The FSA has published a Discussion Paper (DP) setting out its initial thoughts and proposals for discussion from the Retail Distribution Review (RDR). The DP has a six month period during which comments may be made, and will be followed, around Easter 2008, with a detailed feedback paper.
- INTRODUCTION
The FSA has been concerned for some time about the market failures in the current retail investment product market. The problems include a low level of understanding by consumers of both products and general financial matters; poorly designed and complicated products; unsuitable commission structures which create risks of bias and churning; poor or low educational and professional standards of most advisers and barriers to change created by regulation. The sector has also seen much “tinkering” in recent years with polarisation, depolarisation, menus, prescriptive regulation and principles based regulation.
The FSA initiated its review in September 2006, with a major speech by Callum McCarthy, FSA Chairman, which set out the problems faced by the regulator in dealing with the sector. The FSA subsequently set up five working parties, to examine and put forward proposals in their specific areas. The DP is the result of that work, which the FSA has extended by drawing all the proposals into one overall “plan” for how the sector might look.
- FSA OBJECTIVES
The FSA wants to see a market which:
- Meets the needs of consumers and allows them to better understand the products and services available and provided.
- Encourages higher, genuinely professional, standards that inspire consumer confidence.
- Has remuneration structures which encourage competition and allow this to work in favour of consumers
- Has profitable firms which have long term viability to deliver on their longer-term commitments and where, in doing so, they treat their customers fairly.
- Has a regulatory regime to support this which does not inhibit future innovation. The paper sets out ways in which regulatory incentives can be used to encourage all firms to operate with higher standards.
- NEW INVESTMENT ADVICE MARKET
The FSA has proposed that the regulated investment advice market should be reorganised according to the complexity of the consumers’ needs.
3.1 Professional financial planners
These would be those individuals who have achieved high competency standards probably at the level of Chartered Financial Planner (Personal Finance Society) or Certified Financial Planner (CFP) (Institute of Financial Planning). These professional financial planners would be required to agree all remuneration with the consumer and not be influenced by the product provider. Use of the term “independent” would be limited to those firms who are made up of those who are “predominantly” professional financial planners.
The FSA has suggested that the issue of whether or not a firm offers only a limited range of products is not significant, as long as it was clear to consumers that “independence” meant real freedom from potential bias in advising on a product. Some professional financial planners may be specialists, offering expert advice in areas such as pensions and tax planning.
3.2 General financial advisers
General financial advisers could continue to provide similar services as now, but would not have the same range of in-depth knowledge or qualifications as professional financial planners.
However, the FSA has made it clear that it wants to encourage higher professional standards for these advisers. The current benchmark may be increased, from Certificate in Financial Planning (Chartered Insurance Institute - CII) or Certificate for Financial Advisers (Institute of Financial Services - IFS), to a minimum level of Diploma in Financial Planning (formerly the Advanced Financial Planning Certificate (AFPC – CII)).
The FSA will also encourage all advisers to sign up to the ethical code of a professional body. General Financial Adviser firms would be able to be paid only by commissions, but the FSA will reflect the higher risk of this in its regulatory approach.
General financial advisers would be unable to call themselves “independent”, because they would not be free from the conflicts of interest that arise from commissionbased remuneration.
3.3 Regulatory “Dividend”
This could apply to firms of professional financial planners, and could involve less intensive supervision and lower capital requirements than for other types of financial adviser. This would reflect the lower levels of risk to consumers as the features applying to these new types of firm would limit the potential for mis-selling and give rise to more financially sound and sustainable businesses based on more consistent income streams.
General financial advisers will be able to continue with their current remuneration arrangements – with higher professional and prudential standards. However, the FSA has stated explicitly that this model has “proved itself ... to be a poor way of providing consumers with the advice and products they need, (and) life may be tougher for them”.
The FSA is also considering a more risk-based approach to capital and other prudential requirements for personal investment firms. A further Discussion Paper is due in July 2007 on this issue. The regulator wants firms with lower standards and higher risks to hold more capital both to protect consumers and to reduce the likelihood of other firms having to meet compensation payments if a firm goes into default. For general financial advisers the effect is likely to be a marked increase in prudential requirements.
3.4 Primary Advice
Primary Advice is intended to drive down the costs of giving straightforward advice to the “average” consumer, on middle and low incomes. These consumers may have less complex needs and therefore may not require or be able to afford an expensive full financial planning or advisory service.
Primary Advice is a new type of regulated advice service covering a broad range of a consumer's needs. This could direct the consumer towards a limited range of savings, investments and possibly protection products that would be broadly appropriate for that consumer.
Such low cost advice could have the following features:
- Limited product ranges which might include, but could be wider than, the current stakeholder set of products. The FSA does not envisage any charge-capping.
- Standardised advice processes and use of accredited advice "tools" to streamline advice processes.
- A reduction in existing suitability requirements. The FSA also says it would work with the Financial Ombudsman Service (FOS) on this to overcome the disinclination of product providers to distribute products on anything other than an “arms-length” basis, and give sufficient certainty up-front that firms will not be subject to disproportionate regulatory or complaint handling risks if they follow the approach agreed by the regulator when the service was provided.
- Ensuring that consumers are aware of the nature and limitations of a primary advice service, and of the underlying risks of any products they purchase.
This route might appeal to banks, building societies or internet outlets or operate alongside the core businesses of mortgage or general insurance advisers.
3.5 Thoresen Review on Generic Advice
The Thoresen Review is examining ways of providing generic financial advice on a national scale. Generic advice will not be regulated, and will need to fit in alongside other, regulated, advice services. It could result in advice to a consumer that he or she should take actions that could easily be implemented by taking out one or more simple products. There might then be a short step from generic advice to the sale of a product to meet the identified consumer need. The review is not yet complete.
3.6 “Grandfathering”
The FSA has suggested that a, possibly substantial, transitional period would be given before higher professional or prudential requirements were required. This would reduce the risk of interruption to the market. It will also need to consider whether there might be conditions for advisers to carry over their existing qualifications even if not of a similar standard to new and if so, whether these advisers would still need to acquire the higher qualifications within a particular time period.
- NEXT STEPS
The period for comments closes on 31st December 2007. The FSA has stated that it will produce a Feedback Statement in the second quarter of 2008, and, depending on its content, to issue a Consultation Paper or Papers with more detailed cost-benefit analyses during 2008.
The FSA will also be visible at various events during the discussion period to give opportunities, particularly for smaller firms and consumer groups, to discuss the main issues and to share their views.
The DP in full can be found at http://www.fsa.gov.uk/pages/library/policy/dp/2007/07_01.shtml.
