From Special Report: RDR Update - May 2012
Retail advisers’ RDR checklist
The supervisory approach to RDR implementation looks to be robust and advisers must make sure that everything is in place as soon as possible
Given the wide-ranging nature of the RDR and the detailed complexity of the FSA rules, it is not surprising that many firms still have a lot of work to do to prepare themselves for the 31 December 2012 implementation date.
Obviously, the issues that each firm needs to focus on in developing and executing its RDR strategy will vary depending upon its business model, size, corporate group structure, client base and resources. Notwithstanding this, there are a number of key issues that all adviser firms need to think about, 10 of which are outlined below.
As a firm that advises retail clients on retail investment products:
• Do you also provide non-advisory services to such clients?
If the firm provides execution-only or discretionary services in relation to certain types of retail investment products (like unit trusts), it will continue to be subject to the FSA’s remaining ‘packaged product’ rules. Consequently, ‘full service’ firms will need to think about whether they wish to operate separate charging structures for their services and about the different disclosure requirements that apply. In addition, firms acting as discretionary managers need to determine whether their client take-on and investment processes ever result in their giving ‘personal recommendations’ to discretionary clients on retail investment products – if they do, is the firm in a position to apply the relevant RDR requirements to these limited advisory activities or can it restructure its business so as to prevent such recommendations from being given in the first place?
• Are you just an adviser for RDR purposes?
Even firms whose business is largely focused on providing advice to clients may end up being affected by other elements of the RDR. For example, if the firm provides custody and execution-only trading services in relation to more than one provider’s products, it will fall into the definition of a platform service provider and be subject to various disclosure requirements as regards any commissions received from product providers. Alternatively, if the firm is associated with a product provider (for example, because it acts as investment manager to the assets of a fund), it will be caught by the adviser charging rules that apply to product providers and will, consequently, be unable to pay commission to other advisers for distributing the product.
• Are you clear about which types of retail investment products you advise on?
While the RDR clearly applies to advice on collective investment schemes (both regulated and unregulated), investment trusts, pensions and life policies and Scarps, firms also need to determine whether they advise on any product that is likely to fall within the ‘catch all’ element of the retail investment product definition - “any other designated investment which offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in the financial asset”. Depending upon the legal structure of the investment in question, this is likely to include ETFs, EIS funds and VCTs and may also extend to certain warrants and structured products.
• Will you be offering restricted advice or independent advice?
For many firms, the key RDR-related decision is the choice between offering restricted and independent advice. If its advice is restricted, the firm needs to be able to describe the nature of its service in a way that not only makes its restrictions clear to clients (that is, as regards types of products, size of product range and access to different product providers) but that also differentiates the firm’s offering in what will be a vastly-expanded market for non-independent advice (for example, by highlighting any areas in which the firm specialises). If independent, the firm needs to ensure that it has the investment processes and structures in place that will enable it to demonstrably comply with the “comprehensive and fair analysis” and “unbiased and unrestricted” criteria for independence (for example, use of third party research providers, and of broadly-based, regularly reviewed panels of products and/or product providers).
• Will you be using platforms in delivering your services to clients?
Just as a firm’s product recommendations must be suitable for a client, its use of platforms as mechanisms for accessing those products must also be in the client’s best interests. Firms using platforms for any significant proportion of their retail investment product business should consider putting procedures in place (a) to establish, apply and evidence the criteria against which the firm selects which platform/s to use (always bearing in mind the heightened obligations that apply to independent advisers in this regard) and (b) to identify, manage and record scenarios where the client’s needs and circumstances dictate that advice should be given “off platform”.
• How will you fulfil your RDR disclosure obligations to clients?
From a purely regulatory perspective, the RDR imposes a wide range of disclosure obligations. To begin, firms will need to disclose the independent/restricted status of their advice and their adviser-charging arrangements through amended customer agreements and tariff schedules. In addition, firms need to consider (a) whether there are other client documents requiring amendment, (b) how oral disclosures about restricted advice status can best be delivered to clients and (c) how the per-transaction disclosure of total adviser charges will be accommodated within the firm’s standard sales/advice process.
• What else do you need to keep your clients informed about?
Although the FSA has begun to produce material aimed at raising consumer awareness about the RDR and the Money Advice Service intends to follow suit, firms with well-developed relationships with their clients are in a much better position to prepare them for the changes ahead by explaining how services and charging structures will be impacted. If you are already aware of changes that will directly affect the way your services are delivered to clients, (for example, services being re-structured, service charges becoming subject to VAT or being increased to compensate for lost commission income), make sure that clients understand when these changes are happening and why.
• How will you handle commission on pre-RDR and legacy business?
Firms that continue to accept product provider commission for existing/legacy business will need systems and procedures aimed at ensuring that receipt of such income does not result in their breaching the adviser-charging requirements. The Cobs provisions in this area are particularly detailed. Among other things, firms will need to ensure that trail is only retained on retail investment products recommended before RDR implementation, that re-registration of trail between firms complies with various disclosure criteria and that adviser charging requirements are applied if post-RDR advice on pre-RDR business results in any additional/new investment.
• Can you comply with all of the RDR reporting and notification requirements?
Firms’ data collection and reporting systems will have to contend with the amended RMAR, requiring details of revenue from initial/on-going adviser charges and of advisory services provided on a one-off/on-going basis. In addition, new periodic reports (covering professional standards and complaints arising from retail investment activities) and one-off notification requirements (covering adviser competence and complaints arising from individual advisers’ activities) will necessitate changes to IT systems and compliance procedures as well as training to develop staff awareness about the types of events that trigger required notifications.
• Are there issues where you need external advice?
With the RDR deadline fast approaching, firms need to have a clear and achievable plan for ensuring their compliance with the new requirements. They also need to take a realistic view about which elements of that plan they can implement themselves and which areas may require recourse to external advisers such as lawyers (for example, if employment contracts need to be changed to enable compliance with the new professionalism requirements), accountants (for example, as regards the application of VAT to the firm’s services and charges) and other advisers (for example, for assistance with documentation, developing in-house processes).
The early stages of the new regime’s operation will coincide with the wider structural transition from FSA to FCA regulation.
With the FCA marketing itself as “a judgement-based, bold and pre-emptive regulator”, it is clear that the supervisory approach to RDR implementation will be robust.
So far, the FSA/FCA has signalled more themed visits to assess compliance with key RDR requirements, more direct intervention in product design and sales processes, greater supervisory challenge to firms’ business models and a determination to pursue tougher action when firms fail to meet the required standards.
On this basis, the key RDR message for firms right now must be – be prepared.
Rebecca Thorpe is principal of Bovill specialist financial services regulatory consultancy