RegulationOct 12 2015

FCA asks if you want Australian, US or Dutch rules?

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FCA asks if you want Australian, US or Dutch rules?

In a 46-page paper published today (12 October), HM Treasury and the Financial Conduct Authority asked advisers what they think about the way Australia, the Netherlands and United States regulate IFAs.

The input paper for the Financial Advice Market Review spells out how Australia introduced the Future of Financial Advice regulation in 2012 to 2013.

The objective of FOFA was to improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice.

FOFA included a requirement that the adviser act in the client’s best interest, including a safe harbour which advisers could rely on to show they have met the best interest duty. This included a ‘catch all’ clause to ‘take any other steps reasonable in the circumstances’.

The Australian regulations also contained an opt-in requirement to renew fee agreements every two years, plus a requirement for annual fee disclosure.

Conflicting remuneration structures, such as commissions for investments (not including life insurance), were banned.

The Australian government is currently considering whether to legislate in relation to professional development and training of advisers and is looking into reducing high up-front commissions on life insurance products.

Elsewhere, the Netherlands’ Authority for Financial Markets introduced a number of reforms similar to the UK’s Retail Distribution Review.

The objective was to shift the culture in the market from product-driven sales to consumer-focused advice by removing the incentive for advisers and intermediaries to recommend products that were not in the best interests of the client.

These reforms included a ban on remuneration through commission, including packaged investment products and mortgages. This was recently extended to cover other retail investments.

Rules on product governance, setting standards for the product oversight and governance process, as well as for suitability of products, were also produced.

Finally, in the US, brokers must make “suitable” recommendations, meaning that investments must fit the customer’s needs and tolerance for risk.

In contrast to this, investment advisers must follow a fiduciary standard, which is generally defined by the Investment Advisors Act 1940.

There are limited competence requirements for investment advisers and no specific restrictions are placed on conflicts of interests and fee structures. Instead, advisers are a ‘fiduciary’ and therefore have a fundamental obligation to provide investment advice in the best interests of their clients.

Investors in the US are responsible for selecting their own advisers and negotiating arrangements with them based on the disclosure they receive.

While the market is still developing, there has been a large degree of recent innovation in the US advice market and the FCA noted there are a number of significant advice websites serving customers.

The FCA asked: “Are there any approaches to the regulation of advice in other jurisdictions from which we could learn?”

emma.hughes@ft.com