RDR commission ban rules kick-in as some financial advisers drop the 'independent' label

New rules prohibiting the payment of commission to advisers came into force on 31 December 2012 after the Financial Services Authority (FSA) decided to take action to improve transparency over the charges consumers face in the retail investment market.

Under the regulator's Retail Distribution Review (RDR) rules advisers can only receive payment for the personal recommendations they make about investments from clients. The FSA introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. Commission payments had risked advisers not always providing personalised recommendations that best suited clients, the FSA had said.

The RDR rules require advisers to inform clients of whether they are providing advice on an 'independent' or 'restricted' basis. This declaration must be provided to clients in writing in good time before they provide advice services.

Generally, independent financial advisers (IFAs) will be required to consider all available products and providers in the market before making a personal unbiased and unrestricted recommendation to clients on what to invest in. Restricted advisers will legitimately be able to offer advice based on a smaller list of products or providers, even if taken from a single source, providing they are up front about this with clients.

However, both IFA and restricted advisers will be bound by the adviser charging rules other than in cases where restricted advisers can be said to be offering "basic advice", a simplified form of financial advice generally using pre-scripted questions to determine whether a financial product will suitable for a customer. In those circumstances restricted advisers could legitimately obtain fees, commission or other benefits from product providers or others.

An online service where consumers can rate financial advisers has said that initial research it has conducted has raised questions over whether the biggest adviser firms are being clear about which kind of advice they are offering post-RDR.

VounchedFor.co.uk said that eight of the 10 biggest firms offering financial advice were now doing so on a 'restricted' basis, but warned that those companies are "are not being clear enough" about it. Only two companies were "explicit" about offering restricted advice, whilst others had merely dropped the reference to 'independent' advice from their websites, it said. Prior to the RDR coming into force just two of the biggest 10 financial advice firms provided advice on a restricted basis, according to a report by the FT Adviser.

“We fear this lack of transparency combined with large firms’ marketing budgets may draw consumers unknowingly toward ‘restricted’ advice," Adam Price, founder of VouchedFor.co.uk, said in a statement. "While it is possible restricted-advice firms could offer the client lower charges, by not incurring the cost of reviewing all investment options, our experience suggests this is often not the case. Moreover, some restricted-advice firms appear to be recommending their own in-house funds over better alternatives."

"Ultimately, the difficulty for consumers in comparing restricted-advice firms is that they have to determine how competitive that firm’s preferred investment funds are. That may defeat the purpose of seeking advice," Price added.

Under the RDR platform operators and product providers are permitted to provide a mechanism through which client investors can pay the adviser charge, subject to certain conditions. Platforms allow financial advisers to view and manage their clients' investments, arrange transactions and provide investment planning tools and other services online.  . Some platforms can be used by customers directly.

Under the rules, platforms and product providers must obtain and validate an instruction from customers in relation to any adviser charge for which it provides a facilitation service. The FSA has left it up to individual companies to decide how to achieve this standard. Late last year the FSA wrote to all the firms that it understands will facilitate adviser charging under the RDR regime "seeking regulatory assurance" from those companies on the issue.

Platform provider the James Hay Partnership has predicted that the new RDR requirements will contribute to a mass-shrinking of the number of operators of platforms. In a report by the FT Adviser, the company's managing director Tim Sargisson said that he expects the number of platforms to fall to fewer than 20 from an estimated figure of more than 100 by the end of the year.