Out-Law News 6 min. read
02 Dec 2008, 1:56 pm
The move aims to prevent product providers, such as life companies and fund managers, from having any influence over the amount financial advisers earn for selling their products. Instead, advisers would be required to set their charges and disclose them clearly to their clients before providing any advisory services.
The FSA also wants to make it easier for consumers to understand whether or not the advice they receive is independent. And it aims to improve standards in the industry by introducing higher minimum qualification requirements, overseen by a new Professional Standards Board.
But the regulator has withdrawn the proposal for a complete split between advice and sales put forward in its April 2008 interim report. It has also confirmed that it will not be imposing a 15-year time limit on claims for negligent advice.
The package of reforms is the last stage in the FSA's Retail Distribution Review (RDR), which aimed to address low levels of consumer trust in the retail investment market. After almost two and a half years of open discussion, the FSA last week published a statement summarising the feedback received and its preferred options for change.
Launching the paper on 25th November, the FSA's managing director of retail markets Jon Pain, said that the proposals "provide a golden opportunity to regain consumer confidence and trust in the financial services industry."
"The reforms are wide-ranging and will be challenging for the industry, but they also present significant opportunities for firms and individuals operating in the retail investment market to modernise practices, raise standards, and treat their customers fairly," he said.
The Retail Distribution Review will now be known as the Retail Distribution Implementation Programme. The FSA plans to publish more detailed proposals for consultation in June 2009 and a policy statement setting out its final rules in early 2010, with a view to achieving full implementation by the end of 2012.
Over the next financial year, the FSA will also be considering whether there is scope for some cross-over of ideas into other sectors, such as payment protection insurance (PPI) and pure protection insurance (term, critical illness and income protection insurance).
In its interim report published last April, the FSA suggested a radical split between advice and sales. Anyone providing financial advice would have to do so on a truly independent basis, analysing the whole of the market, while those selling products would not be able to give any advice at all.
The move would have greatly affected tied and multi-tied firms, who advise on only a limited range of products and so could not meet the requirement for independence. Banks and building societies, whose sales processes currently include an element of advice, would also have had to make radical changes to their business practices.
The FSA has now concluded that the split could restrict the ways in which some consumers, particularly the less well-off, gain access to financial products. Without some level of advice or recommendation, many consumers would not realise their need for, or buy, financial products.
It is also concerned that there might be some potential clashes with the Markets in Financial Instruments Directive (MiFID), where "advice" is a broader concept and does not have to be independent.
So, instead of a simplified regulatory landscape of advice and sales, the FSA is proposing to divide the retail investment market into "investment advice", which would be independent, and "sales services", which would cover a spectrum of services ranging from advice that is not independent to non-advised and execution-only sales.
The new regulatory landscape would be backed up by Money Guidance, the proposed national service intended to provide consumers with impartial information and guidance on money matters.
Commenting on the modified proposals, Chris Cummings, Director General of the Association of Independent Financial Advisers (AIFA) claimed the FSA had "bowed to pressure from the banking and insurer lobby to allow their sales people to still call themselves advisers".
“The FSA had a golden opportunity to revitalise trust in financial services at a time when consumers need our help the most," he said. "But the new proposals perpetuate historic flaws in financial services. Most importantly, consumers want clear blue water between those who are on their side and those who have an obligation to sell a product."
Under the new regime, independent financial advisers would be required to provide unbiased, unrestricted advice based on a comprehensive and fair analysis of relevant markets. The FSA will be consulting on what this will mean in practice, but the paper suggests that the relevant markets will vary with the circumstances.
A firm specialising in a narrow field, for instance, could still provide independent advice if it analysed the whole of that market, although the relevant market could include other types of product that might provide a suitable alternative.
Firms using panels of providers could still hold themselves out as independent advisers if they could demonstrate a robust selection process and that their advisers are allowed to go "off-panel" when necessary.
Similarly, independent advisers using portals or sourcing systems to find products would have to ensure they understood the selection criteria. The FSA suggests they should not rely solely on a portal to source products if product providers have paid a fee to be included.
Using a wrap platform (an online service for viewing and managing investment portfolios) could also be compatible with independence, provided it produces at least as good an outcome for the client as not using a platform.
Under the proposed new model, it would even be possible for the same firm to provide both independent and non independent advisory services, as long as the services are clearly distinguished.
The FSA has also rejected suggestions that an advisory firm cannot be independent if it is owned or partly owned by a product provider, although the regulator says it will keep the issue under review.
Instead of agreeing their commission with the product provider, independent financial advisers would be required to set their own charges and make sure each client is fully aware of what the services they provide will cost. These would be disclosed separately from the cost of the product itself.
Advisers should also discuss with the client whether they are to be paid in a lump sum or by a series of payments over time.
Many consumers, however, will not want, or be able, to pay the adviser's charges up front. In such cases, the FSA would allow the product provider to offer to deduct the charges from the investment and pay it to the adviser.
But the practice of "factoring", where the product provider finances an advance to the adviser from its own funds, would be banned. The FSA will be consulting on rules to prevent any other sort of payments passing from product provider to adviser.
The new "adviser charging" regime would not apply retrospectively, so would not affect arrangements in place when the rules come into force.
Advice services that do not satisfy the conditions for independent advice and all other regulated sales services would fall into the "other" category, currently given the working title of "sales services".
Non independent advisory firms would have to make the scope and limitations of their services clear to clients. But the FSA says that independent financial advisers who are unwilling to meet the new standards of independence would not simply be able to re-label themselves non independent. The same levels of professional competency would be required of all advisers, whether independent or not.
The FSA is also to consult further on how to adapt some of the principles of adviser charging to the non-independent sector. It is particularly keen to ensure there are equivalent levels of disclosure, so that independent and non-independent firms alike would have to explain their charges clearly.
Stephen Haddrill, Director General of the Association of British Insurers welcomed the proposals as good news for consumers:
“Moving away from the commission model of remuneration for independent financial advisers will eliminate any bias, or perception of bias, towards particular products," he said.
"This means that consumers can have absolute confidence that the products recommended to them are best for them, not their IFA. Greater levels of professionalism and qualifications for advisers will also help to increase trust in financial services.
“Transparency is key throughout the advice process – of cost, level of service and expectations. These reforms will go a long way towards achieving this, and we believe they will work in the best interests of consumers by ensuring a healthy market and clear selling of financial products."
Commenting on the FSA's paper, Bruno Geiringer, a life insurance specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, warned product providers to start thinking now about how they would adapt to the new distribution framework.
"Once product providers lose their ability to influence which products advisers can recommend, they will need to differentiate their products from those of their competitors in other ways," he said. "In a difficult economic climate and with volatile markets, it is never going to be easy to tempt consumers to invest money. Simply claiming to offer a better service may not be enough".