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Adam Samuel answers his own RDR interim report questions

Entirely predictably, the banking and wealth management community have greeted the FSA’s extraordinary interim report on the RDR with torrents of abuse.

Under the weight of 888 responses to the original DP 07/1 and some astonishingly skilled lobbying from Aifa, the FSA has completely abandoned its earlier proposed structure for the industry. That would have allowed commission-based (so long as the levels were agreed with the customer) tied and multi-tied salesmen armed with examination success to call themselves independent financial planners

In its place, the regulator suggests “real” advice, a notion of whole-of-market recommendations made by reasonably qualified advisers remunerated without influence from product providers. Everything else is just selling. Those of us in the compliance world who have struggled to distinguish inferior from unsuitable under the single and multi-tied regimes have genuine cause to celebrate. The new proposals are not without their problems as the regulator would accept. It needs to work out a regime for “sales with persuasion” and identify how providers can legally be prevented from influencing remuneration.

The real risk, though, is that a regulator who could do a 180 degree shift in the face of IFA lobbying could do the same in the opposite direction under pressure from the banks. One of the problems with the interim report is that it does not contain any consultation questions or invitation to respond with views. Nevertheless, it is vital that the IFA community and those who believe in it, respond with the same gusto that they used for DP 07/1. With that in mind, this article contains the questions on which the FSA should be consulting and the author’s answers.

1. What do think about the proposed structure of advice, sales and unregulated money guidance?

This is excellent. Advice involves providing the best solution possible for the client. It cannot and should not be restricted or influenced by providers. The only problem concerns the treatment of sales with persuasion and these can be fixed easily. These must be regulated on the same basis as advice (with the obvious lifting of the whole-of-market requirement) although those offering such services must be prohibited from describing the service as advice. “Recommended purchase” would be a better label.

2. How should the FSA’s new proposals apply to the group pensions market?

The adviser should have to make recommendations from the whole of market as with other advised sales.

3. What do you think of the proposed qualification standards?

They are probably about right considering the fact that the level has not altered essentially for 15 years. Requiring vast numbers of advisers to upgrade qualifications from the old FPC to Chartered during a transitional period was a little too much. Having said that, standards must not be allowed to remain static as they have done. The Skills Council must have responsibility for raising the level in the years following implementation or be abolished. Eventually, advisers should be required to reach chartered status or CFP licenses.

4. What should we do to prevent providers influencing adviser remuneration?

Obtain legal advice on this urgently, in particular both the competition or EU law angle and whether an Article 4 exemption from MiFID will be necessary and available. Assuming that reviving the maximum commission agreement does not stand a chance legally, banning providers from stipulating commission levels must be the goal.

5. Should we abandon the current requirement for independent advisers (in both packaged investment products and mortgages) to offer a fee alternative?

No. This was producing some genuine movement away from transaction based advice with firms moving away from commission. This supports the agenda of separating advice from sales. The FSA should, though, produce clearer guidance on the treatment of trail commission and the definition of “fees”.

6. What do you think of the idea of on-the-job assessment as a means of proving professionalism?

There is a risk that this would dilute the level of qualifications required. It could be added to but it should not replace the minimum examination standard. It is unclear who could objectively perform the assessments.

7. What do you think of compulsory membership of professional bodies?

This smacks of the closed shop. It would almost certainly be illegal without legislation. Professional bodies exist to improve standards not to police. They lack the resources to do that effectively.

8. Should we continue to allow “guided sales” to fall within the “execution-only” category?

Only if no advice or recommendation is actually given. Following the rules for mortgages, this type of transaction should only be allowed if the adviser is following a printed recorded script.

9. How should we deal with the liability issues arising out of execution-only, guided sales and sales with recommendations?

Principle 7 should apply to all three requiring “clear, fair and not misleading” behaviour. This should be part of the Cobs rulebook to avoid any problems with private causes of action. If the company gave advice, liability should be judged on the same basis as present for tied or multi-tied advisers. If the company representative failed to follow the scripted questions with the result that the customer has financially lost out, they should be compensated for the failure to follow the regulatory process.

10. What should we do about primary or basic advice?

Tell the Treasury to abandon it. Nobody wants to deliver or receive it.

11. Are we wrong to reject a 15-year backstop period for complaints?

Perhaps a distinction has to be made between providers and IFAs. The former have to keep records of products for their lifetime and tend to be better equipped to retain materials and liabilities. The small IFA sector cannot live with the risk of indefinite liability. This is unfair particularly to advisers in retirement. Some back-stop is needed, whether it is 15 years or some other period is a matter for discussion.

12. Should we read across our proposals to mortgages and general insurance?

In the long run, this would make sense particularly with the mortgage market and the proposed review of MCOB. Currently, the sector probably is not able to handle such changes.

13. How should the FSA respond to banks, building societies and wealth managers whose business models will have to change under the proposed regime?

All these organisations are perfectly capable of offering whole of market independent advice. Many of the banks have done so in the past. Customers will still be able to “receive” a recommended purchase from their bank. No service is being outlawed.

These are my questions and answers. Others will have their own. All should be e-mailed to rdr@fsa.gov.uk. Lets see if we can beat 888.


Comments (3)

Presumably Adam Samuel does not involve himself with customers – there is no mention of them !

Phil Melville Argyle Financial Group


Mr Melville has not read questions 1 and 13.

Adam Samuel


This is an extremely useful summary of the right questions.

IFAs should understand that the interim report is still going to require a fair number of them to upgrade their qualifications and change slightly their approach to remumeration. But what is being suggested now is very favourable to the long-term health of the IFA sector over the Banks etc.

It shows what constructive engagement with FSA can achieve rather than the usual suspects shouting objections to everything FSA does. And AIFA was right to put forward its own ‘manifesto for advice’ that aimed at raising standards at the expense of the old ‘sales types’.

I fear however that the skilful lobbying of some in the IFA sector will in due course be overwhelmed by the weight of lobbying by the Banks, the multi-ties and everyone else still trying to inject new blood into the old tied sales model. We all need to be responding in the manner Adam suggests.

Jonathan Purle BA ACII FPFS compliance director Intethic

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