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Nic Cicutti: Time for an RDR rethink?

Having been a strong supporter of key elements of the RDR over the past few years, one of the most important aspects of its introduction has been that of clarity. This matters just as much to IFAs as it does to consumers.

It follows that just as consumers need to know exactly what their adviser will do for them and what the cost of that service will be, so IFAs have a right to be informed of what they need to do to be fully compliant with the new RDR rules.

Which is why, on the whole, I welcome the FSA’s recently-published factsheet, setting out guidance on many of the most important issues facing IFAs who are grappling with the RDR.

The factsheet should prove useful in terms of answering some simple questions that advisers need to know as they strive to retain their independent status. That said, I also think there are problems with the FSA guidance, which I shall come to shortly.

But first, I want to look at some of the positives. One of them is the requirement that IFAs at the very least have a mechanism in place that enables them to consider whether all retail investment products have been considered when considering recommendations to clients.

In addition, advisers must be able to show that if more esoteric options were not judged appropriate for their client, that at least they were “willing and able” to contemplate their suitability, where necessary.

At the same time, this is not an absolutist demand. For example, the FSA also states that if you are creating a suitability report for a client, you don’t need to set out in minute detail every product that you looked at and why they were not seen as right.

The primary requirement is to describe the suitability of what you are recommending – as well as its potential disadvantages.

I also agree that it is not possible – or credible – to use a single platform for all investment business. At the end of the day, a consumer can never be shoehorned into a single platform in exactly the same way as a limited range of products were never going to be right for all clients.

That has been one of the key lessons of the past 20 years and, ironically, the banks have been the biggest offenders when it came to getting things wrong.

The classic example here – which was originally flagged up by IFAs – was Barclays’ misselling Aviva Global Balanced Income and Aviva Global Cautious Income funds to thousands of vulnerable investors.

Another of the areas where clarity appears to be needed, although at this late stage in the day part of me wonders why, is the FSA’s clear and unambiguous statement that if advisers have not yet qualified with regards to their QCF level four qualification, any retail clients have to be advised by an alternative adviser until they have complied fully with the RDR. This too is welcome.

A further small piece of reassuring news is the fact that the FSA will not say anything, positive or negative, about IFA charging structures of themselves.

As long as an adviser is clear about why certain charges were applied – for example, why clients with less to invest are asked to pay more – then the FSA will not seek to interfere in that decision.

Where I have reservations, however, is in areas of the FSA’s guidance relating to what constitutes full independence. Here, the advice is at best unclear and, at worst, fraught with danger.

The first area is where a group of restricted advisers are collectively able to advise on the entire range of retail investment products and therefore wish to retain independent status.

If my reading of this is correct, on the whole I agree with the idea that it is “individual advice to individual clients [which] has to meet the independence rule”.

Therefore, the acid test is not whether the skill mix in the firm itself covers the full product range but the client’s advice package.

That’s fine, but where doubts enter my mind is over the answer to the next question, that of whether it might be possible to “outsource certain pieces of advice to other individuals and still remain independent”.

To my mind, the answer to that should be yes, in the sense that an IFA, or his firm, may not have the full range of expertise necessary to advise across the full range of financial options and I’m not necessarily talking about products now, that a client may need.

In such situations outsourcing is clearly necessary.

Yet the FSA’s response to this is “it would question whether the adviser can advise in this area and whether the firm is in fact providing independent advice”. Its only exceptions are for pension transfers and opt-outs and long-term care.

I think this is a mistake. Not only is the FSA perpetuating the notion that the primary function of an IFA is to advise on products, as opposed to holistically planning their clients’ financial future.

It also ignores the fact that IFAs have a duty to seek out the best advice options from any source – and if that isn’t available in-house, they have the right to go outside for that help and support. Time for a – belated – rethink.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Gosh – I find myself agreeing with Nic for 2 weeks running!

    I think that the problem is that the FSA wants to be seen to be doing something so just can’t come to a definitive position and leave it there.

    My advice – don’t just do something, stand there.

  2. RegulatorSaurusRex 31st January 2013 at 10:17 am

    There are three types of journalist, those who make it happen, those who watch it happen and those who wonder what happened…

  3. Wow, I too have been frequently irritated by Nic’s comments and sweeping statements regarding IFAs (like any industry there is good and bad but we are not all bad!!!) but I too find myself totally agreeing here with him. The whole positive for us as IFAs that has come out of RDR is that we are here to advise, not to flog products. I think the FSA may take some time to get used to that idea, as ridiculous as that sounds!

