The Financial Services Authority’s (FSA) Retail Distribution Review (RDR) is part of a spate of regulatory initiatives that aim to define the financial services market for the next generation.
The Markets in Financial Instruments Directive (Mifid) has set out some pan-European principles, which have been incorporated in this review. Some familiar ideas crop up, such as commission bias and what defines ‘independent’. Yet what is new in this review?
The review introduced the concept of a “professional financial planner”. The Institute of Financial Planning (IFP) has been pushing for “planners” to be distinct from “advisers” for most of its 21-year history. Under the FSA’s proposed definition, financial planners would have to achieve certain qualifications – the globally recognised Certificate of Financial Planning promoted by the IFP seems likely to be the preferred option.
A professional financial planner would not be limited to fee or commission-based remuneration. Instead the RDR proposes a change in the definition of “independence” from a product basis to a remuneration basis. To be called independent, an adviser must agree remuneration up front with the client. It is this that has exercised the Association of Independent Financial Advisers, which says that the “independent” tag should remain for those advisers who look at the whole of the market, however they are paid.
Who is likely to benefit from the creation of this category? The IFP is delighted to have its model recognised by the regulatory authorities. It also plays into the hands of wrap providers. Many professional financial planners use wrap as the basis of their business, enabling them to achieve a holistic picture of their clients’ affairs and charge fees on an assets-under-management basis rather than by the product.
It is also good for those who provide “commoditised” investment products such as fund of funds or manager of managers. Simon Ellis, managing director of Fidelity’s Multi-Manager, says: “It is more risky and costly to allow advisers to make individual portfolio recommendations. It is an unscalable business model.”
Few will dispute the FSA’s efforts to drive up standards, professionalism and transparency through the creation of the professional financial planner role. The Investment Management Association (IMA), Association of British Insurers (ABI) and Financial Services Consumer Panel have all broadly welcomed the concept. It is at the other end of the scale where controversy lies. The FSA has proposed a category of “primary adviser”. This type of adviser will only be able to give “simple” advice on “simple” products. Which begs the question: how should ‘simple’ be defined?
Philip Martin, business development director of Nucleus, a platform, says: “‘Simple’ products and ‘simple’ advice do not exist. It’s been tried before with stakeholder. This part of the FSA proposals is worrying. It would mean products would have to be regulated, and you may end up with a regulator-designed product. Is it really feasible to offer ‘simple’ advice in such a complex financial services marketplace?”
As yet there is no guidance on what these ‘simple’ products might be, but Mifid also has an impact here. For the time being, insurance products are outside the scope of Mifid. If insurance products also meet the agreed definition of ‘simple’, recommending them becomes a no-brainer. Yet it is exactly some of these high-commission, poor-value insurance products that have served consumers so badly. There is a middle option: the Generalised Financial Planner, though the FSA is consulting on whether this should be a temporary or permanent category. Under the new definition of “independent”, this group would not be allowed to call itself so. Apart from this distinction, the actual business practices of this group are unlikely to change. They will still be allowed to sell products, take commission though, under Mifid, if they are to take trail commission they will have to be seen to be offering an ongoing service.
Keith Churchouse, managing director of Churchouse Financial Planning, says this may cause problems for the providers: “The primary advisers may not be able to recommend boutique investment houses, for example, while the top end will only be advising high-end clients. It means fewer people will be able to recommend certain funds.”
Is it different this time? After all, the advisory industry has shown itself immune to radical change. Churchouse says there is a momentum to the new proposals plus a general awareness of the need for change among financial advisers. The biggest question remains: when customers understand how they are paying for financial advice, what will they be prepared to pay for?