POSITION PAPER NO On the Review of Financial Advice

POSITION PAPER NO. 1 2011 On the Review of Financial Advice ISSUED AUGUST 2011

POSITION PAPER If you require any assistance or clarification, wish to discuss any aspect of this paper or have any observations please contact the Jersey Financial Services Commission (the Commission ). Responses to the questions may be sent directly to the Commission by 31 October 2011. The Commission contact is: Mike Jones Deputy Director, Securities Jersey Financial Services Commission PO Box 267 14-18 Castle Street St Helier Jersey JE4 8TP Telephone: +44 (0) 1534 822172 Email: m.jones@jerseyfsc.org REVIEW OF FINANCIAL ADVICE 3 of 34

Glossary of terms RFA the Commission the Commission Law CPD the FSA the FS(J)L the IB Codes Investment employee MiFID QCF the RDR SPS means the Review of Financial Advice means the Jersey Financial Services Commission means the Financial Services Commission (Jersey) Law 1998, as amended means Continuing Professional Development means the United Kingdom s Financial Services Authority means the Financial Services (Jersey) Law 1998, as amended means the Codes of Practice for Investment Business means an individual that meets the definition of an investment employee as provided in the Investment Business Fees Notice published on the Commission Website: http://www.jerseyfsc.org/the_commission/fees_notices/index.asp means the Markets in Financial Instruments Directive means Qualifications and Credit Framework means the FSA Retail Distribution Review means a Statement of Professional Standing 4 of 34 ISSUED AUGUST 2011

Contents 1 Executive Summary...6 1.1 Overview...6 1.2 What is proposed and why?...7 1.3 Who would be affected?...7 1.4 Next steps...8 1.5 Timetable...8 2 The Commission...10 2.1 Overview...10 2.2 Commission s functions...10 2.3 Guiding principles...10 3 Background to the Review of Financial Advice Proposals...11 3.1 FSA Retail Distribution Review...11 3.2 Commission response to the RDR...11 4 Increased Professional Standards for Investment Employees...13 4.1 Aim and Overview...13 4.2 RDR Proposals...13 4.3 Commission RFA Proposals Headlines...14 4.4 Commission RFA Proposals - Details...14 5 Independent and Restricted Advice...20 5.1 Aim and Overview...20 5.2 RDR Proposals...20 5.3 Commission RFA Proposals...20 6 Remuneration for Investment Advice...22 6.1 Aim and Overview...22 6.2 RDR Proposals...22 6.3 Commission RFA Proposals Headlines...23 6.4 Commission RFA Proposals - Details...23 7 Financial Resource Requirements...27 7.1 Aim and Overview...27 7.2 RDR Proposals...27 7.3 Commission RFA Proposals...27 8 Additional Areas for Consideration...28 8.1 Client Classification...28 8.2 Platforms...29 8.3 Investment Employee no objection...29 8.4 Product Classification Regime...30 9 Summary of Questions...31 APPENDIX A...34 List of representative bodies and other organisations who have been sent this Position Paper...34 REVIEW OF FINANCIAL ADVICE 5 of 34

1 Executive Summary 1.1 Overview 1.1.1 This Position Paper is the Commission s first step in its Review of Financial Advice ( RFA ) and initiates the Commission s response to the UK Financial Services Authority Retail Distribution Review (the RDR ). The Commission looks forward to working closely with Industry to finalise the details of the proposals contained within this Position Paper. 1.1.2 The RDR is a key part of the FSA s consumer protection strategy. The aim of the RDR is to improve clarity for people who are looking to invest, raise the professional standards of advisers, and reduce the conflicts of interest which are found in commission based remuneration for adviser services. 1.1.3 The FSA hopes the RDR will result in a modernisation of the Industry to address a market that the FSA feels is not working, in that it does not work well for consumers, advisers or the firms which provide these products and services. 1.1.4 The Commission has sought to introduce various measures in an effort to generally improve the quality of investment advice provided by investment businesses since the introduction of the Financial Services (Jersey) Law 1998, as amended (the FS(J)L ). 1.1.5 Despite the Commission s work in this area, there have been a number of enforcement cases in connection with the provision of investment advice, including the Alternate Insurance Services Limited case, which has been the subject of a Commission public statement. In addition, examinations of registered persons, holding a class C or class D Investment Business registration, and two mystery shopping exercises have highlighted that there continues to be a need for improvement in the investment advice process 1. 1.1.6 Consequently, the Commission shares the concerns of the FSA with respect to the investment advice industry which, when combined with the absence in Jersey of three of the investor protection 'pillars' found in other jurisdictions (an ombudsman, investor compensation scheme, and statutory cooling-off periods), confirms the Commission s position that the changes proposed, at a high level in this Position Paper, are justified from a consumer protection perspective. 1.1.7 The Commission s position is set out in chapters 4 to 7 of this Position Paper. 1 Results of the Commission s mystery shopping exercises are available from the Commission website: http://www.jerseyfsc.org/investment_business/on_site_thematic_examinations/index.asp 6 of 34 ISSUED AUGUST 2011

