The main proposals for discussion from the RDR published today include the following:
– To strengthen substantially the FSA’s existing regulatory requirements for those firms and advisers who offer a full range of financial planning and specialist advice services.
– Increased regulatory and professional requirements may lead to an increase in costs to these firms so that only those consumers with the financial means to address their needs will be able to get full financial advice. This will mean fewer firms and advisers will offer services to those on middle incomes (between £25,000 to £50,000 a year).
– The market for regulated investment advice could then be divided into two parts: Professional financial planning and advisory services; and ‘Primary Advice’ providing more straightforward advice and help on more straightforward needs using simple products.
– In the Professional financial planning and advisory services sector, financial planning firms might be expected to apply remuneration practices that remove the potential for conflicts of interest and which give customers clarity about the services provided by all parties, and their corresponding costs. The term ‘fee-based’ will be re-defined to mean an advisory remuneration derived in discussion with the customer and not influenced by the product provider.
– To restrict the use of the term ‘independent’ to those firms which offer these services and have a high proportion of their advisers maintaining the highest level of professional standards.
– Firms and advisers offering full financial advice, but who did not meet the professional financial planner requirements, would be able to continue using the full range of commission-based remuneration arrangements but they would not be able to call themselves ‘independent’.
– For both professional financial planners and general financial advisers, there could be adjustments to prudential requirements up or down to reflect the nature of their businesses and the quality of their risk management. The FSA will publish a separate discussion paper in early July to open up the debate on prudential requirements.
– A transitional period before higher professional or prudential requirements were brought in, to limit the risk of disruption to the market.
– To enable firms to offer ‘Primary Advice’ the FSA may need to reduce significantly some of its existing suitability requirements and work with the Financial Ombudsman Service to ensure firms understand the level of their obligations.
– To make Primary Advice less costly, the paper proposes to limit product ranges to some form of product selection. Products meeting such criteria as ‘simple’.
– Firms and advisers offering Primary Advice would need skills and qualifications appropriate to the services they provide. A wide variety of firms such as banks, building societies and insurers might choose to offer this service.
– Firms might choose to offer this service through their branches, by telephone or over the internet, possibly alongside non-advised offerings.
– For some firms a Primary Advice service could be compatible with their core business, such as mortgage or general insurance brokers.
The RDR discussion paper will have a six month consultation period, which ends on December 31. The FSA aims to publish a feedback statement in Q2 2008.