Summer 2010
 

Retail Distribution Review - More Reading!
 

The 26th March 2010 was another significant milestone for followers of the RDR. We were treated to not one but three Papers, and for those of us who actually read the content, a few more Papers were buried in the footnotes of DP10/2 more of which below.
 

Overview

The Papers mostly confirmed what had been trailed - but a notable exception was the cost/benefit analysis which confirmed the costs for those involved in manufacture and distribution will be more than first suggested by the FSA.

There a recurring theme/message: the FSA mean business.
 
Policy Statement 10/6 is just that; a statement with accompanying rules setting out what will happen from 2013 with particular reference to what constitutes "independent" or "restricted", and Adviser Charging along with a ban on factoring in relation to investment contracts and commentary on "Simplified Advice".

Discussion Paper 10/2 provides a lot of food for thought in relation to platforms with particular reference to compulsory re-registration from 2013, and warnings regarding inducements and advisers having suitable products to access.

Consultation Paper 10/8 sets out the FSA proposals for pure protection sales by investment advisers.
 

The Detail

Policy Statement 10/6
Delivering the RDR - Feedback to CP09/18 and final rules
 

CP10/06 provides detailed and final rules for improving the clarity with which firms describe their services to consumers and addressing the potential for adviser remuneration to distort consumer outcomes. (The rules for increasing the professional standards of advisers were set out in CP09/31.)

Services to Consumers
 

• The definitions proposed for "retail investment products", "relevant markets", "independent", and "restricted advice remain.
   
• A number of previous proposal have been confirmed, changed or clarified including:
  • A single product investing in a range of funds would not meet the independent advice requirements.
  • Certain retail investment products can be excluded from relevant markets if there is good reason to do so.
  • Restricted advisers must recommend a product that is suitable - not one from their product range that most closely matches the client need if it is in itself not suitable.
  • Oral disclosure to describe restricted advice will no longer required but the nature of the restriction must be clearly communicated and written status disclosure will continue to be required.

Access to Advice and Simplified and Non-Advised Sales

• The Paper addresses concerns to responses to CP09/18 in relation to the impact of the RDR on access to advice. In particular:
  • It highlights the research from Oxera which estimates that only 11% of advisers will leave the market
  • There will not be a new regulatory regime for Simplified Advice unless providers come forward with proposals
  • Basic Advice will be retained for commission based Stakeholder sales with a new requirement to disclose that it is restricted advice that is being offered.
  • No changes are proposed to non-advised commission sales.

Adviser Charging

• Charges must be product neutral
• Ongoing charges should only be paid for ongoing service
• Post 2012, there is a presumption by the FSA that any change in adviser will result in existing trail being paid to the client not the new adviser unless the client agrees otherwise as the new adviser did not provide the initial advice or service.
• The FSA has re-confirmed Distributor Influenced Funds (DIFs) should only be recommended when suitable and there should be no financial incentive not post RDR any ongoing from the fund to the adviser.
• The rules for separating product and adviser charges for vertically integrated firms have been finalised and there be no significant long term subsidy.

Inducements

• Rules concerning inducements have been clarified with particular reference to technology.

Monitoring

• The FSA will closely monitor product sales data in the lead up to 2012 to ensure that there is not churning

Cost Benefit Analysis

• The FSA has confirmed significant increases in previous estimates; for intermediary firms one off costs are now estimated at £275m - £370m and £100m - £120m ongoing. For providers the one off costs are now estimated at £330m - £385m one off and £70m - £85m ongoing.

Discussion Paper 10/2
Platforms: delivering the RDR and other issues for discussion

DP10/2 considers a range of issues relating to platforms and it is evident that the FSA has reached a point where they evidently feel confident to make wide ranging comments.

In particular, the Paper considers:
 

• Re-registration between platforms;
• The single vs. multiple platform debate;
• Capital requirements for platforms;
• Responsibilities to investors; and,
• How platforms should be paid post RDR implementation.

The period for discussion and submissions ends on 26th May 2010 and a Consultation Paper is scheduled for this summer and a Policy Statement by the end of this year.

Don't forget: there are two further connected Papers to also read:

• Investment advice and platforms: Project findings; and,
• Investment advice and platforms: Good and poor practice report

Consultation Paper 10/8
Pure protection sales by retail investment firms; remuneration transparency and COBS/ICOBS election

This Paper sets out the FSA's proposals for pure protection sales by investment advisers.