Executive Summary 1.2 What is proposed and why? 1.2.1 The key proposals of the RDR are: 1.2.1.1 increasing professional standards of all retail investment advisers; 1.2.1.2 improving the clarity with which firms describe their services to consumers (independent and restricted advice); 1.2.1.3 addressing the potential for adviser remuneration (initial and trail commissions) to bias advice; and 1.2.1.4 improving the sustainability of the market (financial resources). 1.2.2 Taking the four key areas described above the Commission s response through RFA is that: 1.2.2.1 in two areas 1.2.1.1 (increasing of professional standards) and 1.2.1.3 (adviser charging), the Commission proposes to replicate a large number of the FSA s proposals and make significant changes to our Investment Business regulatory framework; however, 1.2.2.2 in the remaining two areas 1.2.1.2 (clarity of service description) and 1.2.1.4 (financial resources) the Commission believes, at this stage, that its existing regulatory framework, which includes the Codes of Practice for Investment Business (the IB Codes ), already adequately addresses these areas of concern. 1.2.3 The Commission considers that increasing professional standards together with new adviser charging requirements will contribute significantly to the reduction of risk to the public of financial loss due to incompetence, dishonesty or malpractice of persons carrying on the business of financial services in or from within Jersey. Further, these measures will protect and enhance the reputation of Jersey in commercial and financial matters. This is in line with the Commission s guiding principles described in more detail in section 2.3 below. 1.3 Who would be affected? 1.3.1 All persons registered to undertake classes C 2 and D 3 investment business; 1.3.2 investment employees at those firms; existing clients of such firms; and members of the public who seek investment advice. 2 Giving investment advice when not prevented from holding client assets by virtue of a condition of registration. 3 Giving investment advice when prevented from holding client assets by virtue of a condition of registration. REVIEW OF FINANCIAL ADVICE 7 of 34

Executive Summary 1.4 Next steps 1.4.1 This Position Paper will be the first step in a series of consultations with industry outlining Jersey s proposed response to the RDR. The Commission welcomes any feedback to this Position Paper from Industry. Responses to the questions posed should be provided by 31 October 2011. 1.4.2 As part of the next steps in the RFA the Commission proposes to engage fully with Industry and intends to form a working party with the objective of assessing the practical implications of the RFA proposals. 1.4.3 The working party will be formed from members of relevant key professional bodies (such as the Personal Finance Society, the Jersey Bankers Association and the Chartered Institute for Securities and Investment), Jersey Finance Limited, and direct Industry representatives together with representatives from the Commission. 1.4.4 Do you consider the proposed members of the working party adequately capture all the relevant stakeholders? If not, please identify any stakeholders that you feel are not represented. 1.4.5 Where the working party discussions, and responses to this Position Paper, identify necessary amendments to the Investment Business regulatory framework, which are currently anticipated to include changes to the IB Codes and the Guidance Note: Professional Qualifications (Investment Business), the Commission will consult on the detailed amendments through publication of a Consultation Paper. 1.5 Timetable 1.5.1 The Commission intends that any amendments to the regulatory framework, as a result of the RFA will take effect from 1 January 2014. 1.5.2 The Commission considers this to be a reasonable timeframe as it believes that the Commission s position, as set out in this Position Paper, is widely anticipated by Industry following: 1.5.2.1 the Dear CEO letter 4, issued on 6 April 2011 to all registered persons registered to conduct Investment Business; 1.5.2.2 the statement of intent, with respect to the RDR, set out within the Commission s Annual Report 2010 5 ; and 4 Available from the Commission website: http://www.jerseyfsc.org/pdf/dear%20ceo_6_april_2011_investment%20business.pdf 5 Available from the Commission website: http://www.jerseyfsc.org/pdf/annual_report_2010.pdf. The statement of intent is included in the Director General s Report. 8 of 34 ISSUED AUGUST 2011

Executive Summary 1.5.2.3 presentations to key Industry bodies (the Personal Finance Society and the Chartered Institute for Securities and Investment) in April and October 2010 respectively. 1.5.3 Do you consider that the timeframe for introduction of the amendments resulting from the RFA is reasonable? If not, please provide further detail, including an indication of the timeframe that you consider reasonable. REVIEW OF FINANCIAL ADVICE 9 of 34

2 The Commission 2.1 Overview 2.1.1 The Commission is a statutory body corporate established under the Financial Services Commission (Jersey) Law 1998, as amended (the Commission Law ). It is responsible for the supervision and development of financial services provided in or from within Jersey. 2.2 Commission s functions 2.2.1 The Commission Law prescribes that the Commission shall be responsible for: 2.2.1.1 the supervision and development of financial services provided in or from within Jersey; 2.2.1.2 providing the States, any Minister or any other public body with reports, advice, assistance and information in relation to any matter connected with financial services; 2.2.1.3 preparing and submitting to the Minister recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure; 2.2.1.4 such functions in relation to financial services or such incidental or ancillary matters: as are required or authorised by or under any enactment, or as the States may, by Regulations, transfer; and 2.2.1.5 such other functions as are conferred on the Commission by any other Law or enactment. 2.3 Guiding principles 2.3.1 The Commission s guiding principles require it to have particular regard to: 2.3.1.1 the reduction of risk to the public of financial loss due to dishonesty, incompetence, malpractice, or the financial unsoundness of persons carrying on the business of financial services in or from within Jersey; 2.3.1.2 the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters; 2.3.1.3 the best economic interests of Jersey; and 2.3.1.4 the need to counter financial crime in both Jersey and elsewhere. 10 of 34 ISSUED AUGUST 2011

