The Financial Conduct Authority. (FSA) launched a review of retail investment markets in 2006 to tackle endemic problems in the Financial Services Industry. Briefly, the core aim of the review was to improve consumer confidence in investment markets and to provide better outcomes for retail clients.
In June 2007 the FSA published its first paper setting out its vision of the financial services market. During the past 4 years there have been consultations between market participants and the FSA to determine the broader impacts of this new regulation and allow time for the financial services industry to adjust to the new world we are entering post RDR.
An important milestone of RDR is 31 December 2012 when full implementation of the new regulatory framework must be in place.
How does it affect clients?
The RDR reforms are wide reaching and any client engaging in the retail investment market will feel the impact of the new regulations. The outcomes of these changes can be summarised as follows:
Cost Transparency
The FSA has focused on providing improved cost transparency for retail clients both on the advice they receive but also on the financial products that they acquire.
Advisers must disclose from outset the agreed remuneration for providing initial and ongoing advice services. Clients will know exactly what they are paying for and can agree on the level of ongoing service they will receive. Advisers must base their charging structure on the service level they provide rather than the remuneration generated by the product or provider they recommend.
Gone are the days when advisers automatically received commissions for the life of the financial contract. The practice of a financial adviser placing investment business with product issuers that pay the largest amount of commission has been extinguished to the benefit of clients. This will also remove product biased advice recommendations which has historically been detrimental to clients financial well being.
Commission payments will no longer be payable for new financial products implemented effective 1 January 2013. Advisers will also still be able to receive legacy commissions on business that was placed before 1 January 2013.
‘Advice fees’ can still be deducted from financial products on an upfront and ongoing basis and alternatively the invoiced fee route is an option when charging clients.
Much activity will be evident here as a consequence of this particular reform. Financial Advice practices will have to carefully consider their business models and make a decision to the ongoing service proposition they offer clients. This will entail an overhaul by advisers; of client relationship management, research and operating systems which must be tailored to the ongoing service they have committed to their clients.
Financial Advice Options
Financial Advice Practices will have to make a decision on the range of financial products that they can advise. Essentially, there will be 2 advice capabilities that a client can access post RDR. These are Independent (unrestricted) and Restricted financial advice:
Restricted advisers may be tied to a single financial institution and can only advise on a single range of products offered from that provider. Restricted advisers may also form multiple ties with a limited range of product providers to improve the suite of investment products they can recommend to their clients.
High Street Banks and Life Offices scaled back their advice operations during the 1990s and we expect that many will launch new advice services and proactively engage and market clients using the restricted advice model. Independent advice practices may also form formal relationships with product providers and change to (multi-tied) restricted advice.
Alternatively, firms which offer independent financial advice will need to consider the broad range of investment products and undertake a comprehensive analysis of the relevant market. Therefore quality research and analysis systems are vital to demonstrate the unbiased unrestricted advice approach.
Gresham Wealth Management Ltd will retain its independent advice status as we strongly believe that to serve our clients best interests we must not be tied to a restricted product range and have the ability to recommend the most appropriate product(s) that are available in the market.
As a Legal Professional this is particularly important for you as the Solicitors Code of Conduct 2007 (as amended) Rule 19.01, when acting in connection with the provision of financial services to clients means you must retain your independence.
Professional Standards
There will be a modernisation of qualification standards that financial advisers need to obtain and to continue to maintain in order to give investment advice to retail clients from 1 January 2013. All persons providing financial advice to retail clients need to demonstrate minimum qualification standards but also undertake ongoing structured learning to retain their financial adviser status.
Gresham Wealth Management Ltd has embraced these new qualification standards and has achieved Corporate Chartered status which demonstrates our professional commitment to raising standards of knowledge, capabilities and ethical standards. The Chartered Status gives parity to other professionals, such as Accountants and Solicitors and distinguishes our capabilities from competitors and peers.
The positive outcomes of the changes will mean that financial advisers will form a closer relationship with their client’s moving forward. The ability for a business to implement a model that provides a robust ongoing service proposition will see proficient advice practices being rewarded by these changes. The client focused approach of these new regulations will undoubtedly improve the quality of professional advice client’s receive; the ongoing service and monitoring of their wealth portfolio and improved financial position.
Since launch in April 2010, Gresham Wealth Management’s primary objective is to deliver a client focused advice proposition based on sound professional and ethical standards. We have built the foundations to take advantage of the new financial landscape that will develop over the coming years.