The principle provisions are:

 

• There will be a requirement by Retail Investment Firms to explain and disclose any commission they will receive in respect of pure protection sales so that the consumer is clear about the basis of the sale; and,
   
• Firms electing to sell pure protection products under COBS vs. ICOBS will be able to continue to do so post RDR without having to apply the rules on Adviser Charging to their pure protection sales.

The closing date for responses to the CP is 28th June 2010.

All Clear Now?

Despite the fact that the FSA has published a Policy Statement and Rules, a Discussion Paper and also a Consultation Paper this doesn't mean that there are not issues and anomalies.

I have found a number and would be happy to discuss them in the context of a particular firm's or company's circumstances.

Actions Speak Louder Than Words

Lobbying will continue apace as interested parties seek perceived advantage for members/employees. Additionally, some IFAs may still continue to hold back from taking any decisions in the hope that the consultation process or a change of government may yet come to their rescue and water down the examination requirements.

However most intermediaries and providers are now with the publication of the latest Papers providing a lot of the required clarity, now sensibly planning ahead with a view to ensuring that they can achieve the changes they need to put into place by the end of 2012.

A number of recurring issues remain uppermost in the minds of IFAs:
 

• How best and most effectively to achieve QCF Level 4 status - and how for larger intermediaries, to identify those advisers with both the aptitude and attitude to do so;
• How to successfully embrace Adviser Charging and to run a fee based practice;
• How to increase and sustain the value of their businesses; and,
• Whether to sell now, wait, and/or seek alliances/support.

The remainder of this update highlight some of the perceived opportunities - and pitfalls.

Distributor Influenced Funds

The rush towards DIFs in the last 18 months has been apparent for all  - including the FSA to see - as increasing numbers of IFAs actively seeking to move clients onto platforms.

IFAs need to ensure that their advice processes are robust, TCF centric and that they do not fall into the "one size fits all" or the "sausage machine" mentality. The consequences are likely to be far reaching.

This has been further reinforced by the content of the latest RDR PS10/06 and the FSA has made continuing mention of DIFs and the need for clarity and robustness in terms of selection.

All this doesn't mean DIFs are dead but it does mean that the FSA is going to maintain a close watching brief. Accordingly, intermediaries and their advisers need to act with thought and care to ensure appropriate outcomes.

Corporate Activity 

The current level and pace of activity in respect of acquisitions, and sales  - or at least talk about the possibilities - is still significant. According to a Plimsoll study in 2009, one in seven intermediaries was contemplating a sale as the market consolidates.

A number of private equity houses, have been running their slide rules over businesses now that they believe the level of valuations are more realistic than they have been for some years.

The challenge however is not so much securing funding - though this is problematic for some - but rather persuading sellers to recognise that their exit price is not going to be what they might have hoped for say 12 to 18 months ago.

There is likely to be  continuing activity throughout the remainder of 2010 but systematic research, preparation and good presentation are all important to increasing the likelihood of a successful outcome.

Sellers are now more savvy having witnessed the outcomes of previous transactions. It is not just the immediate transaction itself that needs to be considered but the impact of earn-outs for the seller and the ease of integration for the buyer.

The iceberg analogy is one for all parties in a deal to remember; there is often more to be concerned about below the surface than what is immediately visible above it. Failure to carry out detailed and systematic due diligence can lead to lasting detriment for any acquirer.

It is also important for any firm contemplating either acquisitions or a sale, to recognise the time it takes to achieve results and the strains that can be imposed on the business if adequate resources are not made available. All too often unsuccessful attempts at acquisitions and sales can and do leave businesses in a weakened position which both erode value and potentially increase risk and instability.

The need for a clearly thought through strategy and the allocation of dedicated resource is therefore paramount.

Taking Action

It is all too easy to hope that if one waits long enough, the major issues affecting retail financial services will go way or at least dissipate. History shows, that whilst they may take on a different emphasis, they usually do not disappear.

Please feel fee to send me an email (roderic@rennisonconsulting.com) or give me a call (07977 277416) if you would like to talk about any of the items covered or indeed other subjects.

Roderic Rennison