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Gary Dale: RDR confusion reigns


Almost four months into the RDR and confusion has well and truly set up camp, especially with regards to structured products, both deposits and investments. 

The irony here is that from a product provider’s perspective there was little to change in terms of structure or admin processes and, on the face of it, the transition should have been relatively straightforward. The polar opposite has in fact transpired.

At a macro level we have the demise of the advisory channels within retail banks (not necessarily a bad thing) which is leading to a widening advice gap. 

This has paved the way for a new breed of investors – the self-directed. This may seem like a logical step for investors given their apparent reluctance to pay adviser fees but there still remains a huge knowledge gap which must be addressed before the bell tolls on the financial adviser. 

We are also seeing businesses develop ‘execution only’ service propositions and again, as the regulator recently pointed out, care and attention needs to be applied to get this service right for consumers.

Where structured investment products are concerned, the thorny issue of execution-only, or non-advised, transactions seems to have caused great confusion for a couple of reasons. 

The most obvious question to answer is why Sips transacted execution-only can still offer initial commissions. 

The clue is in the description. The RDR relates to all investment products where advice is given, with the focus on the removal of commission bias with regards to specific products or providers.

Where investment business is transacted on an execution-only basis, no advice is given, therefore by definition there can be no product or provider bias. An important point to note here is that products can still be transacted on an execution-only basis where an adviser fee is agreed – it does not always have to involve products offering initial commission. 

The misunder- standing with execution-only seems to relate to the appropriateness test and where and with whom responsibility lies. 

In a nutshell, the responsibility for carrying out the test relating to the sale of any Sip offered on an execution-only basis lies with the adviser/broker. 

This is known as the Mifid appropriateness test and was implemented in Chapter 10 of the FSA’s Conduct of Business Sourcebook for investment business and further qualified in the FSA paper ‘Treating Customers Fairly’. 

Advisers or brokers need to be aware that even though they are deemed to be transacting on an execution-only or non-advised basis, the product itself is still classified as a complex instrument under Mifid and so the appropriateness test must be carried out. 

It is essential advisers complete the appropriateness test where Sips are transacted on an execution-only or non-advised basis. 

Firms giving such services may indeed avert the much prophesised advice gap disaster waiting round the corner but only by delivering it in an unbiased and informed way.

Gary Dale is head of structured product intermediary sales at Investec


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Since most forms have opted out of MiFID I understand that for them the appropriateness test only apples to derivatives and warrants. I am not aware that SIPPS fall under the definition of derivatives and warrants….

  2. Both ends at once 29th April 2013 at 10:47 am

    The fundamental requirements of the RDR (a higher qualifications benchmark and the replacement of commission with CAR) are hard to argue with.

    The confusion, unintended consequences, additional workloads, conflicts of logic and stupendously increased costs have come about as a result of the FSA having got completely carried away with its omnipotence and lack of accountability.

    As a result, its original RDR plan has been endlessly and needlessly embellished, added to and made hugely more complicated and costly than was ever either necessary or reasonable. Five or six years ago, the FSA anounced one thing with an estimated implementation cost of £600m but then foisted on the industry something completely different with a currently estimated implementation cost of £2.6Bn. How could this have ever been allowed to happen?

    Such are the consequences of an unbridled monster riding roughshod over any body that dares to try to stand in its way.

  3. The fact commission can be paid on execution only business remains, for me, a loophole which will no doubt be exploited.

    This is one area of RDR legislation which, I feel, it open to abuse.

    Another (off topic) unintended consequence of RDR is the fact many RACs and pension plans with GARs had ‘at retirement’ commission priced into the plans – clearly that is no longer allowed to be paid and it would seem the providers have absorbed it which hardly appears to be TCF.

  4. I agree with Paul on that I have clients where this aaplies, why should they pay twice?

  5. @ Phil Castle 10.14. Unfortunately, Phil, clients have to pay twice because you are not able to do what you have to do for free. If the FSA had listened to what the industry said and any pre RDR business was left totally alone (including post RDR advice on these plans) there would not have been half the number of unintended consequences. However the FSA either could not see how this would affect clients or more than likely could’nt give a toss about clients. They kept using statements like “overall and in the round” for whatever justification they deemed they would grace TSC with. I only hope the FCA have more sense, but as its mostly the same peeps in the same jobs etc etc, I doubt anything will change. I pray I am wrong and would love to be proved so.

  6. Have I missed something, but I thought that the commission ban only applied to investments and Pensions?

    The reason why I say that is an annuity is covered by the long term insurance section of the FSCS I,e 90% with no upper limit, NOT the 50k limit which applies to investment business, so why have guaranteed annuities been allowed to remove payment for advice thru commissomn where they ditched their in house advisers? This is NOT TCF. Don’t pay us, fine, PAY the commission back to the client and they can. choose what to do, take advice and use the payment for it or trouser it,

    Other is precedent for this as Pearl and others paid advisers a flat fee to advise on redress lot their endowments-

  7. The FSA’s definition of an adviser charge is:

    ‘any form of charge payable by or on behalf of a retail client to a firm in relation to the provision of a personal recommendation by the firm in respect of a retail investment product (or any related service provided by the firm) which:
    (a) is agreed between that firm and the retail client in accordance with the rules on adviser charging and remuneration (COBS 6.1A); and
    (b) is not a consultancy charge’.

    An annuity is a Retail Investment Product (life and annuity sub category).

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