3 Background to the Review of Financial Advice Proposals 3.1 FSA Retail Distribution Review 3.1.1 The RDR is a key part of its consumer protection strategy. It has been proposed in an effort to reduce the risks of significant bias from remuneration structures which, when combined with the highest professional qualifications, should limit the potential for mis-selling, enable more sustainable businesses and ultimately increase client confidence in the investment business sector. 3.1.2 It is the Commission s view that the FSA s proposals as set out in 1.2.1 of this Position Paper will have a direct impact on Jersey s investment business sector and its clients; given that many local businesses have strong links to the UK investment product market. 3.1.3 Full details of the RDR proposals can be found on the FSA website. 6 3.2 Commission response to the RDR 3.2.1 The Commission considers that many of the RDR proposals would contribute to the fulfilment of the Commission s guiding principles, as detailed under paragraph 2.3 above. 3.2.2 In the past four years, the Commission has carried out two mystery shopping exercises on the suitability of investment advice and the sales process provided by investment employees; the second of which was completed in 2010. 3.2.3 Following the second mystery shopping exercise, the Commission was encouraged to note that there had been a marked improvement in the number of firms sending out suitability letters and providing clear and customer friendly sales literature compared to the mystery shopping exercise undertaken in 2007. The 2010 findings, however, showed that there are still some areas for improvement in the investment advice process, in particular, transparency regarding fees, charges and commissions; and comprehensively assessing the customer s complete financial position and risk profile. 3.2.4 As a result the Commission is responding to the RDR by launching its Review of Financial Advice. 3.2.5 The Commission has considered each of the four strands of the RDR and is responding accordingly. 6 Available on the FSA website: http://www.fsa.gov.uk/pages/about/what/rdr/index.shtml REVIEW OF FINANCIAL ADVICE 11 of 34

Background to the Review of Financial Advice Proposals 3.2.6 The Commission considers that a number of the FSA s proposals are already appropriately addressed under Jersey s existing regulatory framework. For example, the RDR involves the introduction of a fundamental distinction between independent advice and restricted advice. The Commission considers that this aspect of the RDR is already sufficiently addressed under paragraph 4.5 of the IB Codes which requires a registered person to inform its client of the nature and extent of any restriction in relation to the advice it provides. However, it is the Commission s view that certain aspects of the FSA s proposals such as increasing professional standards of all retail investment advisers and addressing the potential for adviser remuneration (initial and trail commissions) to bias advice would serve to enhance Jersey s regulatory framework. 3.2.7 The overarching aim of the RFA is to increase trust and confidence in the investment business industry and encourage greater transparency in this sector. The transparency requirements (rules relating to remuneration) will require investment firms to clearly demonstrate that they are putting their client first and acting in the client s best interests at all times. 3.2.8 The Commission anticipates that increased professional standards for investment advisers and changes to the way in which advisers are remunerated for providing advice will go some way to addressing the above areas for improvement in the investment advice process. 12 of 34 ISSUED AUGUST 2011

4 Increased Professional Standards for Investment Employees 7 4.1 Aim and Overview 4.1.1 One of the key objectives of both the RDR and the RFA is to deliver standards of professionalism that inspire confidence and build trust in the investment business Industry. 4.1.2 It is the Commission s intention to largely replicate the FSA s proposals on professional standards. 4.1.3 The Commission considers that raising professional standards for investment employees is in line with two of the guiding principles which it must have regard to as it undertakes its functions (see chapter 2 of this Position Paper). The Commission believes that increased professional standards will contribute to the reduction of risk to the public of financial loss due to incompetence, dishonesty or malpractice of persons carrying on the business of financial services in or from within Jersey and such measures will protect and enhance the reputation of Jersey in commercial and financial matters. 4.2 RDR Proposals 4.2.1 The FSA expects that the new professionalism requirements will improve the level of consumer confidence and build general levels of trust in the retail investment sector. This will be done through four strands and by 31 December 2012 retail investment advisers will need to: 4.2.1.1 subscribe to a code of ethics; 4.2.1.2 hold an appropriate qualification, including any qualification gap fill 8. 4.2.1.3 carry out at least 35 hours of continuing professional development ( CPD ) a year; 4.2.1.4 hold a Statement of Professional Standing ( SPS ) from an accredited body 9. 7 An individual that meets the definition of an investment employee as provided in the Investment Business Fees Notice published on the Commission s Website: http://www.jerseyfsc.org/the_commission/fees_notices/index.asp 8 Qualification gap fill is Continuing Professional Development (CPD) carried out specifically to fill the gaps between the content of qualifications that are not fully RDR compliant and the new RDR standards. 9 A body authorised by the FSA to issue Statements of Professional Standing. REVIEW OF FINANCIAL ADVICE 13 of 34