  4. I could not agree more with the sentiments contained in this article. Why would I want to be restricted? Are the benefits to me not outweighed by that which I can offer my clients? Who am I meant to be working for? Myself or the client? Although I still think regulation taken as a hole is detrimental to the IFA community. Individual constituents of that regulation all seem sensible and worthwhile but when added together the weight of such is difficult to carry. Notwithstanding that the RDR gives us an opportunity to develop and expand our businesses into other areas of advice as independent financial advisers. Importantly we may recommend the status quo but we can still charge the client without a product having changed hands.

  5. Wow Nic, a lot of column inches just to say “I disagree with one point in the FSA Factsheet, the rest is welcome”. I agree though.

  6. Good piece.

    The best is at the end: “… the FSA [is[ perpetuating the notion that the primary function of an IFA is to advise on products.”

    This is at the root of a lot of the disconnect between the FSA and those they regulate. Products are an element of what we do but they are not WHAT we do. We dispense advice – and often – but by no means always – that advice will require products to be purchased.

    The FSA is obsessed with product. Hence the need for advisers to know every product under the sun. Hence the FSA defining open-architecture wraps as “product” and not as a service, an enabler. Hence compliance driven requirements to look at product split, provider split and all that utter tosh.

    You can recommend the best “product” for your client from the whole market eg a sparkling, ticks-all-the-compliance-boxes pension plan. But the more important consideration – that perhaps that client didn’t actually need a new pension because they’ve got “enough” already to live on for the rest of their lives? That’s secondary. Which is nuts.

  7. So, Nic agrees that someone who was perfectly competent to give advice on the 31st December 2012, should be excluded from giving advice on investments post 2012 until they have attained QCF Level 4.

    A more bizarre viewpoint it is hard to imagine.

    Giving advice on financial investments is both complex and time consuming, eliminating unsuitable investments from the mix for a clients ATR and Tolerance of Risk needs to be documented and recorded, but the fundamental principle of investment is to invest in something and that the advice is regulated implies without equivocation that the products recommended must be regulated, again implying that by being regulated, the regulator has taken the time to consider the effects on an investor of that type of product and how it matches ATR etc.

    There will be times in the very near future whereby the confusion surrounding both the FSAs “guidance” on these matters falls short of advisers needs for clarification.

    When I look back at the content of my Fimbra rule book and compare that with the current FSA rulebook, I often wonder how in hell we got to a position in our industry that perfectly ethical, honest and competent advisers can be disenfranchised and put on the dole if they do not meet new criteria, yet he incompetent persons within the regulator who failed in their duties get to keep their jobs.

    This could never happen in any other industry except ours when the regulator cannot be held accountable for its previous incompetence and lack of skill, care and diligence in the performance of its function, yet purports to know what is best for consumers.

    Banking supervision was lamentable, so was the supervision of a variety of other providers such as Keydata, Lehman Brothers, Arch Cru etc etc and yet this regulator is still allowed to stay in business.

    They have wasted Billions of pounds of our money on daft ideas like MAS, made almighty cock ups with their lack of supervision of large institutions, yet continue in the same vein to ruin our IFA sector, the least complained about and much respected of all financial sectors.

    Nic, you need to seriously consider whether you will have enough advisers in future to write to, never mind analyze something you appear to know very little about, consumer needs!

  8. Let’s face the fact that the FSA’s RDR proposals were never, ever, properly thought through. The FSA had an agenda which included getting rid of commission (ideological rather than logical), raising more tax (in collusion with government), destroying the IFA community in favour of the banking sector (so there would be plenty of jobs for FSA quangocrats when needed) and raising advice standards (through minimum qualifications).

    No-one can really argue against the last of these aims albeit many will contest whether passing a tickbox exam will make those with 10 years or more experience actually do anything different that they might have done previously.

    Whether or not the FSA believed that advice would become cheaper or that there was a possibility that milions upon millions of people would be disenfranchised from access to advice I don’t know. The very strong likelihood seems to be that advice will become more expensive for those prepared to pay and those people who can’t or won’t pay will be left to make their own decisions.

