Retail Distribution Review

Written evidence submitted by Rensburg Sheppards Investment Management Ltd

1 Executive Summary

1.1 We fully support the three core aims of the Financial Services Authority (FSA) with the RDR initiative.

1.2 However, in implementing requirements designed to meet its aims FSA has effectively shoehorned the entire advice-giving community into one set of rules showing a lack of consideration to our industry, resulting in unnecessary shortcomings and challenges.

• The revised definition of 'independent' could have unintended consequence of poor consumer outcomes, individuals being sold unsuitable products and customers could be mis-led into thinking they are receiving whole of market advice when in fact the basis of their advice will focus solely on Retail Investment Products (RIPs).

• The RDR proposals are unlikely to improve clarity or transparency of charging structures in the investment sector and it will result in more complexity from the consumers' perspective.

• The majority of these advisers who do not meet the level four requirements have significant experience within the industry and would have also been required to keep their Continuing Professional Development (CPO) up to date.

2 Our Business

2.1 Rensburg Sheppards Investment Management (RSIM) is a subsidiary of Investec Plc. The core activity of RSIM is personal asset management. RSIM provides discretionary investment management services for private clients, pension funds, trust and charities. It also provides financial planning services for private and intermediary clients. We have eleven regional offices throughout the UK employing over six hundred employees.

3 Summary of concerns

3.1 Independent and restricted advice

Proposals to broaden the range of products captured by RDR

3.1.1 We believe that it is short-sighted of the FSA to broaden the range of RIPs to include more complex products, specifically Structured Capital at Risk Products ("SCARP") and unregulated Collective Investment Schemes ("CISs"). Neither product is very transparent or easily understood by the 'average investor', both could be higher risk and as such would require enhanced due diligence and both are generally unsuitable to all but a small sub-section of the general public.

3.1.2 Advisers could respond to the addition of these products in two ways - simply 'steer clear' of recommending these two products for fear of mis-selling and other associated issues (thus making the advice restricted); or recommend these products, making them more widely available to retail clients, causing wide-spread mis-selling (albeit inadvertent).

Two tiers of advice to the same client

3.1.3 Another (perhaps unintended) consequence of implementing a one-size-fits-all approach to advice is, whereby an adviser could potentially give both independent and restricted advice in the same sitting. For example - a client visits an independent adviser for some general financial planning advice and product recommendations. The adviser, having conducted a fair and comprehensive analysis of the client's needs and of the market, including all RIPs, subsequently recommends a SIPP. However, the adviser at this stage has to declare themselves as restricted, as they do not review the whole of the SIPP market, as they only recommend SIPPs from a small panel or their own in-house offering.

3.1.4 It is also unclear whether the same adviser could be included in the two tiers of advice or whether a separate adviser would be required once the advice has become restricted. We do not consider that the initial recommendation is restricted advice, as all RIPs were considered, yet the arising product recommendation was made from a restricted list of providers.

Meaning of "independent"

3.1.5 The proposed definition of "independent" has been broadened, yet remains fundamentally flawed and potentially mis-leading, as its scope still only considers products. Equities and bonds are excluded and therefore not required to be considered in the course of giving advice. Clients will be mis-led into thinking that they are receiving whole of market advice when this is not the case and most importantly no provision has been made to disclose this fact to clients.

3.1.6 The resulting situation will be advisers who call themselves independent, but this independence still only exists across a sub-section of the whole market.

3.1.7 Furthermore, we are surprised at the lack of prominence that suitability has within the context of independence. The FSA has made it clear that for a firm's advice to be 'unrestricted', it will have to provide advice in relation to all types of RIPs from investment trusts to pension funds and life insurance. This marks a significant change to the current criteria where a firm may call itself independent if it gives advice in relation to a specific sector of the product market (e.g. unit trusts). We believe that independent advice should be given across the range of products deemed as suitable for the client, rather than a standardised, default product ranges deemed by the FSA to be suitable for all.

Restricted advice

3.1.8 RSIM comprises of both investment advisers and financial planners, neither of which will be classified as independent going forward because neither will give advice on the full range of RIPs. The majority of our business focuses primarily on managing investment portfolios for clients. This includes investments from a wide range of stocks, bonds and collectives. Advising on long term products such as pensions and life assurance is something most of our advisers have never done. We believe that being a specialist in certain types of investments will achieve better outcomes for consumers. The FSA has stated that there should be no material impacts with regards to classifications yet, though consider ourselves to be independent currently, this may need to change.