Increased Professional Standards for Investment Employees 4.3 Commission RFA Proposals Headlines 4.3.1 With regards to the FSA s four strands of increasing professional standards (4.2.1 above), it is the Commission s intention to largely replicate the FSA s proposals albeit that in two of the four areas this will not require significant change. 4.3.1.1 Investment employees will be reminded of the requirements in the IB Codes for registered persons, and their staff, to conduct their business with integrity thereby addressing the similar provision the FSA is introducing for retail investment advisers to subscribe to a code of ethics. 4.3.1.2 Whilst there is already a requirement for all investment employees to be appropriately qualified it is proposed that the Commission will raise the standard of the qualification requirements in line with the FSA proposals. 4.3.1.3 All investment employees are already required to complete 35 hours CPD under section 3.4 of the IB Codes, therefore, no changes are necessary in this respect albeit the Commission may look to refine the CPD requirements to incorporate certain structured learning outcomes. 4.3.1.4 It is proposed that the Commission will introduce a requirement for investment employees to hold a SPS from an accredited body. This is likely to include a statement that they have adhered to that body s standards of ethical behaviour complimenting the proposals of 4.3.1.1 above. 4.4 Commission RFA Proposals - Details 4.4.1 From 1 January 2014, it is the Commission s intention to raise the benchmark qualification level for all investment employees to the equivalent of level 4 QCF (Qualifications and Credit Framework) or level 4 NQF (National Qualification Framework) (QCF is gradually replacing NQF) 10. 4.4.2 The QCF is a unit-based framework and is designed to operate in a manner which is inclusive, responsive, accessible and non-bureaucratic. The following is provided to assist in understanding the level of difficulty of a level 4 QCF qualification: 4.4.2.1 GCSE grades between A* and C would be considered level 2; 4.4.2.2 GCE A levels would be level 3; 10 Further information on the Qualifications and Credit Framework can be found in the following document, which is published by the Office of Qualifications and Examinations Regulation (the English body that, in conjunction with its Welsh and Northern Ireland partners has the statutory responsibility for regulating external qualifications): http://www.ofqual.gov.uk/files/regulatory_arrangements_qcf_august08.pdf 14 of 34 ISSUED AUGUST 2011

Increased Professional Standards for Investment Employees 4.4.2.3 the first year of a degree is considered to be level 4; and 4.4.2.4 a PhD is considered to be level 8. 4.4.3 The Commission appreciates that raising qualification standards alone may not make for a competent investment employee. However, the proposed enhanced standards of professionalism will encompass a combination of qualifications, behaviours and practices, which, it is hoped will bring about a step-change in professional standards for investment employees providing investment advice. 4.4.4 The Commission believes that increased qualification standards and levels of professionalism are a key component in increasing trust and confidence in the investment advice sector. 4.4.5 The Commission appreciates that the circumstances of each investment employee will be different; therefore, the attainment of the increased professional standards will be unique to each individual. 4.4.6 Depending on the individual s circumstances, it may be possible to meet the proposed increased qualification requirements without attaining a further professional qualification; for example, by completing additional CPD or attending an oral or work-based assessment which some professional bodies offer. 4.4.7 The Commission understands that various resources are available (such as gap filling tools provided by professional bodies) to allow investment employees to assess whether the qualification(s) that they hold will be sufficient to meet the new standards or whether additional actions will be needed to attain the required standard. 4.4.8 The Commission is aware that the FSA has issued a list of appropriate qualifications (within PS 11/1 11 ) which details those qualifications which meet the full qualification requirement up to and after the FSA s deadline of 1 January 2013. The list also highlights those qualifications which meet the full requirements when combined with additional CPD (or qualification gap fill). 4.4.9 As part of the RFA the Commission intends to update its Guidance Note: Professional Qualifications (Investment Business) to reflect the increased professional standards. 4.4.10 The Commission also intends to amend the information requested as part of the Investment Business Employee Information Form (Senior Management and Investment Employee Upload) to capture whether an investment employee s qualification meets the required standard and/or gap fill has been completed. The form will also be amended to request the capacity in which the investment employee acts, for example, whether they provide investment advice, deal in investments, manage investments, or a carry out a combination of these activities. 11 Available from the FSA website: http://www.fsa.gov.uk/pubs/policy/ps11_01.pdf REVIEW OF FINANCIAL ADVICE 15 of 34

Increased Professional Standards for Investment Employees 4.4.11 As the requirements for each individual to attain the increased professional standards will be different, any queries regarding qualifications should, in the first instance, be directed to an individual s HR department, training and competence manager, compliance officer or their examination provider. Where the above avenues have been exhausted, individuals may seek clarification from the Commission in writing. 4.4.12 The onus will be on the registered person to ensure that their investment employees meet the new increased professional standards. 4.4.13 In addition to attaining higher professional qualifications standards, the Commission proposes that investment employees: 4.4.13.1 will need to hold a SPS issued by an accredited body 12 ; 4.4.13.2 may need to complete some qualification gap fill depending on the qualifications held; and 4.4.13.3 be clear about the integrity and competence requirements placed on a registered person by the IB Codes. 4.4.14 Do you think it is appropriate for the Commission to raise the standards of qualification requirements for investment employees? If not, please provide details of other options to ensure investment employees achieve appropriate standards of professionalism. 4.4.15 Do you think the deadline of end of 2013 is a reasonable timeframe for investment employees to be able to attain the increased professional standards? If not please provide details of why the proposed timeframe is unreasonable and provide an indication of what you consider to be reasonable. Who do the proposals affect? 4.4.16 It is anticipated that the increased professional standards will apply to investment employees of registered persons who provide investment advice (as defined by Article 2(2)(c) of the FS(J)L). 4.4.16.1 This definition captures investment employees of registered persons holding a class C or class D Investment Business registration. 4.4.16.2 Investment employees of registered persons that only hold a class A and/or class B investment business registration (dealing in investments and managing investments) will fall outside the scope of these requirements. 4.4.17 The requirements pertaining to indirect investment employees will not change. 12 The Commission intends to place reliance on the FSA requirements with respect to the SPS and it will not be separately accrediting professional bodies. 16 of 34 ISSUED AUGUST 2011