    It won’t be IFAs who will have to pick up the pieces when people stop saving, stop planning for retirement, stop buying family protection (because that will be the next commission block) – it will be the government.

    Still, we all know that politicians (with one or two exceptions) are arrogant, incompetent and only interested in their own backpockets, so why should anyone be surprised when RDR proves to be a total disaster – they mess up almost everything else they touch.

  9. Nic, I disagree with the notion that the FSA are perpetuating the idea of IFA’s pushing prooducts, the RDR has removed the ‘paid by commission’ culture, which was all about product. Now the advice is paid for on a standalone basis without product bias or influence.

  10. But the FSA are no more soon, they will be replaced the the FCA and then all will be well…. oh wait….. that is just re-branding….. at our expense…. to cover their incompetencies.

    I think anyone giving advice last year should have the knowledge after minimal study to have passed the level 4 qualifications, but yes there is something to be said for being competent one day and not the next. All in all though I believe the qualifications were laregly relevant and worthwhile.

    It is so incredibly sad that the FSA lack common sense, accountability and any kind of working knowlege of the Adviser jobs that they are regulating.

    Their lack of clarity about what independent means is appauling.

    They have priced many customers out of the market which surely is against their objectives? And have removed consumer choice. I like the clarity but surely this needed and needs more targeting and the product providers themselves as how they make their money is the bit most consumers struggle to understand.

    The fact that many are disadvantaged by losing enhanced allocation on future investments (where a decent honest adviser won’t take max up front commission and so passes additional benefit on to their clients) – and this begs the question – where does that money go now enhanced allocation is no more? And is it really beneficial for a person who could invest £100,000 and get £101,000 invested for them and have their adviser paid commission of £2,000 to have to pay their adviser £2,000 and have £98,000 invested or instead to invest £100,000 and find an additional £2,000 to pay theri adviser – the projections using the same funds and growth rates show the client would typically be thousands of pounds worse off under the new system, and I for one would rather have a good return than clarity at the cost of my investment returns!

  11. I’m still struggling as to the point of RDR. If the FSA wanted to stop product sales and commission then why can someone “sell” a mortgage, term assurance policy or be a restricted adviser and still be paid a commission!?

    As Ned mentioned “Banking supervision was lamentable, so was the supervision of a variety of other providers such as Keydata, Lehman Brothers, Arch Cru etc etc and yet this regulator is still allowed to stay in business”.

    The resulting fall out of the lack of regulation of the big players was laid at the feet of the humble adviser.

    I doubt that the other FSA will be hammering on the door of Tesco’s for misselling Shergar burgers to an unsuspecting public when the fault clearly lay with the product provider.

    A complete re-think of RDR is required however by the time they get round to it I suspect those to which it will apply may be few and far between.

  12. Richie – you can’t have commission as a restricted adviser. You can on things such as annuities if you are anyone and don’t provide advice – but then that wouldn’t be in a client’s best interests otherwise why would they be seeking advice.

    The reality of many advisers going restricted is actually that they have always been independent, would like to have remained so but due to the FSA’s lack of clarity as to what independent is, have decided to go restricted to ensure they don’t fall short of the rules. Probably most of these will be using the same companies as independent advisers and would go off panel if in the client’s interests to do so, and if they regularly review their proposition (as opposed to a network picking say 4 companies and sticking to them on enhanced commission terms as was) will be offering the same as an IFA for a lower charge.

  13. Good seminar today from Gill Cardy at IFACentre. You can remain Independant, no need to go restricted thru fear of the unknown.

  14. I’m late to this article/blog but agree with much of what has been said and certainly Nic’s final observations.

    Investment products [RIPs as now unfortunately defined] will often form a part of our advice be it as a new recommendation or using an existing product to achieve a client’s objective.

    Fundamentally however they are not the point of the advice but a by-product of an advice lead process. The 50 odd page reports we now have to produce do however largely focus on products in a most defensive style.

    This is because of the emphasis on product sales rather than advice and the structure of redress via FOS/FSA orders etc. It is much easier to accuse someone of ‘mis-selling ‘with hindsight when a ‘product’ goes wrong even though the original advice might have been entirely suitable at the time.

    This by the way is not an attempt to justify the inappropriate suggestion to invest in unsuitable ‘products’ in the first place which is not really advice but meeting of sales/bonus targets anyway.

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