RDR re-cap: What you need to know

The FSA is set to publish a Policy Statement (read: final rules) on adviser charging and service labelling later this morning.

Here, IFAonline revisits the major proposals in last June's consultation paper 'Distribution of retail investments: Delivering the RDR'.

Today's Policy Statement will set out the regulator's rules on the following:

Describing your service

Independent advice: for use only when recommendations are based on a fair and comprehensive analysis of the market, and where advice is unbiased and unrestricted.

Restricted advice: when a firm can only give advice on certain parts of the market, such as its own range of products, which must be made clear to the customer.
The professionalism proposals would apply to all adviser categories except "basic advice".

Disclosure requirements

Firms must provide in writing whether they provide independent advice or restricted advice.

Restricted firms must orally explain how their services are restricted.

Adviser charging

Advisers should be paid by charges set out up-front and agreed with their clients, rather than by commissions set by product providers.

Charges should reflect the services being provided to the client, not the particular product provider, or product, being recommended.

Charges should not vary "inappropriately" according to the product provider, or the product, a firm recommends.

Firms must communicate both their overall charging structures, at the outset, and the specific amounts an individual is charged.

Firms must provide their clients with the total adviser charge payable in cash terms as soon as this is practicable and make a record of the total charge.

The FSA is not seeking to prescribe the basis on which a firm might charge for its services - a firm, therefore, might charge a fixed fee, hourly rate, a percentage of funds invested or a mix.

Ongoing adviser charges should only be levied where a consumer is paying for an ongoing service, such as a regular review of the performance of their investments.

The exception will be where a client buys an investment to which they will contribute over time.

There will be a ban on receiving commission and rebating it to the consumer. The FSA says it does not believe the potential for product or provider bias "can be properly dealt with" while providers continue to set commissions receivable by adviser firms.

The rules come into force on 1 January 2013 but firms can adopt adviser charging at any time, although permission to renegotiate commission on past business is unlikely.

Firms do not have to revisit business conducted before the deadline and can continue to receive trail on products sold beforehand.

Responsibilities on providers that deduct adviser charges

Providers do not have to offer facilities enabling the adviser charge to be deducted from the investment. But where they do, they must be in contact with the consumer about when the charge is deducted and consider whether it could have an impact on investment performance.

Vertically-integrated firms

These companies must still separate their adviser charge from their product charge, even when distributing via in-house advisers. This would ensure, the FSA says, a "level playing field".

Inducements

The FSA says it will will not tolerate retail investment product providers offering any incentives to adviser firms that are not explicitly designed to enhance the service to the client.

Any significant non-monetary benefits - such as access to training days - must be available to all adviser firms and not just a select few.

Remuneration of individual advisers

FSA says TCF requirements already cover remuneration of firms' investment advisers, but it mulls pulling across a Code initially written for banks and building societies over to retail investment intermediaries.

The draft code, which has 10 points, is designed to "ensure firms' remuneration policies are consistent with effective risk management".

The FSA says adviser performance should not be assessed solely in relation to recommendations converted into sales.