Advisers' RDR questions answered - January 2013
According to the Financial Services Authority, a good deal of discussion has taken place during its Positive Compliance sessions and Business Risk Awareness Workshops. Here are the regulator’s answers to the most frequently asked questions arising from those sessions.
Q1. How are you going to supervise the Retail Distribution Review (RDR)?
How firms comply with the RDR will be supervised in several ways. We will ask how your firm has implemented RDR as part of our firm visits and we will focus on the RDR status of firms during the regulatory reviews over the next three years. We are also planning to undertake thematic reviews looking at aspects of the RDR over the next 18 months.
Q2. My firm has already had a regulatory review - will I receive another visit in 2013 on RDR?
If your firm has already had a regulatory review, then we will not visit you again specifically to look at compliance with the RDR. But if you answered questions about your progress towards compliance with the RDR as part of your previous review, this may be checked during the year.
|More answers from the FSA on RDR:
* FAQs 1 - January 2013
* FAQs 2 - February 2013
Q3. I have been told my firm should expect a regulatory review in the next year – how much of it will focus on the RDR?
The review is focused on governance, culture and controls – the RDR is relevant to all of these areas. At your review we may ask some specific questions on the RDR and your approach to implementation. We may also ask questions designed to determine your firm’s ability to identify and mitigate risk.
Independent and restricted advice
Q4. What must I have on file to prove I have been offering independent advice?
Firms need to show evidence that they are able to advise on all retail investment products (RIPs) that are capable of meeting the investment needs and objectives of their retail clients. As they need to be assessed on an individual client basis, many firms will be unable to say upfront what products may be capable of meeting the investment needs and objectives of their clients. So we will expect most firms providing independent advice to be able to provide advice on all types of RIPs.
Advisory firms typically use research to distil the product market (whether or not they formally construct a panel). If a firm does this, it should be able to show evidence of its selection criteria to select products and the product research it has undertaken, and how these are consistent with the independence requirements and the client’s best interests rule. If a firm excludes a certain type of RIP from its ‘panel’ because, after review, it decides there is a valid reason consistent with the client’s best interests rule for doing so, it should be able to show evidence of this decision.
A firm that says it provides independent advice also needs to be able to advise off-panel if that would be in the best interests of a particular client. As stated in our previous guidance (FG12/15), to do this a firm’s advisers should maintain an awareness of what is and is not included in the panel. This is so it can identify clients for whom an off-panel solution would be suitable. The firm will also need to show evidence of how it regularly reviews the decision to exclude certain product types from its panel.
A firm that holds itself out as independent should also genuinely be able to consider all RIPs of the relevant market. We would question a firm that said it was independent and considered all products but did not have a mechanism for actually advising on a particular product – investment trusts or exchange traded funds (ETFs), for example. We would also expect the firm’s disclosure documentation to be clear about the service the firm provides.
Q5. Do you have to regularly advise on all products/funds etc to remain independent?
No, you need to consider all retail investment products in the relevant market, but we do not expect that you will actually recommend all retail investment products as a matter of course.
Q6. Why do I need to recommend Unauthorised Collective Investment Schemes (UCIS) to my clients?
We deem UCIS to be potentially suitable for retail customers who can be classified as sophisticated or high net worth. A firm’s independent status will not be affected if it does not consider UCIS in its review of product types when giving advice to those retail customers who are not sophisticated or high net worth – that is, ‘ordinary retail investors’. If the firm has reviewed its client base and decided UCIS are not suitable for its clients therefore, it could still call itself independent and not offer advice on these products. The firm would need to be able to show evidence of this and would also need to keep this under regular review. Firms that deal with sophisticated/high net worth clients who may receive promotions of these investments, on the other hand, may need to include the products in the review of the market for those clients – for instance if the clients have the requisite appetite for risk. The firm will also need to consider how it will deal with new clients who already hold UCIS products in their portfolio.
Q7. Must I advise on ETFs and unit trusts to be independent?
ETFs and unit trusts are retail investment products, so we would expect a firm holding itself out as independent to be able and willing to advise on these products if they meet the investment needs and objectives of any of its retail clients.
Q8. What do I need to do on my suitability reports to show I have not considered certain retail investment products?
The suitability report (which will be required in most cases) for an individual client should set out the client’s demands and needs and explain why the firm has concluded the recommended transaction is suitable for the client. It should also set out the possible disadvantages of the transaction. There is no requirement to set out all the products you have not recommended. A firm can exclude a certain type of RIP from its ‘panel’ because, after review, it decides doing so is consistent with the client’s best interests rule. It should be able to show evidence of this decision, but it does not have to repeat this in the suitability report.
