The UK’s “Retail Distribution Review”
description
Transcript of The UK’s “Retail Distribution Review”
The UK’s“Retail Distribution
Review”
Il Salone del Risparmio18 April 2013
Julie Patterson, Director, Authorised Funds
It covers four areas
Minimum adviser qualifications Capital requirements for advice
firms Disclosure of nature of advice Rules on “inducements” paid to or
received by advisersHowever, the scope of the review is
growing
2
When?New rules on payments to advisers
took effect from 1 January 2013Rules expected very soon on payments
from product providers to “platforms”FCA expected to consult on whether
the rules on payments to advisers should be extended to execution-only brokers, wealth managers and insurance companies
First, the “good”….
Covers all types of advice/adviser
Independent = based on a comprehensive and fair analysis of the relevant market; and “unbiased and unrestricted”
Restricted = not independent, ie if the adviser considers products only from a limited number of product providers or only products of a certain type
There is also an option of “simplified advice, where pre-scripted questions are used. But this is still advice and is still caught by the new rules
5
Covers all types of RIPs
Retail Investment Products (“RIPs”) are: Life policies Funds Personal pensions Certain closed-ended investment
companies “Structured capital-at-risk products” Other products offering exposure to
underlying financial assets in a packaged form
6
Final rules for AdvisersMust make certain disclosures to the client
about the nature of the service and chargesCannot solicit or accept commissions (even if
passed to clients)Must have an appropriate charging structure
for clients May not vary according to product type or provider May not be influenced by provider “facilitating”
paymentMay not receive payments spread over time,
unless there is an ongoing service (agreed by the client)
Note: the rules do not apply where the client is outside the UK
7
Final rules for Product Providers
The rules apply even if the retail client is not a direct client of the product provider
The rules do not apply if the client is outside the UK
Provider must not offer or pay any form of commission, remuneration or benefit
And must take reasonable steps to ensure a clear distinction between product charge and adviser charge
BUT..... 8
Moving to the “bad”…
“Legacy” InvestmentsThe new rules apply:only to new investments made after 1 January 2013but not if they are additional investments into an existing product and no new advice has been given
Everything else is “legacy” business and commissions can continue to be paid ad infinitum Also, if an insurance product was bought before end-2012 and if it allows investors to “switch” between underlying funds, then these switches are regarded as legacy (whereas switches between funds bought direct are subject to the new rules)
10
Final rules for Product Providers
A provider can “facilitate” the adviser’s charge for advice at the point of sale from the investment and can facilitate ongoing adviser charges “from the product”, provided it: Obtains and validates instructions from the retail
client Offers sufficient flexibility in the payments it
facilitates Does not pay out in advance or in a materially
different way from what the client has agreed
And there is an exemption for regular contribution products, including eg saving plans into funds
11
Further rules imminent…
Payments to “platforms” – the FCA proposes to stop payments out of product charges or by product providers
“Rebates” of fund charges in cash – the FCA wants to stop routine AMC rebates (ie retrocessions), even if they go to the investor
12
What this will mean for funds
INVESTOR ADVISER
Investments via platform account
Platform invests in fund
FUND(a new share
class with lower AMC)
FUND SUPERMARKET Client cash account
FUND MANAGER
Fund Manager does not know investor and “rebates”
banned, so adviser charge cannot efficiently be
facilitated
Investor will have to pay into cash account so that adviser can be paid
13
What about life/bank wrapped funds?Bank and insurance products are caught by the same rules, but they can “facilitate” payments to advisers
by reducing the value of the policy/investment
Platform invests in life and
structured products
ADVISERINVESTOR
Adviser charge facilitated via life or bank product
LIFE COMPANY/BANK
Platform facilitates payment to adviser, subject to agreement between adviser and client, by
reducing the amount of the insurance contract
Client cash account
LIFE/BANK PLATFORM
14
…and the insurer/bank can continue to negotiate rebates/retrocessions with fund
managers
Platform invests in life and
structured products
ADVISERINVESTOR
Adviser charge facilitated via life or bank product
FUND MANAGER
LIFE COMPANY/BANK
Platform facilitates payment to adviser, subject to agreement between adviser and client, by
reducing the amount of the insurance contract
Client cash account
Rebated AMC
Life Company/Bank invests in fund as principle (i.e. it is the beneficial owner of the fund units). Therefore, rebate of AMC
can be negotiated ,as adviser charging rules do not apply
LIFE/BANK PLATFORM
FUND
Life Company/Bank issues a product
backed by its holdings of fund units, which it
buys at a cheaper AMC
15
So, yet further FCA proposals…
The FCA accepted that investors ought to be able to benefit from lower product “prices” negotiated by wholesale purchasers such as platformsBut it believes a client cash account (with payments in and out in real money) would be confusing for investorsTherefore, it proposed a system of “unit rebates” instead
16
Which takes us to the ”ugly”
With unit rebates
INVESTOR ADVISER
1. Investments via platform
account
2. Platform invests in fund
FUND
AMC
FUND SUPERMARKET
FUND MANAGER
3. Platform (as a bulk buyer) is able
to negotiate an AMC rebate
6. Cash proceeds from unit redemptions used to pay adviser charge
18
4. Rebate must be used to buy extra units
5. Extra units purchased.
But also, units
redeemed to pay adviser
charge
What’s happening?
Platforms began to install systems to offer “unit rebates” (having previously installed systems to operate client cash accounts)
We still do not know for certain how platforms are to be paid
Meanwhile, HMRC have decided that any form of rebates to investors (whether in cash or in units) are taxable, including from legacy investments
Therefore, IMA continues in intensive dialogue with both the FCA and HMRC!
And so to Europe…
The impact on non-UK UCITS?
The FSA cannot impose requirements on non-UK UCITS or management companies
But the rules apply to UK advisers selling non-UK UCITS
Therefore, UK advisers cannot receive manager-determined retrocessions from EU UCITS
21
The proposed ban on inducements only to independent advisers will have widely
different effects around Europe
Note: much of the IFA business in the UK now comes through B2B platforms