R DR Guidance c onsultation, Independent and restricted advice T he FSA published its Guidance consultation on Independent and Restricted Advice on 27

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1 O n T arget Briefing G C R DR: Independent and restricted advice a n overview This paper is provided for the information of product manufacturers and fund m anagers operating in the UK. I t represents our understanding of the FSA s Guidance consultation entitled Retail Distribution Review: Independent and restricted advice which was published in F ebruary T his document, has been put together using all possible skill and care. H owever it should be noted that no responsibility for any errors or omissions c an be accepted by Aim Two Three LLP, its partners or its employees. References to slide presentations and other briefing papers are relevant only t o clients of Aim Two Three LLP for whom these services are p rovided.

2 R DR Guidance c onsultation, Independent and restricted advice T he FSA published its Guidance consultation on Independent and Restricted Advice on 27 t h F ebruary. Those of us wanting to have complete clarity on this i ncreasingly vexed issue had eagerly awaited it. A ctually, it has not provided this much need clarity in all areas, in fact it could be a rgued that some crucial issues are now less clear than they were! The most confused area surrounding the Independent b een around the issue of Ret ail Investment Products. or Restricted debate has Section 2 of the Guidance consultation (GC) is useful and seems to provide the potent ial for an easing of the requirements for Independence. A s a brief recap to be Independent in the post- RDR world it is necessary for an a dviser to consider all Retail Investment Products (RIPs) and understand how t hey work. The definition of RIPs is deliberately wide and includes some products (for example - Unregulated Collective Investment Schemes (UCIS), Structured I nvestment Products (SIPs)) w hich many of us deem too risky to be included in a r ange, which i s routinely considered by advisers. A long with others, I have previously recommended that, far from being included in the RIP definition, advice on these products should be restricted to firms with a ppropriate special permissions. These recommendations were, clearly, not a ccepted. Firms have been left to make decisions over the nature of their business proposition on the basis that only firms which consider all RIPs, including the risk ier products, c an describe their advice service as Independent I n this GC paper, the FSA has made some interesting comments which, in our view, could lead to U CIS being removed from the RIP range. Section 2.5 of the paper states In general, we expect there to be very few types of investment products sold to retail clients that would not fall within this d efinition. T he paper quotes from COBS 6.2A. 11G which states that a relevant market should.. comprise all retail investment products which are capable of meeting the i nvestment needs and objectives of a retail client. A ll clear so far! H owever, at paragraph 2.17, the paper states that the FSA proposes to consult on new rules for unregulated collective investment schemes (UCIS) during 2012; t his will make clear our expectation that UCIS will be suitable for very few retail c lients, if any.

3 Clearly, if the consultation determines that these products are not suitable for a ny r etail clients t hey need not be considered or understood when advising r etail clients and therefore s hould not be part of the RIP range. T his is borne out by Paragraph 2.18 Where we have identified high- risk products and recommended that they should not reach retail investors in the UK, a f irm would not need to consider them for its clients to meet the standards for i ndependent advice. They cite the example of Traded Life Policy Investments in s upport of this. Unfortunately, while we need an answer to the question of whether UCIS should b e RIPs now, we actually have to wait for the FSA s consultation. Consultation periods are generally 3 months long; with a further month to digest the results and produce feedback and draft rules this means that it will be July at the earliest b efore w e actually achieve clarity. The inclusion of VCTs, SIPs etc as RIPs doe s not give r ise to anything like the same issues as UCIS - t here are fewer of them, they have an identifiable profile and there a re many sources of research available. I n any event, paragraph 2.8 permits a firm to not consider some RIPs but still describe itself as Independent if it..can identify a common relevant market across all of its clients that does not include certain retail investment products. Provided it is..able to market itself in such a way that attracted only the i ntended type of clients, and only take on the intended type of clients.. In practice this may be difficult, as the needs and resources of existing clients will c hange with time. P aragraph 2.9 talks about the fact that a firm can describe itself as Independent where it specialises in a particular relevant market (as usual, ethical investment specialists are the chosen example). Such firms cannot describe themselves as Independent in the broader sense. To quote the example giv en by the FSA F or e xample, a firm Greenfield which specialises in ethical and socially responsible investment, should not hold itself out as Greenfield Independent F inancial Advisers. Greenfield providing independent advice on ethical products m ay be acceptable. The paper also sets out some of the FSA s expectations of Independent firms in respect of them meeting the twin tests of their advice being based on a comprehensive and fair analysis of the relevant market a s well as being unbiase d and unrestricted. Paragraph 2.16 confirms that a firm need not actually recommend all products falling within the definition of RIPs while paragraph 2.15 confirms that any exclusion of products from its range must be centred on the client. It is i mportant to note that there is a considerable difference between recommending a product and considering it. Paragraph 2.20 makes it clear that a product cannot be considered in isolation if t he comprehensive and fair test is to be met..a firm should not restrict its advice to certain collective investment schemes, and should base the selection of