Increased Professional Standards for Investment Employees 4.4.18 To clarify, any investment employees who are not directly employed by the registered person will fall outside of the scope of these proposals. They will, however, still be required to adhere to their local regulatory and training and competency requirements. The Commission will still expect to receive, on an annual basis, confirmation that all such investment employees are competent to carry out the investment business duties assigned to them in relation to the registered person. 4.4.19 The Commission understands that certain registered persons provide specialist advice only, for example, advice in relation to some forward foreign exchange transactions and commodities trading advice. 4.4.20 With regard to specialist areas of advice, the Commission may consider variance requests on a case-by-case basis, however, it should be noted that such variations will not be widely available and will only be applied in limited circumstances. 4.4.21 Do you think that certain specialist areas should not be subject to the increased professional standards of the RFA? If so, what areas should fall outside of this scope? 4.4.22 Do you envisage any logistical or practical problems arising from the introduction of the increased professional standards? If so, what problems do you envisage? 4.4.23 The FSA has clearly indicated that it will not allow any form of grandfathering 13 in relation to the proposals for increasing professional standards. 4.4.24 It is the Commission s view that investment employees should have been keeping their knowledge up-to-date as set out in the IB Codes. For those that have been doing this, taking an exam, if necessary, should be relatively straight forward. In any event, not permitting grandfathering would ensure a level playing field for all investment employees. 4.4.25 Do you think that the Commission should allow certain current investment employees that do not meet the increased professional qualifications to continue to give investment advice on the basis of relevant experience i.e. allow some grandfathering? If yes, please explain the criteria which you believe should be applied to identify these individuals. 4.4.26 The Commission recognises that the current professional qualifications which are available are mainly UK-centric, especially in the area of regulatory requirements and tax. However, whilst the UK and Jersey regulatory frameworks differ at the detailed level, many of the principles and concepts are broadly similar and relevant especially in cases where investment employees have UK based clients. 13 Grandfathering in this context means allowing some current investment employees to be allowed to continue to give investment advice by virtue of their past experience, despite not holding all relevant qualifications that a new investment employee would require. REVIEW OF FINANCIAL ADVICE 17 of 34

Increased Professional Standards for Investment Employees 4.4.27 The possibility of a Jersey investment industry-specific professional qualification has been considered, however, it should be noted that as the financial services regulatory body, the Commission would not ordinarily become involved in drafting or administrating professional qualifications. However, the Commission may consider providing comment on the syllabus of any such professional qualification where appropriate. 4.4.28 It should also be noted that any Jersey-specific professional qualification (if a module) would probably only account for a small percentage of the credits that many investment employees will need to attain to reach QCF level 4. 4.4.29 Do you think that a Jersey-specific professional qualification would be beneficial and should the attainment of such a professional qualification form part of the professional standards requirements? If so, do you have any suggestions as to who should be responsible for drafting and administrating a Jersey-specific professional qualification? 4.4.30 Do you think that raising the professional standards will have a negative impact on the investment advisory industry s ability to attract new investment employees? If so, please provide details of your concerns. Gap Fill 4.4.31 As previously indicated, in certain circumstances an individual will be able to bring their existing qualification(s) up to level 4 QCF standard without attaining a further professional qualification; for example, by completing CPD gap fill or attending an oral or work-based assessment which some professional bodies offer. 4.4.32 As referenced in 4.4.8, the Commission is aware that the FSA has issued a list of appropriate qualifications (within PS 11/1) including a list of existing or legacy qualifications that meet the higher level exam requirements. 4.4.33 Individuals should assess whether they hold a qualification that meets the level 4 QCF standard. Where such qualification is not held, the investment employee will need to benchmark their qualification against the new requirements to ascertain whether a gap filling exercise can be undertaken or whether a new qualification is required. 4.4.34 The FSA has issued criteria against which it will measure a professional body that applies for accreditation and on 6 June 2011 published a list of the first six professional bodies that it proposes to recognise as an accredited body 14. The majority of the proposed accredited bodies have produced gap fill templates which will help the investment employee identify any learning outcomes to be completed in order to demonstrate attainment of the increased professional standard. 14 The six professional bodies are: the CFA Society of the UK; the Chartered institute for Securities and Investment; the Chartered Institute of Bankers in Scotland; the Chartered Insurance Institute; the Institute of Financial Planning; and the Institute of Financial Services. 18 of 34 ISSUED AUGUST 2011

