Retail Distribution Review

Written evidence submitted by the Association of Private Client Investment Managers & Stockbrokers

Executive summary

1. APCIMS [1] does not disagree with the headline objectives of the RDR as outlined by Hector Sants. We do, however, have serious concerns about the timing of RDR implementation, the practicalities and costs involved and the potential for reduced choice and confusion for consumers. Consequently, we are not optimistic about the RDR achieving its objectives.

2. As regards the identified outcomes :

· a better qualification framework for advisers – APCIMS considers the RDR requirements inflexible and bureaucratic, driving experienced advisers out of the industry and requiring extensive professional education regardless of its relevance to individual roles.

· a transparent and fairer charging system – APCIMS considers the RDR requirements unnecessarily detailed (e.g. multiple layers of disclosure for consumers) and potentially open to abuse by product providers.

· greater clarity around the type of advice being offered – APCIMS believes that the RDR will result in the vast majority of advisers only being able to offer "restricted advice" and consumers being unable to differentiate between the many different types of business captured by that description.

Context

3. Over the last four years, APCIMS has frequently expressed concern about how the RDR regime would –

(i) impact the provision of on-going investment services which are not product-focussed; and

(ii) align with European Commission work aimed at instituting a Europe-wide regime for pre-contractual product disclosure for "packaged retail investment products" (PRIPs) and at further harmonising the overall delivery of investment services (MiFID Review).

4. As regards (i), the RDR’s exclusive focus on "retail investment products" (RIPs) and on the activities of the provider/distributor firms whose business is wholly concerned with such products means that the FSA has failed to consider how its requirements impact the business of firms whose services to private individuals arre not primarily product-based. A regime designed to address the abuses which characterise mass market sales of products to small-scale, financially-unaware savers is not appropriate for the relationship-based, portfolio services which our members provide across a wide range of different investment types.

5. In scenarios where a consumer commits a significant proportion of his savings to a single product which is long-term and illiquid and where adviser remuneration is prone to product/provider bias, (e.g. a pension or a life policy), the RDR’s headline requirements make sense. However, the investors that deal with APCIMS firms are typically looking for a range of market-traded and market-related investments. So, while they may be advised on products such as unit trusts and investment trusts, these generally form only a small proportion of their portfolios and, being readily-tradable, are used for investment purposes (e.g. risk diversification or gaining exposure to overseas markets) rather than as savings vehicles. In this context, regulation aimed at ensuring that the overall service is provided in such a way as to meet the client’s best interests seems far more appropriate than a regime aimed at one-off product sales – APCIMS contends that its firms are already subject to this more "holistic" regulatory approach by virtue of MiFID and CRD requirements and that many elements of the RDR are excessive. In addition, when APCIMS firms trade collectives for their clients, they are subject to market-orientated regulation (e.g. transaction reporting and client money rules) which do not apply in mass-market product distribution scenarios.

6. As regards (ii), APCIMS believes that the FSA has effectively "front-run" European work on PRIPs. Although the FSA made frequent references to this work in support of its RDR proposals, the fact remains that the FSA has already finalised the rules that will take effect in 2013 while the European Commission continues to develop and consult on its PRIPs and MiFID Review work. Until very recently, the material which the European Commission had issued on PRIPs was at a very high level – nevertheless, the FSA appeared to adopt it as a minimum upon which it could build extra layers of UK-only regulation (e.g. the concept of "independent" or "restricted" advice) with the result that many UK firms are likely to be saddled with a super-equivalent regime (as occurred following MiFID-1 implementation).

7. The European Commission’s current consultation on PRIPs seeks views on the scope of the PRIPs regime, the investments that should be covered by the PRIPs definition and the details of new product disclosure documents. The current MiFID Review consultation seeks views on amending the requirements that cover selling/advising on investments and extending the application of MiFID sales/advice rules to PRIPs not currently within MiFID scope.

8. If the results of the PRIPs/MiFID work turn out to be significantly different from the RDR’s requirements, UK firms will have expended considerable resources for no purpose and UK consumers will face another raft of new disclosure documents and alternative service descriptions. It is also worth noting that the MiFID Review consults on possible abolition of Article 4, a provision which the FSA has used to retain various requirements super-equivalent to MiFID (including elements of the RDR) – if this were to happen, the UK might be required to dismantle those elements of its domestic regulation that went beyond MiFID with the result that the resources put into their original implementation would be wasted.

APCIMS recommendation

10. Given that these major European projects are still at a consultative stage, may be subject to significant amendment and are based on timetables that extend beyond the RDR implementation date, we believe that the RDR implementation timetable should be deferred so as to allow for maximum possible alignment with eventual European requirements.

11. In the paragraphs that follow, we address the main RDR outcomes in order of their impact upon and importance to firms within the APCIMS constituency.

