A changing landscape for disclosure

Chris Read looks at changes in the disclosure landscape in the run-up to RDR with a focus on adviser charging, and asks the question: Is this all moving fast enough to get systems in place to automate these changes?

As long ago as February 2011, the FSA published its consultation paper CP11/09. This encapsulated the changes needed in retail investments product disclosure to reflect Retail Distribution Review (RDR) adviser charging and to improve pension scheme disclosure. Consultation on this closed in May.

CP11/09 was followed in August by a Policy Statement PS11/09 linked to CP10/29, which is focused on implementing RDR within platforms and nominee-related services. Recent submission of feedback in PS11/14 has provided an update in thinking, which we summarise in an addendum to this article.

It is worth looking at the disclosure requirements implied by each of these as they will collectively create a significant extra burden for the market within the next year.

The reasoning for the original CP11/09 and the feedback in PS11/14 is as follows: consumers need more information about products' charges, risk levels and the main product features so they can make informed decisions.

From the point of view of providers, many have been crying out for more practical ‘flesh on the bones' of RDR changes which CP11/09 and PS11/14 delivered in several key areas. Specific disclosure requirements are as follows:

1 Where reduction in yield figures are shown, they must be shown for both product charges and for overall charges from all parties.

2 Disclosure of bank interest on cash held in a SIPP and clarity on how much interest is being retained (this becomes a requirement by April).

3 A need for proper reflection of inflation in SMPIs (7% less 2.5% inflation). Inflation adjusted projections are to become mandatory.
4 More descriptive table headings are required for projections.

5 The length of projection tables needs to be reduced so that rows will only be required for chosen year of retirement and for the first five years of the pension. The changes mentioned in points four and five must be implemented for in-force illustrations as well as new ones.

6 SIPPs will take on a wider definition of any pension product that allows fund or asset class choice.

7 Product providers that facilitate payment of adviser charges will be required to describe product and adviser charges separately (i.e. unbundled). The new format will need to show the effect of each type of charge in the ‘effect of charges' table and ‘reduction in yield' information. RDR already bans payment of commission for advised sales of investments and personal pensions, including SIPPs.

8 When adviser charges are changed, a new key features illustration (KFI) must be issued.

The main criticism levied at the FSA is how little time is being left to providers to make all these changes. Some providers had already issued requirements for adviser charging solutions and have had to make adjustments to these since the arrival of CP11/09 and PS11/14. Cost and complexity has definitely been added.

KFI multiplication post-RDR

A more significant concern is the future requirement for a new KFI to be created every time an adviser makes a new charge. This stipulation does not take into consideration the new way that advisers will be engaging and charging for that engagement with customers as a result of RDR.
In short, advisers will charge variable amounts according to the value they are delivering and charges will not necessarily be linked to specific products unlike commission payments today.

A routine financial planning session is clearly delivering less value than a specialist estate planning and advice session. Fees will inevitably be subject to negotiation between adviser and client. Sometimes fees will be paid upfront or paid in instalments.Some advisers may want to adjust charges to reflect the value of the overall portfolio of a client. The client may want to facilitate the charge from a particular product for tax reasons. So, providers need to calculate a charge based on the value of multiple products while deducting it from a single prescribed product.

Modifying provider systems to deal with all this extra complexity will almost certainly require new adviser charging components to be implemented.
Substantial change to illustrations and a great deal of integration between the two will need to follow as provider systems will need to make these adjustments and pay charges accurately and promptly, much as they do commission payments today.

But if providers think the new disclosure demands being placed on them are onerous, they can at least be satisfied that their new administrative burden does not fall on them alone. The demands placed on platforms and IFA firms also look heavy from a reading of PS11/9, which contains final rules from CP10/29: Delivering the RDR and Other Issues for Platforms and Nominee-related Services.

One specific requirement is that cash rebates by platforms will be banned by 31 December (no rules will be enforced until this point).
Another is that execution-only platforms will be caught up in the same requirements for increased transparency and unbundling of pricing as other wrap platforms. They will need to disclose fees or commissions received from third parties.

Payment of fees from platform users' cash accounts rather than via unit rebates is favoured by the FSA, but no ruling has been declared in this area yet. More positively for IFAs, they will be saved from having to artificially spread their customers' assets across a range of platforms to meet the independence rule. However, they must assess whether being on a platform is in each client's best interests

Advisers must be able to demonstrate why a particular platform is suitable. In other words, choice of platforms and off-platform solutions need to be considered alongside each other for all clients.

Although, in theory, a firm may be able to use a single platform for the majority of clients, in reality IFAs need to consider carefully whether one single platform is definitely in the best interests of all clients.So suddenly, clientasset migration onto platform does not look necessarily as quick and easy a process as it initially sounds.

Regulator indecision

A reading of this Policy Statement does leave you asking "Is the FSA dithering in too many contentious areas and putting off final decisionmaking until this year?"

This may be because the FSA splits into The Financial Conduct Authority and the Prudential Regulatory Authority, and the harder focus of the FCA which now regulates IFAs.

No doubt further disclosure updates will follow in the near future as all corners of the industry get clarity on what RDR really means in terms of what types of communication customers will need to receive and what safeguards will need to be applied to ensure they are treated fairly.
Let's hope the new FCA leaves enough time for providers and platform operators to make the necessary changes before the RDR comes into force.

Addendum
Following the completion of the article, the FSA published its latest policy statement on disclosure called PS11/14: Product Disclosure: Retail Investments Changes to Reflect RDR Adviser Charging (Feedback to CP11/3 and final rules). In this, it made clear the following:

• Pre- and post-charge projections must be shown on KFIs as well as detailed in Effect of Charges Table
• External fund charges must be quoted on KFIs
• Projections should be given for first, third and fifth year as well as intended date of retirement
• RDR-ready KFIs can be used from 1 October as large firms will go live with auto enrolment and RDR-compliant illustrations from that date
• The FSA declares a desire to fully align annual statutory money purchase illustrations (SMPI) and point of sale (POS) illustrations over time
• The 2.5% inflation assumption in SMPIs will be applied, with all three projections given and the same will need to be applied in POS illustrations in due course
• There is a delay on demanding the writing-in of new adviser charges on existing business as providers struggle to cope with the costs of implementing this so although this is desirable it is not yet mandatory
• The door is opened to non personal or ‘generic illustrations' as they are called. These are likely to be used for auto enrolment and for populating group personal pensions (GPPs) illustrations where relatively homogenous groups are being moved into GPP schemes or auto enrolled in short time frames, and
• Other stated changes that need to happen to personal pensions KFIs including reflecting new gender equality rules; inflation-adjusted pensions illustrations; as well as the making KFIs generally clearer and more transparent. But many of these changes are being delayed due to the lack of modern IT systems inside providers which render necessary system changes unaffordable.

The FSA picks up several times the need for providers to invest in more modern systems to be able to make disclosure changes more easily, quickly and cheaply. One quote taken from PS11/14 sums up this sentiment well:
"Trade bodies and many firms speak of the need for clearer illustrations that are more beneficial to consumers. But firms' continued use of costly legacy systems appears to prevent them from creating KFIs which are understandable and well-presented."

Chris Read is chief executive at Dunstan Thomas