RDR - looking at disclosure with CP11/09 and PS11/14
As long ago as February 2011 the FSA published its consultation paper CP 11/09 which encapsulated the changes needed in retail investments product disclosure to reflect RDR adviser charging and to improve pension scheme disclosure. Consultation closed on this back in May. Recent submission of feedback in PS11/14 has provided an update in thinking.This was followed in August by a Policy Statement PS 11/09 linked to CP10/29 which is focused on implementing RDR within platforms and nominee-related services. It is worth looking at the Disclosure requirements of each in turn as they will collectively create a significant extra burden for the market.
The reasoning for the original CP11/09 and the feedback in PS11/14 is as follows: consumers need more information about products’ charges, risk levels and the main product features so they can make informed decisions. From the point of view of providers many have been crying out for more practical ‘flesh on the bones’ of RDR changes which CP11/09 and PS11/14 delivered in several key areas.
Specific disclosure requirements are as follows:
- Where Reduction in Yield figures are shown they must be shown for both product charges and for overall charges from all parties.
- Disclosure of bank interest on cash held in a SIPP and clarity on how much interest is being retained (this becomes a requirement by April 2012).
- There is also a need for proper reflection of inflation in SMPIs (7% less 2.5% inflation for example). Inflation adjusted projections are to become mandatory.
- More descriptive table headings are required for projections.
- The length of projection tables needs to be reduced so that rows will only be required for chosen year of retirement and for the first 5 years of the pension. Both #4 & #5 changes must be implemented for in-force illustrations as well as new ones.
- SIPPs will take on a wider definition of any pension product that allows fund or asset class choice.
- Product providers that facilitate payment of adviser charges will be required to describe product and adviser charges separately (i.e. unbundled). The new format will need to show the effect of each type of charge in the ‘effect of charges’ table and ‘reduction in yield’ information. RDR already bans payment of commission for advised sales of investments and personal pensions including SIPPs
- In addition, when adviser charges are changed a new Key Features Illustration (KFI) must be issued.
The main criticism levied at the FSA is how little time is being left to providers to make all these changes. Some providers had already issued requirements for adviser charging solutions and have had to make adjustments to these since the arrival of CP11/09and PS11/14. Cost and complexity has definitely been added.
KFI multiplication post-RDR
A more significant concern is the future requirement for a new KFI to be created every time an adviser makes a new charge. This stipulation does not take into consideration the new way that advisers will be engaging and charging for that engagement with customers as a result of RDR. In short, advisers will be charging variable amounts according to the value they are delivering and charges will not necessarily be linked to specific products unlike commission payments today.
A routine financial planning session is clearly delivering less value than specialist estate planning and advice session. Fees will inevitably be subject to negotiation between adviser and client. Sometimes fees will be paid upfront or paid in installments. Some advisers may want to adjust charges to reflect the value of the overall portfolio of a client. The client may want to facilitate the charge from a particular product for tax reasons. So providers need to calculate a charge based on the value of multiple products whilst deducting it from a single prescribed product.1
Modifying provider systems to deal with all this extra complexity will almost certainly require new adviser charging components to be implemented. Substantial change to illustrations and a great deal of integration between the two will need to follow as provider systems will need to make these adjustments and pay charges accurately and promptly, much as they do commission payments today.
Following completion of the above article the FSA has published its latest policy statement on disclosure called PS11/14 and entitled ‘Product disclosure: Retail investments – changes to reflect RDR Adviser Charging – feedback to CP11/3 and final rules.’
In this the FSA made clear the following:
- Pre- and post-charge projections must be shown on Key Features Illustrations (KFIs) as well as detailed in Effect of Charges (EoC) Table
- External fund charges must be quoted on KFIs
- Projections should be given for 1st, 3rd and 5th year as well as intended date of retirement
- RDR-ready KFIs can be used from 1st October 2012 as large firms will be going live with Auto Enrolment and RDR-compliant illustrations from this date onwards
- The FSA declares a desire to fully align annual Statutory Money Purchase Illustrations (SMPI) and Point of Sale (POS) illustrations over time
- The 2.5% inflation assumption in SMPIs will be applied with all three projections given and the same will need to happen with POS illustrations in due course
- There is a delay on demanding the writing in of new adviser charges on existing business as providers struggle to cope with the costs of implementing this - so although this is desirable it is not yet mandatory
- The door is opened to non personal or ‘Generic Illustrations’ as they are called. These are likely to be used for Auto Enrolment and for populating Group Personal Pensions (GPPs) illustrations where relatively homogenous groups are being moved into GPP schemes or ‘Auto Enrolled’ in short time frames
- Other stated changes that need to happen to personal pensions KFIs including reflecting new gender equality rules; inflation-adjusted pensions illustrations; as well as the many changes to make KFIs generally clearer and more transparent. But many changes are being delayed because of the lack of modern IT systems inside providers which render necessary system changes unaffordable
- The FSA picks up several times the need for providers to invest in more modern systems to be able to make disclosure changes more easily, quickly and cheaply. One quotation taken from PS11/14 sums up this sentiment well:
“Trade bodies and many firms speak of the need for clearer illustrations that are more beneficial to consumers but firms’ continued use of costly legacy systems appears to prevent them from creating KFIs which are understandable and well presented.”