Demonstrating Ongoing Professionalism Increased Professional Standards for Investment Employees 4.4.35 The IB Codes in their current form stipulate that CPD is a compulsory requirement for all investment employees with a minimum of 35 hours of CPD to be undertaken each year. The Commission may look to refine the CPD requirements to incorporate certain learning outcomes. 4.4.36 Under the Commission s proposals, investment employees will be required to obtain and hold an annual SPS as evidence that they are, amongst other things, meeting the required standards of keeping their knowledge up-to-date and adhering to their accredited body s standards of ethical behaviour. 4.4.37 Do you think that the requirement to hold a SPS should be introduced in Jersey? If not, please detail an alternative method by which an investment employee could demonstrate meeting the required standards. 4.4.38 Do you think that the requirement for investment employees to hold a SPS will provide clients with greater confidence when dealing with advisers? If not, please provide alternative actions that could be undertaken to address client confidence. 4.4.39 Do you think that the requirement for investment employees to hold a SPS will help to visibly enhance professional standards within the investment advisory sector of the Jersey investment business industry? If not, please provide details of why not? REVIEW OF FINANCIAL ADVICE 19 of 34

5 Independent and Restricted Advice 5.1 Aim and Overview 5.1.1 The FSA is setting a new standard for independent advice, aimed at ensuring that advice is genuinely independent and considers a broad range of products. 5.1.2 This means that retail investment advisers will offer either independent advice which is free from restrictions or bias and which reviews the market comprehensively or alternatively, restricted advice, having explained the nature of any restrictions to their client. 5.2 RDR Proposals 5.2.1 With regards to service description the aim is to ensure that advice is genuinely independent and advisers consider all retail investment products when making a recommendation. The FSA breaks down advice into two categories, independent and restricted. 5.2.2 If a firm claims to be independent from 31 December 2012, it will need to: 5.2.2.1 consider a broader range of products; 5.2.2.2 provide unbiased and unrestricted advice based on a comprehensive and fair analysis of the relevant market; and 5.2.2.3 inform its clients before providing advice, that it provides independent advice. 5.2.3 If a firm gives advice on products from a limited number of providers, or only considers certain types of products, it will need to describe itself as restricted. Firms must disclose in writing and orally, before providing advice, that they provide restricted advice and explain the nature of the restriction. 5.3 Commission RFA Proposals 5.3.1 The Commission considers that this aspect of the RDR is already appropriately addressed under paragraph 4.5 of the IB Codes which requires a registered person to inform its client of the nature and extent of any restriction in relation to the advice it provides. Accordingly, the Commission does not intend to make any changes to this aspect of our regulatory framework. 5.3.2 However, the Commission does intend to increase its supervisory scrutiny in this area and this will be one of the focal points of the on-site examinations of investment businesses going forward. 20 of 34 ISSUED AUGUST 2011

Independent and Restricted Advice 5.3.3 Do you agree that paragraph 4.5 of the IB Codes sufficiently addresses the FSA s proposals in relation to independent and restricted advice? If not, please provide details of why not. REVIEW OF FINANCIAL ADVICE 21 of 34

6 Remuneration for Investment Advice 6.1 Aim and Overview 6.1.1 One of the key objectives of both the RDR and the RFA is to address the potential for remuneration to distort client outcomes and to help ensure that the client is made aware of all associated fees and charges. 6.1.2 At present, registered persons that give advice on investments face the prospect of earning different amounts of money depending on which particular product provider and product they recommend. This creates a potential conflict of interest that can be damaging to clients and undermine trust in the investment business sector. 6.1.3 The Commission considers that amending the basis for remunerating registered persons for investment advice is in line with two of the guiding principles which it must have regard to as it undertakes its functions (see chapter 2 of this Position Paper). The Commission believes the proposed amendments will contribute to the reduction of risk to the public of financial loss due to incompetence, dishonesty or malpractice of persons carrying on the business of financial services in or from within Jersey and such measures will protect and enhance the reputation of Jersey in commercial and financial matters. 6.2 RDR Proposals 6.2.1 The new RDR rules on adviser remuneration, which come into force on 31 December 2012, will make the process of remuneration more transparent, so consumers will know exactly what they are paying for. 6.2.2 The FSA s rules will mean consumers can be confident that the advice they receive is not biased by commission, as the adviser s remuneration will be agreed between the adviser and consumer instead of being determined by a product provider. 6.2.3 The new adviser remuneration rules mean that all firms that give retail investment advice (such as banks, independent financial advisers, wealth managers, stockbrokers and product providers on their own products) will have to: 6.2.3.1 set their own charging structure; 6.2.3.2 have a charging structure based on the level of service they provide; 6.2.3.3 disclose charges to consumers upfront, using some form of price list or tariff; and 6.2.3.4 deliver an ongoing service when an ongoing fee is levied, unless the product is a regular payment one. 22 of 34 ISSUED AUGUST 2011

