RDR requirements changed: 5 things you might have missed

1) Nothing new on insistent clients

Despite the report noting that a number of respondents raised the problem of insistent clients, it gave no specific recommendations to tackle the growing problem.

The Financial Advice Market Review merely reiterated the FCA’s three step guidance from last year and mentioned the regulator recently asked for industry views on the issue.

The report stated: “The FCA intends to set out its next steps on this issue in a policy statement shortly. Given this, FAMR did not see the case for further action at this stage.”

2) A new buzzword - streamlined advice

While existing suitability rules give firms the ability to narrow the scope of their recommendation from considering all of a customer’s needs and objectives (‘full advice’) to a sub-set of them (‘simplified’ or ‘focused’ advice) or even ‘basic advice’ on stakeholder products, the Financial Advice Market Review admitted these have been slow to develop.

Instead it threw a new term into the mix - ‘streamlined advice’ - around which a framework would be built, along with new FCA guidance, including illustrative case studies highlighting the main considerations when developing such models.

The report gave a few examples of consumer needs that could be met by streamlined advice such as a 30-year-old looking to start making regular contributions into a stocks and shares Isa or a new parent looking to purchase protection to safeguard their new family.

Specific terminology

The working group was asked to publish a shortlist of potential new terms to describe ‘guidance’ and ‘advice’, with the final choice of words and approach to implementing them to be confirmed in the third or fourth quarter, after market research and consumer testing.

Many respondents suggested alternative labels:

3) Train new IFAs and support for employers

The Financial Advice Market Review did not believe the requirement for retail investment advisers to hold QCF level four qualifications was unreasonable.

However the review accepted more could be done to support the next generation of well-qualified advisers.

It therefore suggested the FCA consults on modifying the time limits for employees to attain an appropriate qualification in it existing training and competence sourcebook, allowing employees to work for up to four years under supervision to obtain an appropriate qualification.

The review was also told that many employers do not attempt to offer support or guidance due to the risk of crossing the regulated advice boundary without being authorised to give advice.

To give clarity on navigating potential regulatory liability when providing financial support to their workforces, the FCA and The Pensions Regulator were asked develop and promote a new factsheet.

The Financial Advice Working Group should also work with employers to develop and promote a guide to the top 10 ways to support employees’ financial health.

It also recommended that HM Treasury should explore ways to improve the existing £150 income tax and National Insurance exemption for employer-arranged advice on pensions.

4) Clarification of cross-subsidisation

The report also called on the regulator to consult - in the third or fourth quarter - on cross-subsidisation rules in relation to the interpretation of ‘long term’ and the flexibility allowed.

Current guidance states “the allocation of costs and profit between the adviser’s charge and product cost should be such that any cross-subsidisation is insignificant in the long-term” - with each case having to be considered on its particular facts.

The FCA generally looks, as a starting point, at whether the costs will be recovered over a payback period which is reasonable, compared to the time which may be available to non-vertically integrated firms investing in new business models, as well as not being inconsistent with the firm’s standard payback period.

The report pointed out firms are not widely aware of this and many assume that the allowable cost recovery period is very limited.

“FAMR believes that the basic principles set out by the Retail Distribution Review remain valid – that vertically integrated firms should not be able to exploit their control of product manufacturing to secure an unfair competitive advantage in the provision of advice.”

5) Rules of thumb

Some respondents suggested that nudges at crucial life stages could be used to prompt consumers to think about their financial position and consider taking action, along with the development of rules of thumb for easily digestible support for those who don’t have the time or inclination to seek out advice.

Again, the working group was called upon to lead a task force to design and test a set of rules of thumb and nudges, while the Treasury was given the job of assigning the continuing responsibility to an appropriate body with financial capability expertise.

Initial testing should be completed by the first quarter of 2017, with responsibility assigned soon after.