Retail investment reforms are a call to action for the industry, says FSA

Out-Law News | 30 Jun 2009 | 5:21 pm | 7 min. read

The Financial Services Authority's proposed new rules for the retail investment industry will impose a complete ban on commission-based sales and require firms to tell customers from the outset whether or not their advice is independent and how much it will cost.

Investment advisers, whether independent or not, will have to meet higher minimum standards, overseen by a Professional Standards Board, and abide by a new Code of Ethics that will ensure they act in the best interests of each customer, according to the plans.

The measures are set out in the FSA's long-awaited consultation paper on delivering the results of the Retail Distribution Review (RDR). They will affect all regulated firms involved in producing or distributing retail investment products and services including banks, building societies, life insurers, wealth managers and financial advisers.

Announcing the proposals on 25th June, Jon Pain, the FSA's managing director of retail markets, said:

"The RDR is about regaining consumer trust and confidence in the retail investment market, building a more sustainable sector and making it easier for people to find their way around and get the help they need – this is more important now than ever before.   

"We have today set out the specific changes we propose to make to implement our far-reaching package of measures.  This is a call to action for the industry - all investment advisers need to consider how they will respond and implement these wide-ranging and challenging improvements by the 2012 deadline."


Many of the proposed changes were outlined by the FSA in November last year. The requirement for firms to disclose in writing the nature of the services they provide before giving any advice, for instance, is not new.

But the FSA has taken on board the need to make the categories of advice more easily understood. As a result, all firms selling retail investment products must clearly describe their services as either "independent" or "restricted".

The concept of independent advice remains unchanged from earlier proposals. To qualify as independent, an adviser must carry out a comprehensive and fair analysis of the whole of the relevant market and provide unbiased and unrestricted advice.

The paper, however, gives some guidance on what is meant by the relevant market. Advisers operating in a relatively narrow field, such as retirement planning, need only review that specialist market to be able to give independent advice, as long as they make this clear to the client from the start.

But for the majority of independent financial advisers (IFAs) who offer a non-specialised service, the new rules will mean they will have to consider all retail investment products capable of meeting the client's needs before making a recommendation.

For many firms, this will mean covering a much wider range of products than they do currently. Even more so because the FSA is proposing to widen the definition of retail investments beyond "packaged" products to include all retail investment products best able to meet the client's needs.

Firms that use panels can still hold themselves out as providing independent advice, providing the panel is sufficiently broad in composition and regularly reviewed. And where the analysis of the market is carried out by a third party, the firm will be responsible for ensuring that analysis is suitably robust.

Restricted advice

For all non-independent advice, the FSA has chosen a new umbrella term, "restricted advice". This label covers firms that advise on their own products or on a limited range of products, such as bank advisers and other single-tied and multi-tied adviser firms.

It also includes "basic advice" – streamlined advice on charge-capped stakeholder savings and investment products, often provided by supermarkets and other retailers.

"Guided sales", which the FSA now calls "simplified advice processes", where the adviser provides a personal recommendation to assist consumers in making straightforward investment choices, can qualify as independent if the advice satisfies the whole of the market test, but otherwise will be restricted advice.

Firms providing restricted advice must disclose this in writing and orally to the client in good time before providing the service. Importantly, those offering a restricted advice service (including simplified advice processes) will be required to meet the same minimum professional standards as independent advisers. 

The FSA, however, does not intend to impose the same qualification requirements on firms offering "basic advice".  In addition, it is not planning to make any changes to the current regime for non-advised services, also known as execution-only sales, where no advice or recommendation is given.

The cost of advice

The paper sets out in more detail the FSA's plan to introduce "adviser charging" for all independent and restricted advice, except basic advice services.

Instead of earning commission paid by the product provider, advisers will set their own charges and agree them with the customer from the outset. If the total cost is likely to differ significantly from the firm's standard price list, this must be disclosed as soon as practicable.

How advisers charge for their services – whether by fixed fee, an hourly rate or a percentage of funds invested – will be up to them. But the paper warns that charges should not vary "inappropriately" according to the product or provider the firm recommends.

Consumers can pay the charge upfront or choose to have it deducted from their investment. The FSA will be consulting further on the responsibilities of providers offering this facility, in particular to ensure that the adviser cost and the cost of the product are clearly differentiated and that payments deducted to meet adviser charges are passed on in full to the firm.

Providers will no longer be able to advance finance to advisers out of their own funds (known as "factoring") as the FSA believes this could influence the products firms recommend to clients. And to reinforce the message, product providers will be banned from offering commission to secure sales and adviser firms from recommending products that automatically pay commission as from the end of 2012.

The FSA asks for views on applying the principles of adviser charging to providers who sell products directly to consumers. The regulator believes this would create a level playing field between firms selling their own products and firms giving advice.

The paper also asks for comments by 31st July on whether adviser charging should be applied to corporate pension schemes, both in cases where advice on joining the scheme is given to individual employees and where no such advice is given.


The consultation also promises a tougher stance on inducements generally. Rather than relying on firms' general duty to act in the best interest of their clients, the FSA is proposing to be more explicit:

"For example, we want to be clear that we will not in future tolerate retail investment product providers offering any incentives to adviser firms that are not explicitly designed to enhance the services to the client," the paper states.

Any significant non-monetary benefit offered by providers, such as access to trading programmes or the free provision of software such as customer relationship managing systems, would have to be made widely available rather than being used to reward or influence particular firms.

The regulator will also be looking more closely at firms' internal payment structures and incentive schemes to make sure performance is not solely measured in sales or weighted in favour of a particular product or provider.


The FSA estimates the initial cost of complying with the new regime at £430 million and subsequently £40 million a year, annualised at around £140m over five years.  This represents approximately 0.3% of annual gross new business premiums and 1% of industry profits.

But Bruno Geiringer, a life insurance specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, warned that the changes could result in a dramatic fall in the number of independent financial advisers over the next few years.

"The price to pay for these improvements is likely to be a heavy one in the short term," he said. "The move to adviser charging will have a significant effect on many firms' cash flow, and higher professional standards combined with the need to search the whole of the relevant market could force many advisers to drop their independent status or leave the market altogether.

For those advisers – independent or not – that remain, there will be additional costs in terms of capital funding requirements, systems development, retraining and new documentation," he added.

Wider application

At this stage, the proposals are confined to retail investments, but the FSA says it is considering the benefits of a wider application into the general insurance and mortgage markets to include the sale of pure protection products (life term, critical illness and income protection insurance) and payment protection insurance (PPI).

Respondents have already expressed concerns that adviser charging will not work in these areas because consumers will simply not be prepared to pay for advice. The FSA's concern, however, is that not applying the principles of RDR could shift sales from retail investments towards protection products and PPI, where advisers could still earn commission.

The FSA will be carrying out further research and analysis in this area and will publish a report in early 2010. Additional work will also be undertaken on whether detailed requirements are now needed to regulate the market for platforms and fund supermarkets.


The consultation closes on 30th October. The FSA plans to publish its final rules early in 2010 and for the new regime to take effect from 31st December 2012.

This timescale causes Bruno Geiringer some concern. "The market identified the problem of commission bias as long ago as 1984 and only now have proposals been put forward to address it," he said. "The FSA now proposes to introduce the changes without any pilot scheme or market testing by the participants.

"Some changes are unquestionably right, such as the new professional standards, but others still need further refinement," said Geiringer. "I hope the industry will take the opportunity to respond positively to this consultation to make the RDR work effectively in practice".

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