Remuneration for Investment Advice 6.3 Commission RFA Proposals Headlines 6.3.1 The Commission proposes that from 1 January 2014, registered persons giving investment advice should only be paid for the advice and related services that they provide through adviser charges. This means that such registered persons should be remunerated by charges that are explained to the client upfront and agreed with the client, rather than by commissions set by product providers, which are set so as to secure distribution of their product (including so-called soft commissions, benefits provided in non-monetary forms). 6.3.2 Whilst the Commission intends to introduce the changes to advisory remuneration by 1 January 2014, the Commission is aware that the FSA s requirements will come into force a year before this date. This may mean that product providers will seek to change their commission arrangements with Jersey-based registered persons undertaking class C and class D investment business in advance of the Commission s 2014 deadline. 6.3.3 The proposals will not allow a registered person to receive commission (including soft commission) offered by product providers, even if they intend to rebate these payments to the client. This proposal aims to help eliminate the potential for product provider commission to bias investment advice, or to undermine client trust which can arise where product providers set the remuneration payable by way of commission receivable by registered persons. 6.3.4 It should be noted that under the Jersey Investment Business regulatory framework, the requirement for a registered person to disclose all associated fees and charges to their client has been in place since 2001, and was updated in 2008 (paragraph 4.6 of the IB Codes). 6.3.5 Do you agree with the Commission s proposals in respect of adviser charges? If not, please provide further detail. 6.3.6 Do you envisage any logistical or practical problems arising from the proposed changes to adviser charging? If so, what problems do you envisage. 6.4 Commission RFA Proposals - Details 6.4.1 Regardless of whether a registered person is remunerated directly by a client through a fee (for example, by cheque or direct debit) or is paid by deduction from a client s investments, these charges should reflect the services being provided to the client, not the particular product provider, or product, being recommended. REVIEW OF FINANCIAL ADVICE 23 of 34

Remuneration for Investment Advice 6.4.2 All registered persons have a responsibility to act in the best interests of their clients and, for registered persons that offer investment advice, this responsibility means making the most suitable recommendation for the client (including, where appropriate, recommending not to buy a product at all or to take alternative action). Where registered persons offer restricted advice, relating only to a limited range of products or product providers, they must still make their recommendations in their clients best interests. For this reason the Commission proposes to apply its Adviser Charging requirements to all registered persons that give advice on investments. 6.4.3 The Commission will not be prescribing the basis upon which the registered person can charge for their services (for example, by a fixed fee, hour rate or percentage of funds invested), however, the Commission does expect the registered person to set and operate their own charging structures responsibly and transparently. 6.4.4 In summary, the Commission proposes the following changes in relation to remuneration for investment advice: 6.4.4.1 the registered person will be required to set their own charges for their services, as they will no longer be able to receive commission set by product providers; 6.4.4.2 the registered person will be required to have charging structures based on the level of service they provide, rather than the particular provider or product they recommend; 6.4.4.3 the registered person will continue to be required to disclose those charges to clients upfront, in writing; 6.4.4.4 on-going charges should only be levied where an on-going service has been agreed with the client (except for charges for advice on regular contribution products); and 6.4.4.5 product providers will be unable to offer commission to registered persons. 6.4.5 It should be noted that under the Jersey Investment Business regulatory framework, the requirement for a registered person to disclose all associated fees and charges to their client has been in place since 2001. Paragraph 4.6 of the IB Codes currently states the following: 6.4.5.1 A registered person is required to demonstrate in writing that the client has been made aware of all associated fees and charges including commissions (both initial and recurring) and any payments to or from third parties (such as introductory fees or commission sharing arrangements) - effectively a no surprises policy. This information must be disclosed prior to transactions being effected and the information concerning commissions should include either a monetary or percentage figure. This information must be provided to a client upon request, and the client notified of this fact, should it not be possible or practicable to provide it at an earlier stage. Any implications in relation to cancellation, 24 of 34 ISSUED AUGUST 2011

Remuneration for Investment Advice Ongoing adviser charges failure to meet premiums and the ability and effect of making changes should also be made clear to the client. 6.4.6 Ongoing charges should only be levied where a client is paying for ongoing services, such as a performance review of investments (except in the circumstances detailed under paragraph 6.4.9 below). The registered person should clearly confirm the details of the ongoing service, any associated charges and how the client can cancel this service. This should be confirmed to the client in writing. 6.4.7 It should be clear to the client what services they are entitled to receive in exchange for ongoing payment. 6.4.8 The registered person will need to have robust systems and controls in place to ensure that their clients receive the ongoing services that they have committed to. 6.4.9 The Commission will permit a registered person to levy an ongoing charge without necessarily providing an ongoing service where the client wishes to pay for the cost of initial advice by way of regular contributions. This exception seeks to preserve access to advice for a client who may not be in a position to pay for advice at the outset. 6.4.10 Therefore, for services relating to regular contribution products, a registered person could operate a charging structure where the client pays over time, provided that this is made clear to the client before the service is provided. Trail Commission 6.4.11 It is the Commission s intention that registered persons will not be able to receive commission on new sales of investment products from January 2014 onwards. However, registered persons will still be able to receive trail commission from 2014 onwards where the investment advice is given and a contract is set up before the RFA deadline of 31 December 2013. 6.4.12 Trail commission may cease to be eligible where: 6.4.12.1 A product is amended post-2014 to the extent that it becomes a new product. 6.4.12.2 The client is required to sign a new product contract post-2014. 6.4.13 In the circumstances where a client changes the registered person from whom it receives investment advice, re-registration of trail commission will be allowed where it is permitted by the investment contract between the product provider and the previous registered person that acted as investment adviser. The client must be told when a registered person applies for re-registration and informed of the amount of trail commission being transferred. The new registered person will also be required to provide the client with an ongoing REVIEW OF FINANCIAL ADVICE 25 of 34

