Implementation of the RDR (June 2010) – delivering consumer protection and education

The series of March documents included a policy statement on Adviser Charging for advised sales of investments, a discussion paper on platforms and a consultation paper on the sale of pure protection contracts. These papers built on the CPs we published in June (CP09/18) and December (CP09/31) 2009.

The March papers comprised:

- The Adviser Charging PS which contains final rules on describing and disclosing advice services and on Adviser Charging (rules requiring adviser firms to set their own fees instead of receiving commissions from providers), together with changes to existing rules on Basic Advice and inducements.

- The Pure Protection CP which sets out proposals concerning pure protection sales by investment advisers. We propose to: require retail investment firms to explain how they are remunerated for pure protection advice and sales associated with investment advice and disclose the amount of commission if the customer purchases a pure protection product; and amend our rules to allow firms who elect to sell pure protection under Conduct of Business Sourcebook (COBS) rather than Insurance Conduct of Business Sourcebook (ICOBS) to continue to do so after RDR implementation without having to apply the rules on Adviser Charging to their pure protection sales.

- The Platforms DP which sought views on options for changes to our regulation of platforms – both to support the RDR objective of reducing bias in the advised sales process and to address issues we have identified through thematic work and wider experience. Alongside this work we also carried out thematic work to review specific areas of the involvement of platforms in the sale of retail investment products.

- The investment advice and platforms thematic review which looked at the quality of advice offered to customers that invest through platforms and firms’ related systems and controls. The review found evidence of advice that was unsuitable or not in the client’s best interest and weak management oversight.

- The platform operator disclosure documents thematic review which looked at the disclosure material produced by platforms. The good and poor practice report focuses on the way documents are structured and how charges are presented.

The changes in the Adviser Charging PS are intended to put the customer in charge by providing them with vital information about the cost and nature of the advice they are receiving. They will be able to agree the cost of that advice with their adviser, rather than it being decided by the product provider. From the end of 2012, firms will have to be upfront about how much they charge for their services, and no longer hide the cost of their advice behind the cost of a product. In addition, firms will not be able to accept commission in return for recommending specific products. So consumers will know that the adviser’s recommendation is not influenced by the level of commission offered by the provider. The changes also mean firms offering independent advice must demonstrate that their recommendations are based on a comprehensive and unbiased analysis of the market, and that any product selection is made in their client’s best interests. However, if a firm chooses to limit its product range to certain investments or strategies, then the services it offers are restricted and must be clearly described as such to its customers.

A crucial remaining aspect of our work is on professional standards. The December CP set out our proposals to create a new in-house governance structure to ensure advisers achieve a greater level of professionalism, both initially and on an ongoing basis through the achievement of new, higher level qualifications; meeting enhanced standards of continuing professional development; and adhering to common ethical standards. We will give feedback on this consultation in June 2010.

Extracts from FSA Annual Report 2009/2010 (June 2010)