Philip Ryley: An eye on Difs

The FSA expects the RDR to have significant impact on the use of Difs.

This means that all adviser firms involved with sponsoring the establishment of Difs or their distribution must be fully aware of the proposed new requirements and how those requirements will affect their business models. Similarly, firms that run, help to run or make Difs available through other products or platforms will be affected by these changes.

In particular, if the RDR’s proposals on adviser charging go ahead as proposed (which appears highly likely), firms advising on Difs will no longer be able to receive a share of the annual management charge for their role on a Dif governance committee. Second, adviser charges for recommending a Dif should not vary inappropriately compared with substitutable or competing retail investment products and thirdly, the FSA has indicated that it believes it will be extremely difficult for firms to recommend Difs and meet the RDR standard for independent advice.

The FSA has stated that post-RDR, where firms holding themselves out as independent want to recommend a product offered by a connected firm, like a Dif, it will expect to see evidence for each recommendation that the advice is suitable, made following a comprehensive and fair analysis of the relevant market in an unbiased and unrestricted manner, in the customer’s best interests and in accordance with conflicts of interest requirements. Bearing in mind the inherent conflicts of interest involved, the FSA would question whether an independent firm could meet its obligations to act in the best interests of its client and provide advice in an unbiased manner if it recommends a Dif.

For restricted advisers, post-RDR, the FSA will expect them to consider how the inclusion of a Dif in their product range will affect the suitability of advice. This is particularly challenging if the product range only includes Difs.

Details of these proposed changes were set out in CP10/6 and not much has changed since that consultation.

Philip Ryley is head of financial services and markets for law firm Michelmores LLP