As long ago as February this year 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. We still await final rules. 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 CP11/09 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 delivered in several key areas.
Specific disclosure requirements are as follows:
1. Where Reduction in Yield figures are shown they must be shown for both product charges and for overall charges from all parties
2. Disclosure of bank interest on cash held in a SIPP and provide clarity on how much interest is being retained (this becomes a requirement by April 2012)
3. 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
4. More descriptive table headings are required for projections
5. 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 changes must be implemented for in-force illustrations as well as new ones.
6. SIPPs will take on a wider definition of any pension product that allows fund or asset class choice
7. Product providers that facilitate payment of adviser charges will be required to describe product and adviser charges separately (i.e. unbundled). 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
8. 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 CP11/09. Cost and complexity has definitely been added.
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 instalments. 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.
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.
But if providers think the new disclosure demands being placed on them are onerous then they can at least be satisfied that their new administrative burden does not fall on them alone. The demands placed on platforms and IFA firms also look heavy from a reading of PS11/9 which contains final rules from CP10/29 entitled ‘Delivering the RDR and other issues for platforms and nominee-related services’.
Specific requirements are:
1. Cash rebates by platforms will be banned by 31st December 2012 (indeed no rules will be enforced until this point)
2. Execution-only platforms will be caught up in the same requirements for increased transparency and unbundling of pricing as other wrap platforms. They will need to disclose fees or commissions received from third parties
3. Payment of fees from platform users’ cash accounts rather than via unit rebates is favoured by the FSA but no ruling has been declared in this area yet
4. More positively for IFAs, they will be saved from having to artificially spread their customers’ assets across a range of platforms to meet the independence rule
5. But they must assess whether being on a platform is in each client’s best interests
6. Advisers must be able to demonstrate why a particular platform is suitable, in other words choice of platforms and off platform solutions need to be considered alongside each other for all clients
7. So although, in theory, a firm may be able to use a single platform for the majority of clients; in reality IFAs need to consider carefully whether one single platform is definitely in the best interests of all clients. So suddenly, client asset migration onto platform does not look necessarily as quick and easy a process as it initially sounds.
A reading of this Policy Statement does leave you asking the question is the FSA dithering in too many contentious areas and putting off final decision-making until next year? This may be because the institution is going through wide scale change itself as the FSA splits into The Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) and the harder focus of the body that will regulate IFAs on product-specific regulation.
No doubt further Disclosure updates will follow in the near future as slowly but surely all corners of the industry get clarity on what RDR really means in terms of what types of communication customers will need to receive and what safeguards will need to be applied to ensure they are treated fairly. Let’s hope the new FCA leaves enough time for providers and platform operators to make the necessary changes before the RDR comes into force.