Type of advice

12. The RDR has re-defined "independent advice". At present, most APCIMS firms provide independent, whole-of-market advice in relation to collective investment schemes but do not advise on other types of "packaged products" such as life policies and pensions which are not relevant to their market-orientated services. Under the RDR, a firm only offers "independent advice" if it advises on all types of RIPs - consequently, the fact that APCIMS firms advise only on those RIPs which have a market access/risk diversification role in investment portfolios but not on long-term savings products means that they will automatically be deemed to be offering "restricted advice". So -

· even though APCIMS firms have not changed the services they offer or the range of investments upon which they advise, the RDR will automatically result in the status of their product-related business moving from "independent" to "restricted" – a firm that currently provides independent advice on unit trusts from multiple providers across the market may continue to operate in exactly the same way but, in future, the fact that it does not also advise on pensions will mean that its advice is "restricted".

· because independence is only relevant in the context of RIPs, APCIMS firms advising across a wide range of investments including securities and bonds will be forced to describe themselves as "restricted" while IFAs advising on all types of RIPs could describe themselves as "independent", notwithstanding that they do not advise on direct investments.

· even though their services will be unchanged, APCIMS firms stand to lose significant sources of new business, e.g. referrals from solicitors and accountants who are required by their own professional bodies to only introduce clients to investment advisers who provide "independent" advice.

· if the vast majority of advisers end up offering "restricted advice" because they are unable/unwilling to advise on all forms of RIP, consumers are likely to be confused by the many resulting "shades of grey". If "restricted advice" describes both an APCIMS firm advising on unit trusts from across the whole market and another firm advising on unit trusts offered by a single product provider, how does that label help the consumer to differentiate between their services?

APCIMS recommendation

13. European work in this area does not recognise the concept of "independence" and has not yet determined which products are within the PRIPs definition – as outlined above, we believe that the FSA should not be implementing super-equivalent requirements which European developments may subsequently render void.

Charging system

14. The RDR objective of aligning adviser and client interests by ensuring that an adviser is paid by the client to whom advice is provided rather than by the product provider whose product is sold is sound – this is how APCIMS firms have long operated, agreeing their tariffs with clients ahead of service provision and having their charges paid directly by the client. However –

· there is clear potential for "adviser charging" to be abused as a result of product providers being able to "facilitate" the collection of adviser charges and provide various forms of non-monetary benefits to advisers.

· the RDR rules for how adviser charges must be disclosed are impossibly detailed, requiring multiple layers of disclosure at different times and requiring firms to disclose not only the costs arising directly from the RIP in question but also on-going charges that may result from a RIP being included in a client portfolio to which annual management fees are applied.

· the FSA’s prescriptive approach to disclosure of adviser charging is contrary to MiFID – although the FSA was forced in 2007 to jettison its pro-forma charges disclosure document, it is attempting to achieve the same end by specifying disclosure content in extreme detail.

· the adviser charging rules, having only just been made, are already being amended – as well as making already complex rules even more convoluted, this means that firms are unable to accurately plan for their implementation.

APCIMS recommendation

15. We believe that the charging rules should be simplified as consumers are unlikely to benefit from multiple layers of detailed disclosure.

Professionalism

16. While APCIMS believes that the drive to raise professional standards amongst advisers is reasonable, we have significant reservations about the FSA’s approach. Specifically–

· FSA opposition to any form of "grandfathering" for older staff without relevant qualifications effectively means that the experience/expertise that these individuals have acquired over decades of looking after clients count for nothing and may, in many cases, be lost to the industry as advisers choose to retire rather than having to "re-qualify".

· detailed requirements for "gap filling" between existing qualifications and new examination standards will result in many advisers having to learn material which has no relevance to their day-to-day roles or to the advice that they give to clients – the more specialised an adviser’s role is, the more unnecessary material he will have to learn. Also, even though a majority of advisers in APCIMS firms have qualifications far above the minimum level the RDR requires, they will still have to go through the "gap fill" exercise.

· the RDR will require advisers and their firms to complete and record on-going CPD, to make regular professionalism data reports to the FSA and to provide formal confirmations to the professional bodies that will issue the annual Statements of Professional Standing that advisers must have to continue in their roles – these requirements are extremely detailed, will be bureaucratic and costly for firms to comply with and fail to take proper account of in-house training programmes that firms have expended significant resources on developing. In addition, there are concerns about some professional bodies’ ability to handle the operational burdens the new regime places upon them.

APCIMS recommendation

17. We believe that the FSA’s "big bang" approach to professionalism should be softened by, for example -

· allowing a longer "run-off" period with older staff continuing in their roles for an extra year for every seven already worked, thus recognising experience;

· phasing in CPD requirements gradually, perhaps 20 hours in the first year, increasing thereafter; and

· reducing the administrative burden on professional bodies by having a two year assessment process, covering 50% of the adviser population in alternate years rather than 100% each year.

January 2011