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