3.1.9 Portfolios' managed by an investment manager will typically include unit trusts or OEIC's alongside direct equities and bonds or gilts. To require the manager to disclose to the client that the service they receive are suitable (following the requirements of MiFID), but that the advice given on the direct equity portion of a portfolio (as part of a suitable service) is "restricted advice" is potentially mis-leading and confusing to the client.

3.1.10 Differences in operating and advice models across the industry will mean a huge disparity in services offered between different firms each operating as 'restricted' post-RDR. The proposal to adopt just one term - 'restricted' - for all firms will create significant problems for the consumer, as they attempt to navigate the universe of firms offering advice, to compare firms and find the one most suitable.

3.2 Adviser remuneration

Potential mis-selling pre-RDR implementation

3.2.1 One of the consequences of transition of remuneration structures to fee rather than commission based remuneration that we are currently witnessing is firms moving to place business pre-transition to secure as much income as possible through trail commission while the facility is still available. Furthermore, as "product providers" in some areas (where we provide clients of IFAs with discretionary investment management services), we are being requested to increase trail commission payments. We believe that there is no reason to do this other than to secure a larger income flow pre-RDR and protect their business.

3.2.2 We are also concerned that clients will be discouraged by advisers from moving their pre-RDR investments into a different product post-RDR, as the ongoing income stream it generates for the adviser will cease.

Challenges with pre-sales disclosure and transparency of service costs

3.2.3 It is generally accepted that mass-market investors and indeed many of the higher net worth sector have no appetite to pay directly for financial advice prefer to meet such costs via product charges. The FSA's RDR proposals are in principle aligned with this theory, This leaves the industry with the challenge of clearly disclosing the cost of advice and other services, and how these are deducted from the product.

3.2.4 We believe that the ROR proposals will not improve clarity or transparency of charging structures in the investment sector, and no matter how these are disclosed, they may not even be read by the client. The RDR proposals, we believe, will make it much harder to explain charges to the client going forward.

3.2.5 In addition to these challenges with product disclosure, we also anticipate the industry facing difficulties with other aspects of pre-sales disclosure, namely the requirement to express in cash terms the cost of advice and services. This, we feel, will lead to product recommendations being driven by the need for the adviser to find a product whose charges are appropriate to the level that the client wishes to pay, which inevitably will mean inappropriate recommendations and potential mis-selling.

3.3 Professionalism

3.3.1 We have a number of significant concerns in relation to the FSA's proposals on Professionalism.

Relevance of required knowledge to role undertaken

3.3.2 In principle, we believe that advisers should be competent according to the role undertaken - allowing individuals and firms to give more focus to attaining market-leading standards in line with products offered and the type of advice given. The current proposals will force advisers to demonstrate knowledge and competence in areas that are irrelevant to their role, which is an ineffective use of resource and finances, Furthermore, the requirement will also lead to undue pressure on individuals as they expand their knowledge into irrelevant areas, possibly at the expense of attaining a higher level of detailed role-specific knowledge.

3.3.3 This, we believe, will create a generation of "jack of all trades, master or none" advisers, which is unwanted by firms and individuals, and particularly in the wealth management sector, will be unwanted by our clients, who depend on the high level of specific knowledge that is currently provided.

3.3.4 Also the new requirements related to continuing professional development (CPO) will lead to additional costs to firms, which may ultimately lead to higher costs for consumers.

Attaining QCA level four through qualifications and CPO

3.3.5 A significant proportion of the adviser community who are currently deemed as competent will no longer be considered as such at the end of 2012, therefore rendering them unable to practice in their current capacity unless an exam is passed.

3.3.6 There are three types of adviser operating now who will be affected by this change: i) those who joined the profession under a previous regime (in our case, when the industry was regulated by the London Stock Exchange), ii) those who joined the profession with other professional qualifications, iii) those with no formal qualifications who have previously been 'grandfathered' through.

3.3.7 At that time, those individuals may have taken exams and met the minimum standards in order to be able to advise clients. Now, many years later, with greater experience than most and with CPO gained over that period, the goalposts are moved and they are no longer deemed to be competent because they did not take the "right" exam many years ago. In addition we have a number of members of staff who hold professional qualifications significantly in excess of QCA level 4 e.g. Chartered Accountants.

3.3.8 [not printed]

3.4.9 [not printed]

We hope this has been useful data and that the practicalities to firms of RDR implementation can be further considered.

January 2011