Remuneration for Investment Advice service in return for the trail commission, regardless of whether or not the original contract allowed for this as a condition of transfer. 6.4.14 The Commission considers that there is a potential danger that investment employees may encourage their clients to enter into transactions with unnecessary frequency, which may be against the client s best interest with the intent of generating commissions in the period before the RFA is implemented. This practice would be in contravention of paragraphs 2.10 and 2.11 of the current IB Codes. 6.4.15 The Commission will be increasing its supervisory scrutiny in this area and this will be one of the focal points of on-site examinations of investment businesses going forward. 6.4.16 Do you agree with the Commission s proposals with regards to trail commission? If not, do you have any suggestions for possible alternative solutions? Sales of long-term insurance contracts 6.4.17 The Commission intends to allow firms who elect to sell long-term insurance contracts (as defined as investments under Schedule 1 of the FS(J)L) to continue to do so after the RFA is implemented without having to apply the changes on adviser charging to these sales. 6.4.18 This mirrors the FSA proposals and following their stance will ensure that local consumers will continue to have access to long-term insurance contracts. It is accepted that clarity will be needed around the definition of long-term insurance in Jersey compared to the FSA s definition of pure protection. 6.4.19 The requirements surrounding remuneration transparency for the above products would still apply as is currently the case under paragraph 4.6 of the IB Codes. 6.4.20 Do you agree that a registered person selling long-term insurance contracts (as defined under Schedule 1 of the FS(J)L) should fall outside of the advisory charging proposals? If not, please provide details of why not. 26 of 34 ISSUED AUGUST 2011

7 Financial Resource Requirements 7.1 Aim and Overview 7.1.1 The final element of the RDR proposal relates to higher financial resource requirements for all personal investment firms. 7.2 RDR Proposals 7.2.1 In the UK, since 1994 personal investment firms (smaller advisers) have only been required to hold ten thousand pounds of capital ( 10,000). From the end of 2013 all personal investment firms, will be required to hold capital resources which are the higher of: 7.2.1.1 twenty thousand pounds ( 20,000); or 7.2.1.2 three months of their annual fixed expenditure. 7.3 Commission RFA Proposals 7.3.1 The Commission considers that this aspect of the RDR is, to some extent, already appropriately addressed as section 5 of the IB Codes requires a registered person to maintain, and be able to demonstrate the existence of, adequate financial resources and insurance. Accordingly, the Commission does not intend to make any changes to this aspect of our regulatory framework. 7.3.2 The Commission s requirements will remain as: 7.3.2.1 For registered persons undertaking class D investment business paragraph 5.4 of the IB Codes provides that they must maintain a minimum of 10,000 paid up share capital. 7.3.2.2 For registered persons undertaking class C investment business paragraph 5.3 of the IB Codes provides that they must maintain a minimum of 25,000 paid up share capital. 7.3.3 Given the plethora of other changes outlined above, and the current economic circumstances, it is felt that it is not the appropriate time to increase the share capital requirements for class D investment businesses, although the Commission shall keep this position under review. 7.3.4 Do you believe that the financial resource requirements of the RDR are sufficiently addressed under section 5 of the IB Codes? If not, please provide details of any suggested enhancements that you feel are required. REVIEW OF FINANCIAL ADVICE 27 of 34

8 Additional Areas for Consideration 8.1 Client Classification 8.1.1 As noted earlier in this Position Paper the RDR is a key part of the FSA s consumer protection strategy and is aimed directly at the retail investment market. The UK market differentiates between retail, professional and eligible counterparties categories that were introduced as a result of a European initiative: the Markets in Financial Instruments Directive ( MiFID ), which came into effect on 1 November 2007. A client s classification determines the level of protection afforded them. 8.1.2 In early 2007, in preparation for MiFID s introduction in Europe, the Commission considered whether a client classification regime was necessary in Jersey and consulted informally with Industry on the introduction of such a regime. At this time Industry and the Commission agreed that a client classification regime was not required in Jersey. Consequently, Jersey s current investment business framework does not distinguish between retail and professional clients. 8.1.3 As a result of not having a client classification regime the Commission s position, as set out in this paper, will apply to all investment advisory businesses, whichever types of clients they provide advice to. The Commission acknowledges that the application of its position to all advisers regardless of who they advise will take the FSA s proposals a stage further. 8.1.4 The Commission believes this position is preferable to the cost (to both the Commission, and hence Industry through increased fees, and Industry itself directly) of introducing and administering a client classification regime similar to that employed by the FSA. It is also difficult to justify that an investment employee should be qualified to provide advice in relation to a relatively small sum of money but not be qualified when giving advice in relation to a larger sum of money. 8.1.5 It is intended that our requirements will apply regardless of the location of the client that the registered person is advising. 8.1.6 Do you agree with the Commission s position that a client classification regime is unnecessary in the Jersey investment business framework? If not, please explain how the benefits of introducing a client classification regime will outweigh the costs. 28 of 34 ISSUED AUGUST 2011