RDR Review - Ready for 2012?

With the publication of CP09/18 the FSA has further fleshed out its proposals for overhauling the retail investment space, and while the Retail Distribution Review (RDR) consultation remains open until 30 October, professional advisers and industry bodies are urging firms to press ahead with their efforts to meet the implementation deadline of the end of 2012.

Given the amount of change that has occurred at every stage of the Review – from discussion paper, to feedback statement, to interim statement, to consultation – it has proven difficult for businesses to predict what the final iteration of the RDR might look like, or to plan their response accordingly. Sadly, at this late stage some fundamental aspects of the CP remain controversial. One such area is the distinction between “independent” advice (in which the adviser considers all product providers in the marketplace) and “restricted” advice (in which the adviser bases their recommendation on a limited number of providers). “Under the new proposals, the terms would apply to structured products, unregulated collective investment schemes, all investments in investment trusts and packaged products,” explains Caroline Hayes, APCC Steering Committee. “But how easy is this going to be for the consumer to understand? Surely the distinction should have focused on the advice given rather than the products available?”

Consumer access

Ms Hayes fears consumers may become confused while advisers could blur the distinction between the two types of advice. “Whilst in this industry we are used to the concept of wrap and platform products, surely someone could be a ‘restricted’ adviser but also give advice on a platform providing access to numerous funds?” she asks. “How do we expect consumers to understand this distinction?” Instead, she feels that the distinction should have concerned the level of advice provided. Rebecca Thorpe, Bovill, agrees that the definitions create the potential for confusion: “Everyone has focused on independent advice,” she says, “but it’s restricted advice that has the greater scope for consumer confusion, for example over the difference between simplified and basic advice, restricted advice and what sits beneath restricted advice.”

The CP, continues Ms Hayes, effectively restricts consumers’ options to either full advice or non-advised sales. “There should have been an additional category for advisers who could provide basic products, at a basic knowledge level using only limited providers,” she argues. “This would have assisted those consumers who were cared for by the ‘home services’ and perhaps need such advice most.” This fear that the RDR may fall short in its aim to increase consumer access is echoed by others. John Liver, Partner Regulatory and Risk Management, Ernst and Young, notes that: “By effectively doing away with ‘simplified advice’, the FSA is hoping that either the bottom end will provide a service in the Moneymadeclear area, or more costly advice will become more efficient and move down market. The big unanswered question is whether the proposals will be helpful or not to the middle market. In the short term I think not.”

Meanwhile, some feel that grey areas remain as to exactly what falls within the RDR’s scope. “The definition of ‘retail investment products’ is key, setting out who is inside and outside the RDR’s remit,” says Rebecca Thorpe. “But there is still potential within that definition for confusion – it includes investment types that are in a ‘packaged form’, but I’ve not seen any debate so far on what that might actually mean.” 

Transitioning

These issues aside, commentators are unanimous that firms should be thinking hard – now – about how they will transition to meet the 2012 deadline. Indeed, to help member firms respond to the multiplicity of challenges posed by transitioning, AIFA has launched a business transitioning service – called “Fast Forward” – via its website. As Andrew Strange, AIFA, explains: “While I agree with most of the CP’s suggestions, we’ve got to be very careful about the cumulative impact of those things on the industry and the profession. Businesses shouldn’t underestimate the challenge posed by transitioning.”

That challenge is broadly split into strategic issues and practical ones. From a strategic standpoint, the decision as to whether to remain in the “independent” space or move into the “restricted” is a major one – and one which compliance officers should now be engaging with the rest of the business over (in spite of the ongoing concerns surrounding these definitions, outlined above). “If compliance officers view this as solely a compliance job they are wrong,” says John Liver. “For providers and advisers the consequences are strategic in terms of their business model, and their key relationships with customers, suppliers and intermediaries. This is an executive front office question, and compliance should be making sure that it is in that arena rather than thought of as a back office compliance task.” As such, compliance must ensure that the executive and business units are fully informed about the “independent vs restricted” debate, particularly if the firm sits on the boundary between the two. 