Q9. What happens if I am an IFA but have not recommended all products in the retail investment range? If I do not recommend all products in the retail investment range, do I lose independent status?
To hold itself out as independent, an advisory firm must be willing and able to advise on all RIPs that could potentially meet the investment needs and objectives of its retail clients (see Q4). We would expect a firm’s review process to always start with it considering the whole of the relevant market in an unbiased and unrestricted way. However, we do not expect a firm to actually recommend all products captured by the broad definition of RIPs as a matter of course. The firm may conclude that, for many of its clients, certain products are not going to be suitable and therefore not consider these product types further for those clients.
Q10. Can I use a single platform and remain independent?
We expect it to be very rare, if possible at all, that a firm could use a single platform for all of the investment business for all of its clients and meet the standard for independent advice. Generally, a single platform will not offer products from the whole of the RIP market. So a firm will need to advise ‘off-platform’ or through another platform if that would be in the best interests of a client. Our factsheet Using platform-based investments and the independence rule covers this subject.
Q11. Do all my advisers need to be able to provide independent advice for my firm to be classed as independent?
Yes. If your firm is stating that it is independent, all advisers in the firm must provide independent advice.
Q12. Could a group of restricted advisers be independent, if collectively they could advise on all the products on the retail investment range?
No. Individual advice to clients by individual advisers needs to meet the independence rule.
Q13. Can you ‘outsource’ certain pieces of advice to other individuals and still remain independent?
In most circumstances, no. As explained in our guidance on independent advice (paragraph 2.15): “If a firm cannot or will not advise on a particular type of retail investment product, and that product could potentially meet the investment needs and objectives of its new and existing clients, then its advice will not meet the standard for independent advice.” If an adviser does not in practice give advice in an area where their clients have needs but outsources the advice then we would question whether the adviser can or will advise in this area and, hence, whether the firm is providing independent advice. There are only two exceptions to this – advising on pension transfers/opt-outs and long-term care (paragraphs 6.2 – 6.6 of the guidance on independent advice).
Q14. How are you going to supervise adviser charging?
We will monitor the adviser charging rules as business as usual during visits, reviews and thematic work.
Q15. If you visit me, will you criticise the fees that I charge?
The cost of advice is a business decision for the firm, provided it meets the rules we have laid down in our rules (for example, COBS 6.1A) on how to determine its charging structure, and considers its duties under the client’s best interests. As long as it complies with those rules, it is unlikely we would comment on the amount charged or the method used. But we will pay close attention to the disclosure of the cost of advice and the disclosure of what the client should expect to receive for this cost, especially in the area of ongoing advice.
Q16. What is your view on us charging a proportionately higher fee to clients with fewer assets as these clients can cause more time and work?
Your firm decides the cost of advice, in line with its charging structure, which must be shown to the client before advice is provided. We understand the time taken to provide a recommendation does not depend on the sums of money involved. We can see circumstances where it would be feasible to charge somebody with less to invest a proportionately higher fee than someone with a higher amount. However, any material difference in charges from those set out in the charging structure will need to be drawn to the client’s attention and agreed with them. You are also free to offer or negotiate a different price to that in the charging structure for a particular client – for example, a lower price for an existing client.
Q17. Can we charge clients if they decide not to follow the recommendation or advice we give?
You must disclose clearly the nature of your charging structure to the client before you provide advice. It is up to you whether you make a charge in all cases, or only if the client decides to follow your recommendation.
Q18. In what areas can an adviser deal with a client without the necessary qualifications post-RDR?
The full list of regulated activities with details of whether an appropriate qualification is required to carry out that activity can be found in our Handbook under TC APP 1.1.1R. Tables showing which qualifications are appropriate for each activity can be found in our Handbook at TC APP 4E. As a result of the RDR, the qualification requirements for advising on securities, derivatives and packaged products have changed but the requirements for all other activities remain the same.
Q19. Can I advise on pension and investment products not in the retail investment range without the necessary qualifications?
Advising on pensions and investment products is a regulated activity with a qualification requirement. You must hold an appropriate qualification to advise on these products.
Q20. Will my professionalism status show on the FSA Register?
We will not be listing details of professionalism status on the FSA register. If you want this information, you should contact your accredited body.
Q21. If I don’t achieve the necessary status, what happens to my existing Group Personal Pension (GPP) clients?
Any retail clients you deal with will need to be advised by an alternative adviser until you reach full compliance. GPP clients are retail clients and so will fall into this category.
Q22. I took my exams in December, can I continue to give advice while I wait for the results?
No. If you do not achieve the necessary status, any retail clients that you deal with will need to be advised by an alternative adviser until you reach full compliance.