If there is one good thing to come out of the regulator’s first progress report into Retail Distribution Review compliance it is that we now, at last, have some much needed clarity on key issues.
You have my sympathy, dear reader. The results of the first of three thematic reviews into RDR adaptation are chastening, but I would argue the failings identified result more from the Financial Conduct Authority’s refusal to offer clarity than insouciance on the part of the ‘offending’ advisers.
Take, for example, the attack on intermediaries’ misuse of the ‘independent’ badge. Are the issues identified across the 50-firm sample examples of mendacious attempts to retain coveted ‘IFA’ status, or simple misunderstanding of what was required to achieve this in the first place?
One of the case studies presented is that of a firm holding itself out as independent that placed the majority of its business with a single platform.
This has been a contentious issue since the RDR rules were first announced.
I remember going to a panel debate in 2010 where the regulator’s own Rory Percival intimated an adviser would not be forced to use multiple platforms, subject to being able to evidence the homogeneity of its client base.
This was later confirmed in a regulatory paper in December 2010, which said IFA firms could use one platform for “the majority of their business”, as long as they kept a good audit trail and offered alternatives where appropriate, including off-platform options.
Skip to October 2012 and a survey conducted by Skandia revealed 48 per cent of advisers were using a single “main” platform for the majority of business, with 40 per cent of respondents believing this would remain a viable option post-RDR.
This paper seems less and less of a fair critique of poor compliance and more a mechanism to subtly refine previously ill-defined rulesSkandia itself had been on the record earlier that year saying this was perfectly within the rules, as long as the above criteria were met.
The tone of the regulatory rhetoric changed over the two years ahead of implementation, however. It began talking about it being “difficult to prove independence” if an adviser used just one platform.
This more stringent stance has clearly overridden the previous ethereal orthodoxy.
One of the key drivers behind the use of platforms is the efficiency it offers to advisers consolidating their business. It is obvious that the value of this for adviser is in coalescing as many clients as is workable into single offerings; if the FCA wanted to limit the scope of this, it needed to be clearer.
Another criticism in the paper is that restricted advisers do not disclose that they are restricted. That is to say, they did not “use the words... restricted advice”, or were opaque regarding the nature of their restriction.
Again, the rules did not offer clarity here. Read the final guidance on the new advice definitions published in 2012 and you will find a conspicuous absence of any requirement to state using the words “restricted advice” that this is the service being offered.
The guidance did require firms to “disclose the nature of their restriction”, with the regulator offering the following exemplar wording: “we only offer products from certain product providers”. Frankly, there was no way anyone would have known the word ‘restricted’ had to be used.
Paul Harrison of Prudential clearly did not know this either when he spoke to FTAdviser in April of this year and said that restricted advisers were being “too open with clients” by using the term, which has become imbued with negative connotations.
“I think the restricted marketplace is something that has potential to grow. The biggest issue about restricted is the actual word ‘restricted’ as it seems narrow.
“When they [restricted advisers] introduce themselves they should say that they are a financial adviser and have decided not to be independent as the market is very broad so [they] specialise in certain areas. That is not technically incorrect,” he said.
And so on. Taking each point in turn, this paper seems less and less of a fair critique of poor compliance and more a mechanism to subtly refine previously ill-defined rules.
What grates on me is that questions were frequently and vociferously asked on these issues and a straight answer was habitually avoided.
We hacks face this all the time: the regulator will never discuss an individual case when we call for clarification, and is equally reluctant to offer any explanation of rules over which there is confusion, most of time simply pointing us to the latest official paper or quoting thereof.
The FCA would likely argue it is seeking not to be too dictatorial and offer flexibility. But if any firm that in good faith exploits that liberty is subsequently chastised and - as the firms highlighted in this paper were - threatened with enforcement if they do not alter their practices, this seems a fallacious freedom at best.
