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Advisers should expect the unexpected post-RDR

The retail distribution review is a tricky business. The closer it gets, the more issues it throws at us, some of which many of us in the industry had not considered. It remains to be seen what issues will arise after December 31.

One example is that the future of insurance companies looks bleak and I think some IFAs will start to question their relevance. They currently offer clients less service but cost them more than a wrap platform, so it is little wonder IFAs are leaning heavily towards platforms. I also predict
a growing trend of life companies switching off renewal commission when an IFA wants to transfer a client bank – another reason that could persuade advisers to steer clear.

When it comes to transferring clients – specifically block novation – I foresee another potential problem for IFAs that are not prepared.

Block novation is essentially moving a bank of clients from one firm to another during a merger or acquisition. When a firm sells a client bank to another, all commission and policy servicing can currently be transferred to the acquirer as long as the individual clients have been informed by the seller and they do not object.

After the RDR, advice will no longer be commission-based, except in a few special circumstances. Instead, advisers will agree remuneration with a new client before any advice is given.

This has not yet been clarified by the regulator but any adviser taking on a block of clients as a result of an acquisition will have to get individual agreements from every single client with regard to remuneration.

This is all part of the FSA’s drive to improve transparency and treat the customer fairly – things that the vast majority of the industry fully support.

But, practically, it could be difficult and at the very least it is a headache for both client and acquiring adviser. It could also cause a big problem if certain clients are unhappy having to discuss a brand new remuneration package with a brand new adviser.

To ensure block novation takes place, companies may have to end up buying the shares in the selling company. This may solve the novation issue but it is not tax-efficient and will result in the acquiring firm taking on all the other company’s liabilities.

This problem of block novating could mean IFA firms who fail to sell their business before the end of the year could struggle to find someone to buy them following the RDR, given the potential hurdles. Their client banks could become virtually worthless. At worst, I foresee some businesses closing.

There are many things yet to be clarified with regard to the post-RDR regime. Those that plan ahead should be well equipped to deal with this novation issue. As with all aspects of the RDR, preparation is key.

Sheriar Bradbury is managing director of Bradbury Hamilton


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 2nd May 2012 at 4:18 pm

    Not satisfied with driving us out of business the FSA have also made sure that our businesses are next to worthless.

    Farmers were able to claim compensation from the government when they were put out of business accidentally by foot and mouth. Surely there must be compensation for IFA’s put out of business deliberately by stupid regulations by an unelected quango.

    I expect to see some age discrimination cases towards the end of the year against the FSA for their refusal to allow grandfathering.

  2. I’m not sure I agree with parts of this article. The FSA has, I’m sure, already said that trail commission (old format) can be transferred and continued as part of a Novation Agreement. This is subject to the new IFA writing to the client, explaining the trail commission and explaining what services will be offered for it.

    Now, over time, Advisor Charging will become a greater and greater part of an IFA’s book, and trail commission less, but does that matter? It means when their is a merger or takeover of a client bank, the client is better informed and must sigh his agreement to it – but if the client and old IFA have a good relationship, it shouldn’t be too difficult to walk the client through the process and obtain agreement.

    And finally, to Soren Lorenson (Lola’s invisible friend) : “grandfathering” itself would break EU laws on age discrimination : why should a 55 year old adviser with 10 years experience not have to do exams that a 40 year old with 20 years experience have to?

  3. IFA @ 5.22pm

    Nonsense. Its not about age

    Funny how Financial Services are the only ‘profession/trade’ where grandfathering is NOT observed on the basis of you already being authorised and de-regulated. CPD is the order of the day in EVERY OTHER trade or profession as it should have been in FSA lar lar land.

    You cannot justify FSA actions based solely on age discrimination if that were the case the every other trade would have been in the european dock !!!

  4. Soren Lorenson 3rd May 2012 at 10:03 am

    I agree with Derek but the grandfathering issue is clearly age discrimination.

    Wait and see. I understand that there are many who will be waiting till Jan 2013 to see if the FSA does de-authorise them from the trade they have practiced complaint free for decades. They will then launch an action for loss of livelihood which they will win convincingly.

  5. Julian Stevens 3rd May 2012 at 1:42 pm

    The FSA has declared itself to be “confident” of the legality of its threat to de-authorise intermediaries who do not manage to clear its new QCF Level 4 hurdle by the end of 2012. Yet it has declined to reveal the basis of this confidence or of its legal advice or to disclose exactly what piece of legislation affords it such a draconian power. Failure to conform will result in confiscation of livelihood. End of.

    Is it, perhaps, as usual, its own interpretation of some clause buried deep within the FSMA 2000 which, as an overall item of legislation, appears to grant the FSA the power to do whatever it wants without having to justify it to anyone but its own board?

    Yet, on its website, the FSA proclaims itself to be “an open and transparent regulator”. Like Hector Sants claim before the TSC that the FSA has no prejudicial agenda against IFA’s, the evidence appears to suggest otherwise.

  6. I must admit as far as I can see it is illegal to tell someone they cannot practice on Jan 1 when they were deemed suitably qualified the day before. There may well be a massive class action from 2013 for loss of income and business value. I have NOT enjoyed telling advisers in our firm that due to lack of exam passes they will have to hang up their boots, but as things stand, we have no option.

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