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