If the distinction between “independent” and “restricted” remains as is, it seems likely that many advisers will move towards the restricted market. Initially, such firms may be concerned about the impact on their business of losing the “independent” tag, but are these fears well-founded? “There has been a lot of capital invested in the word ‘independent’, and maintaining ‘independence’ as the gold standard,” explains John Liver, “However, whereas in prior proposals the transparency requirements were greater for ‘independent’ advice the only difference now between ‘independent’ and ‘restricted’ advice is that ‘independent’ advice considers the ‘whole of market’.” Mr Liver believes that, over time, the brand value of the term ‘independence’ will decrease – if an adviser offers access to a large section of the market, albeit through a wrap, then the substantive difference of that offering compared with an independent offering is not great. As such, he wonders, will it make much difference – either to businesses in practice and to consumers – if a large sector of the currently “independent” market becomes “restricted”?

By involving compliance in decisions regarding where the firm positions itself – including how services are marketed and designed – the RDR will introduce a new raft of practical compliance work. “Take a compliance officer for a medium-sized IFA,” says Rebecca Thorpe. “He will have to undertake a massive one-off exercise in making sure the basis of advice is well-described and well-defined and wrapped up into the marketing paraphernalia correctly.” Caroline Hayes echoes the point, suggesting that: “If a firm decides to go down the restricted advice route the adviser will need sufficient training to ensure they are clear on the advice they are giving. If a firm is intending to offer both types of advice they will need to ensure their compliance procedures are robust enough to ensure the distinction is exceptionally well-documented and audited.” Looking ahead, management information will have to be significantly better than now, as Ms Thorpe says: “The requirements for management information will increase in terms of monitoring sales and ensuring that you can – if you’re marketing yourself as an independent adviser – support that and demonstrate that there isn’t any provider bias. The standard of evidence required going forward to prove that you are giving advice across the appropriate range of products will be more challenging.”

Professional standards and training

Perhaps the most pressing practical problems of meeting the 2012 deadline concern adviser training and competence and ensuring that advisers attain the QCA level 4 standard in time. Industry bodies have made it clear that they view meeting the deadline as a massive issue (see CM May 2009, p12), and Andrew Strange reiterates AIFA’s concerns. “If the FSA had followed our recommendations and introduced a work based assessment, as opposed to an oral examination, then more advisers might be able to transition on the current terms,” he argues. “In the absence of that the transition period looks very challenging indeed.”

According to Jill Wade, The Consulting Consortium, firms are likely to struggle if compliance and training teams are not completely aligned. “If there are compliance managers who see this as a training issue they need to get on the right page quickly,” she adds, “This is actually a business continuity issue.” Given the huge financial threat that failing to get the adviser force up to standard represents (because advisers below QCA level 4 will simply not be able to advise post-2012) compliance officers should now be involving themselves in contingency planning and risk mitigation, and considering what challenges the business will face if it doesn’t have sufficient advisers qualified in time. “An average individual starting their studies for a QCA level 4 qualification takes three years to pass, as failure rates are anywhere from the high 40s to 50%,” explains Ms Wade. “Compliance professionals should be ensuring that advisers get additional support, encouraging them to form networking study groups within the business and to take their strongest subjects first.”

Compliance should also ask the training team to conduct a gap analysis to determine what level the advisers are at now, how many individuals RDR will affect, and how long it is since they studied, believes Ms Wade. “This might involve some simple testing to see how far advisers are from the level 4 standard, to provide an accurate picture of the potential failure that you need to then respond to.” Moreover, Ms Wade warns that, when allocating time and support to students, there is no one-size-fits-all solution – the best advisers are not necessarily the best students, and they might need more support than others as they will often be busier seeing customers.

Many hurdles

Unfortunately for firms, ensuring that advisers attain the necessary qualifications is just one hurdle of many. Having ensured that advisers are qualified to QCA level 4, there will then be a requirement to “top up” their knowledge via CPD. The CP proposes that firms will have to demonstrate that they are providing their advisers with flexible professional development programmes and, as Jill Wade explains, compliance officers and training teams will need to establish what the gap is for advisers’ future CPD requirements, and what management information they are expected to provide.

Finally, the requirement for higher professional standards, together with the new definitions of “independent” and “restricted” advice, will not only impact the education requirements of front line advisers – compliance will also have to sharpen up their product knowledge. As Rebecca Thorpe, explains: “Compliance will have some responsibility in being able to demonstrate that the firm is fully up to speed with what’s out in the marketplace and making sure that what is being advised on is reflective of the market in that given point in time.”

2012 might seem a long way off, but given the depth of change the RDR will introduce, three years is no time at all.

RDR checklist for compliance officers
Source: Caroline Hayes, SimplyBiz and APCC Steering Committee

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