  • Non-advised services (including execution-only sales)

It also asks for details of a firm’s relevant market

Independent

The regulator wants to know how much, in percentage terms, of a firm’s business comes through its independent service.

It then asks for a breakdown of the firm’s business to find out what type of products it advises on, and what percentage of its business each accounts for.

These include:

  • Model portfolios
  • Multi-manager funds
  • Discretionary fund managers (outsourced)
  • Discretionary services (in-house)
  • Distributor influenced funds
  • Products and funds selected by an individual client
  • Panels/ buy lists

It also asks whether the adviser provides products through a joint venture with an investment management firm.

Restricted

Where firms are restricted they must fill in the same table relating to the products they advise on, and what percentage of their transactions these account for.

Restricted firms must also explain the nature of their restriction and how this may differ from their scope pre-RDR.

The FSA also wants to know how firms tell clients about their restricted status, and at what stage of the advice process they address this.

The disclosure of a firm’s restriction is a hot topic for the regulator which also wants to know how advisers have been trained by the firm in order to ensure they provide the correct disclosure of the firm’s status during the advice process.

It also wants to find out how firms’ will monitor that advisers are providing the correct disclosure.

It asks two further questions in this section. Firstly whether firms have assessed what type of client their restricted service is not suitable for.

Secondly it asks how firms ensure advisers are aware of the circumstances where their restricted service is not suitable for a particular client and that advisers turn these clients away where appropriate.

Adviser charging

The FSA is examining adviser charging in three ways – first, asking questions about a firm’s documented charging structure, before drilling down into the detail of initial charges and ongoing services.

It is asking whether an adviser charging document has been produced (and if not, when it will be ready). It is also interested in how the charges are disclosed to clients, at what point this is done, and how the agreement with the client over the charges is recorded.

Initial adviser charges

Onto initial adviser charges, and the FSA’s questions become a lot more detailed. It wants to know what payment methods are offered, and what proportion of clients use them. It has identified five different categories of payment:

  • Direct payment – cheque, card, cash
  • Facilitated through a platform…
  • …or a product provider
  • ‘Don’t know/ unsure’ ( I’m guessing the FSA will be paying particular attention to those ticking this box)
  • Other

It asks advisers whether they allow clients to pay the initial charge by instalments for advice on regular payments (and if so over what periods are allowed), and whether instalments are offered in any other instances. It also wants to know if firms have arrangements to recoup charges if policies are cancelled before all instalments have been made.

Finally on initial charges, the FSA asks if initial charges are solely contingent on products being taken up.

Ongoing services

With ongoing charges, the FSA kicks off in the same way as it approached initial charges. After asking whether firms have any, it asks them to disclose payment methods offered, and the proportion of clients opting for each, giving the same four options.

It wants details on firm’s services for clients in return for the ongoing charge, and doesn’t fail to ask the most obvious question: ‘Do you provide ongoing services to those with products paying ongoing trail commission?’

Use of platforms and adviser charging facilitation

The regulator kicks off its platform questions by asking how many firms use (presumably there’s going to be a bit of cross-referencing with the answers to the earlier section on independence). If the firm is advising on products where the provider or platform offers charging facilitation, it wants to know if other payment methods are available to the client, and how client consent for adviser charging facilitation is recorded.

It ends with perhaps the most loaded question of the whole survey: ‘Where adviser charging facilitation is used do adviser charges payable by a client vary from where this is not used’. No prizes for guessing what sort of answer the regulator wants…