4 units in a collective investment scheme for a client a nd fair analysis of the market for this product. on the basis of a comprehensive N o doubt t he eventual outcome of the FSA review of centralised investment propositions will build on this (there are additional comments in the 2012 Retail C onduct Risk Outlook (RCRO) paper). Paragraph 2.22 also restates COBS 6.2A.17G to emphasise that advisers should loo k beyond RIPs when appropriate. The examples given are all lower r isk than R IPs. P roduct provider influence There is some welcome, if unsurprising, clarifica tion over the position of a firm w hich is unable to access a provider s products because of that provider s business model. Such a restriction on a firm would not prevent it describing i tself as Independent. Clearly, any agreement with a provider which restricts the personal r ecommendations a firm can provide would prevent that firm holding itself out a s Independent. R estricted advice Advice which is not Independent or Basic will be Restricted advice. Firms operating as Restricted face the same requirements as Independent firms a round suitability, adviser charging and professionalism. Written disclosure made by a restricted firm must make the nature of the restriction clear (COBS 6.2A.6R): A f irm must include the term independent advice or restricted advice or b oth, as relevant, in the disclosure. I f a f irm p rovides i ndependent advice in respect of a relevant market that d oes not include all r etail investment products, a f irm must include in the d isclosure an explanation of that market, including the types of retail i nvestment products w hich constitute that market. I f a f irm p rovides r estricted advice, a f irm must include in its disclosure an e xplanation about whether the advice is limited to retail investment products from a single company, a single group of companies or a limited number of c ompanies. A firm is als o required to provide oral disclosure if it engages in spoken i nteraction with a retail client. (COBS 6.2A.9R) I f a f irm p rovides r estricted advice and engages in spoken interaction with t he r etail client, a firm m ust disclose orally in good time before the provision o f its services in respect of a p ersonal recommendation that it provides r estricted advice a nd the nature of that restriction. E xamples of statements which would comply with C OBS 6.2A.9R include:

5 ( 1) I am a [Firm X] adviser offering restricted advice, which means that my advice is restricted to advice on [Firm X] [products/stakeholder products] o nly or (2) I am a [Firm X] adviser offering restricted advice, which means that my a dvice is restricted to advice on [products/stakeholder products] from a l imited number of companies that [Firm X] has selected. These rules allow firms flexibility in how they describe their restricted advice s ervices, subject to the fair, clear and not misleading requirements. They do, h owever, require the u se of the term Restricted. F irms offering both Independent and Restricted advice must make this clear a nd cannot describe the business as a whole as Independent. I nvestment solutions The paper side-s teps the question of Distributor Influenced Funds by referring i nstead to last December s guidance consultation on DIFs (GC11/29). Paragraphs 5.4 and 5.5 confirm the rules around the use of panels and also that, w hile panels are acceptable within Independent firms, such firms must be able to make off- p anel recommendations. There are no surprises around panels. Paragraphs 5.6 to 5.9 are around the use of platforms. The FSA restates its view that it is likely to be v ery rare, if possible at all, that a firm could use a single platform for all of the investment business of all of its clients and meet the standard f or independent advice. T his subject also features in the RCRO. Model portfolios and discretionary investment services are covered in p aragraphs to 5.21 as well as featuring in the RCRO. S imilar guidance is given around model portfolios as is given for panels. Paragraph 5.13 gives guidance over the selection of model portfolios. Firms s hould consider each product in the model p ortfolio in t he light of the client s individual circumstances. For example, a client may have preferences about the types of investments they wish to make. The model portfolio as a whole, rather t han the individual products held within it should be considered when determining w hether the model portfolio is suitable given the client s attitude to risk. This is very welcome clarification as there have been reports of the F SA questioning s uitability where part of a portfolio doesn t match a client s attitude to risk. In paragraph 5.18 we receive confirmation that a referral to a discretionary investment manager (DIM) is not, generally, a personal recommendation so that t he standard for Independent advice does not apply. P aragraph 5.19, however confirms that, if a firm is providing Independent advice, it should consider a wide range of investment solutions in the market before recommending a client uses a discretionary investment service (Principle 6 (customer s interests)).

6 S ection 6 of the GC comments on specialist activities (advising on pension transfers and pension opt- outs and advising on long- term care insurance c ontracts). With the pension specialisms a firm requires a separate permission. Paragraph 6.4 confirms that a firm without t his permission can still hold itself out as giving i ndependent advice. The position is more confusing with regard to long-term care. Advising on long- term care insurance does not require a separate permission, only a specialist q ualification. I n paragraph 6.6 the FSA states that it does not expect a firm that holds itself out as providing independent advice to have an adviser who is qualified.. But, as with pension transfers advisers..should be able to recognise clients for whom a long-t erm care insurance contract should be considered and be in a position to refer these clients on to someone who can provide advice on these p roducts. However, the FSA has previously confirmed that firms unable to g ive advice on RIPs cannot hold themselves out as Independent if they need to refer clients to another firm. Long- t erm care is clearly a special case. F inally, in paragraph 6.8 the FSA explodes a m yth, which has recently gained c urrency - t hat a firm could be Independent even if its advisers were not able as i ndividuals to give advice on all RIPs but could do so as a team. The requirement i s that The adviser who delivers the personal recommendation should have the skills and knowledge necessary to ensure that the advice meets the standard for i ndependent advice. T here is a consultation process around this GC paper and we would urge providers (and advisers) to use this to push for the speedy start of the UCIS c onsultation only when this issue is finally closed off can firms make proper d ecisions around their future. W hile it would seem to be u nnecessary, it is probably also worth, for the sake of clarity, confirming that p roducts which the regulator deems unsuitable for retail i nvestors should automatically be excluded from the definition of RIPs. F or the full GC document go to: h ttp:// Consultation closes on 9 t h A pril R esponses should be sent to: RDRAdvice@FSA.gov.uk