PS10/06: Distribution of retail investments

The FSA will allow product providers to continue to facilitate deductions under adviser charging.

Independent advice

Independent advice will require the adviser to consider a much broader range of retail investments (excluding Deposits and Direct Market Investments) for a given relevant market than under the current definition of independent advice. The FSA have provided clarification of what constitutes a relevant market - this is much wider than expected and could have a significant impact on many firms. For example, a 'pension specialist' who only advises on pension products could not hold themselves out to be independent as other forms of products may be more suitable for the customer.

An exception of this is that advisers can describe themselves out to be independent when only offering advice in relation to an individual's membership of a Group Personal Pension.

Restricted advice

Restricted advice may be offered by advisers, with requirements to disclose both in writing and verbally the nature of the restriction. However, there is no requirement to use standard wording.

Basic advice is confirmed to remain outside of the adviser charging regime although a new requirement will be introduced to describe this as restricted advice. Non advised services will also remain outside of the adviser charging regime.

The FSA have confirmed that they will introduce adviser charging including the requirement to separate initial and ongoing charges.

The FSA have not at this stage provided detailed guidance on how advisers should go about establishing their pricing tariff but will be discussing this with trade bodies over the coming months.

Where an adviser recommends that a customer uses the services of a Discretionary Asset Manager the adviser is banned from taking commission from the Asset Manager and will have to apply the principles of adviser charging.

The FSA have clarified that their rules on adviser charging are already intended to mean that advisers should not receive any other income from other sources, including DIF's.

The FSA have introduced a new requirement for advisers to consider whether the cost of providing advice to a client is likely to be of benefit to the customer when the cost of the advice being provided is taken into account. This rule may well have broader significance than just to the specific reference to credit when adviser charging is implemented!

The FSA have also confirmed that the approach to legacy business in using a cut of date of 31/12/12 will be implemented. This means that business written before this date can continue to pay renewal commission and initial commission on top ups.

However, it would not be allowable to renegotiate commission terms or apply adviser charging for business on which commission has already been paid. The FSA will be monitoring the activity of switching business, particularly to platforms, to circumvent this.

There will be a ban on negative charges effectively capping allocation rates to 100% before deduction of adviser charges.

The FSA will not require product providers to monitor adviser's use of adviser charging, accepting that product providers should not be responsible for deciding what constitutes an acceptable adviser charge. However, product providers must obtain and validate clients' instructions on adviser charges deducted from products.

The current practice of factoring commission will end. However, for regular premiums, initial advice may be paid for through product deductions over a period of time. For single premiums initial advice must be paid at the point of sale.

The FSA maintain that rebating of charges to consumers largely relates to platforms - this will be included in the forthcoming consultation on platforms. However, they have reiterated their intention to bring this practice to an end since this contradicts the principle of adviser charging.

The FSA have also set out their understanding of the various taxation issues of adviser charging including the application of VAT under the intermediary services exception and confirmed they are working with HMRC on the Pension and Annuity taxation issues. The FSA have confirmed that adviser charging deductions will not be an allowable expense for product providers as currently is the case for commission.

In confirming that non advised services will remain out of scope at this stage, the FSA have reiterated their intention to keep this under review during the implementation of RDR. The FSA have addressed the potential loop hole of using non advised services alongside advised services. In such cases adviser charging will apply to the non advised service as well as the advised service.

The FSA have reiterated their intention to continue to closely monitor the Product Sales Data on a quarterly basis to look for evidence of any worrying trends and will also undertake such monitoring through regular supervision meetings.

Post the implementation date, the FSA's focus will shift to ensuring compliance with RDR, checking the practical aspects are being complied with by firms and conducting a post implementation review.

The FSA have confirmed that the minimum standard of qualification will be QCF level 4.