On Thursday 25th June 2009, the Financial Services Authority (FSA) published the latest update on the Retail Distribution Review (RDR), CP 09/18, entitled, interestingly enough the ‘Distribution of Retail Investments: Delivering the RDR’.

As expected, a furore erupted amongst many onlookers and commentators whom all have various axes to grind for their distribution model, members or panel with which they are batting for. The main aims are broadly categorised under;

Level of Services

• All investment firms will have to describe their services clearly as either ‘independent advice’ or ‘restricted advice’. Firms that describe their advice as independent will genuinely have to make their recommendations based on a comprehensive and fair analysis, and provide unbiased, unrestricted advice.
• All advice must be made in the clients’ best interests (including, where appropriate, making a recommendation not to buy a product at all or to take alternative action).
• Firms offering ‘restricted advice’ will be required to provide oral disclosure using a specific form of words that will include the name of the firm they work for and the range of products they advise on.
• Firms offering ‘independent advice’ will not be able to exclusively offer just their own funds or model investment portfolios, but will have to broaden the range of investments they advise on, for example, including ETFs and structured products.
• Where consumers choose a restricted service – such as a firm that can only give advice on its own range of products – this will also have be made clear.

Commission & Fees

• Adviser firms should only be paid by the client agreed upon, initial table of ‘adviser charges’ rather than by commissions or other payments or benefits paid by providers. These can be paid directly by a client as a fee or are paid as deductions from their investments.
• Importantly, and fundamentally, these charges must reflect the services being provided to the client, not the particular product provider or product, being recommended.
• Renewals fees and charges such as ongoing charges should only be applied where a client is paying for an ongoing service, such as a regular review of the performance of investments. This will not apply to buying an investment to which the client will contribute over time.
• Different product prices will continue to be available through different channels, but where firms access lower prices they will have to pass these on completely to their consumers, without retaining a margin.

Qualifications & Professional Standards

• Ruling out “grandfathering” to the new minimum qualification requirements for offering investment advice, the FSA has stuck with Qualifications Credit Framework (QCF) Level 4 or equivalent as the minimum qualification level an intermediary must have to advise on investments, and has said any gaps in the content between the existing Level 4 tests and new exams can be filled with Continuous Professional Development (CPD), which will need to be completed by the end of 2012.
• To assist in this area, the FSA has brought the decision on whether the proposed ‘Professional Standards Board’ (PSB) should be created as a separate statutory entity ahead of previous timescales to a decision point forward to approx 12 months time (Mid 2010), with the expectation of final implementation by 2012. The PSB will be independent of the FSA
• A draft new code of ethics for investment advisers will be formally consulted on by the either the PSB or FSA once a decision has been taken on its status.

Costs

• The anticipated one-off initial cost of the RDR to the FSA is £2m, with potential ongoing costs of £1.2m. These include improvements in the regulator’s information systems and additional supervisory staff costs.
• The one-off cost to firms of complying with the RDR is anticipated to total about £430m, with a further £40m annual bill for the industry thereafter.

Platforms

• A thematic review is currently being undertaken by the FSA of how intermediaries use platform services, which will focus on assessing suitability and ensure that firms are treating customers fairly. This will also indicate whether it needs to review and/or amend the way it regulates alternative and complimentary distribution channels such as wraps and fund supermarkets.

Mortgage regulation

• By the third quarter of 2009, the FSA expects to complete its review of regulation for the mortgage market and will publish a paper on the future shape of regulation.

Group personal pensions (GPP)

• Group Personal Pensions are to fall under the scope of the RDR only where a potential scheme member is given a personal recommendation on joining the scheme. However, the FSA specified that where a GPP had already been selected for the employer, a firm would not compromise its ‘independence’ if it advises on the merits of joining that scheme only.
• When a GPP is sold without advice is a matter where the FSA wishes to consult the industry on how to apply adviser charging in the corporate pensions market.

Protection

• Possible changes to regulation of the pure protection markets will result from a review The FSA and publication of a report in the first quarter of 2010 with focus on the sale of pure protection products by retail investment firms, including a timetable for consultation and implementation.

So now where?

This CP will closes on 30 October 2009. Feedback on the issues raised relating to corporate pensions business (questions 5 and 14) is requested by 31 July 2009, as the FSA is aiming to consult on draft rules later this year. The FSA will then finalise the draft rules in light of responses and will publish a Policy Statement (PS) giving feedback in the first quarter of 2010.

The final timetable for implementation is likely to require firms to implement changes by 31 December 2012.

The FSA have said they consult on the timetable for establishing an independent Professional Standards Board, in the fourth quarter of 2009.

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