Why has the Industry lost it’s voice?
Individuals such as I spend their Sunday afternoons analysing the responses to the Treasury Select Committee (TSC) regarding the Retail Distribution Review (RDR). Is this a constructive task, you may ask? Constructive perhaps not! Instructive yes! Let me share with you what I learned.
Of the 205 responses to the TSC which were made public only a small number of providers responded. Perhaps this was because they preferred to make their input via their trade bodies namely the ABI and ILAG, both of which put in such anodyne responses which could only flag up to the FSA that no one is going to mount a serious challenge to the RDR. The providers who did respond developed a common theme, there is not enough time and can we have some further clarity on simplified advice as, reading between the lines, we dearly would like to get involved in simplified advice, but we do not want to risk another stakeholder debacle, so let us have some more on the regulatory framework if you please. However the response from Lloyds/Scottish Widows was most instructive:
“5.6 The adviser charging proposals should be implemented. But HMT and HMRC must be fully engaged to provide absolute clarity regarding the income, capital gains and inheritance tax treatment of the ‘adviser charge’ and corresponding impact on the consumer. This clarity is needed to help facilitate a very radical change to the operation of the UK advice market and is required urgently to allow providers to build the systems to administer adviser charging. Ideally, tax relief should be available on the adviser charge.”
Given that this was just over two months ago what on earth are we playing at when these basic questions remain unanswered? Perhaps the question is now answered with the recent Budget announcement regarding the removal of Protection business from the I-E tax system. Scheduled for starting January 2013 this is a nice levelling of the playing fields.
I am confident that the general direction of the RDR is right. However I am far from confident that the implementation is going to go that well. We are after all about to create the largest change in direction this industry will have seen in the last two centuries. One would have thought the level of planning and understanding would have been greater. I think that the problem may be simply that we cannot imagine a post RDR world. I am sure everyone understands the guide book syndrome. Many times I have read guide books in advance of travelling to a particular destination ad you know what? – the really great questions never come to me until I arrive, no matter how much time I spent reading up in advance. Sometimes the culture of a destination is just so alien that I simply could not imagine the questions to ask, and more importantly. would not have believed the answers. RDR is exactly like that. A post commission environment is very alien to the Industry. Going back to the TSC submissions only 39 firms out of 205 were broadly in support of RDR. The education establishments such as the CII were supportive without any issues, the Providers although broadly supportive all had issues. Of the IFA s who were supportive most misunderstood adviser charging (AC). Adviser charging is not commission offset or project fees which resemble commission. I like to think of it as a bare faced fee i.e. not anything masquerading as something else or hidden in any documentation.
The FSA provide for adviser charging paid by third party firms to be authorised and validated, yet have provided no clear guidelines on how to do this. In my mind there are only two options available. The first is to write out to the client with something akin to the confirmation of a direct debit process, the second, which I have to say I favour, is to provide an agreed copy invoice to the third party! This latter method offers the most transparency and would assist the adviser firm to think about the VAT issue and perhaps avoid problems in the future.
I have already encountered firms who are moving clients to discretionary management and the inevitable Distributor Influenced Funds (DIFs) explaining to clients that this is a necessary move because of the implementation of RDR. Fine if that is what suitability dictates but if it is just a way of avoiding AC – shame on them. Happily the FSA seem to be aware of this possibility and according to their recent risk conduct outlook will rigorously police such behaviour.
The hard reality is that the FSA have brought about the “bare faced fee” by a good deal of subterfuge, and perhaps the end will justify the means, but in changing the distribution system they are undoubtedly going to throw many people who need quality advice into the hands of something called ” Simplified advice” We are quite late in getting this off the ground and I for one await with much interest, the FSA paper on this, promised early summer. It probably is possible to come up with some sort of systemised process although many would disagree with me. The issue will be the massive detriment risk that could be built up if something is wrong or not updated swiftly. Optimistic, as I am, I am far from confident that simplified advice can be brought about in the timescales now available.
Whilst we wait for the paper, perhaps someone can provide me with answers to the following:
General
There seems to be a conflict between COBS Rule 6.1A 8 and 6.1B 5 where 6.1B 5 seems to suggest that commission can be paid if it facilitates AC. We presume this is loose drafting or is there some explanation we are not aware of?
We also find some terminology used in comments and statements made by the FSA, which suggests AC can be made “through” the Product, unhelpful. We believe what is meant is that AC can be deducted from the premiums or contributions being made i.e. before the contribution passes through the product boundary and before it becomes part of the product and its subsequent payment accounted for as part of the product charges. This would then be in line with 6.1 A. Would you agree?
Life Assurance Bonds
Post RDR if a client invests £100,000 into a Life Insurance Bond and the adviser charge (AC) is £3000 do we presume that that the amount for the 5% tax free deferral is based on £97,000 and not £100,000?
In the above case do we also presume that any tax calculation such as the amount of gain in the Bond will be based on the £97,000?
Discretionary Management.
Where a discretionary manager currently shares 0.5% of their 1.25% management fee and pays this to the IFA we presume that this will have to cease. The Discretionary manager may arrange the payment of the adviser charge from any cash account held under CASS rules or by selling units or shares into the cash account provided authorisation is obtained and then validated?
We presume that a facilitated adviser charge is not a trading expense of the paying firm. Although we presume the administrative cost of offering facilitation may be a legitimate trading expense?
Accounting Issues
Do we presume that nothing further has happened in relation to I-E issues and that AC will not form part of E?
We presume that adviser charges being deducted as part of facilitation should be part of some “escrow arrangement” or should be safeguarded in some way to prevent adviser charges being taken by a liquidator. We can see issues regarding the timing of this safeguarding in relation to the requirement to validate. Has any thought been given to this?
Should a client stop an adviser charge will it be released to the product or kept in escrow pending any legal action the adviser may wish to take?
Pension and AC issues
We presume that the concept of a “product boundary” will become important in relation to adviser charging. For example a cash account may exist inside the Pension Product Boundary in the case of a SIPP, and at the same time, if for example that SIPP is on a platform, there could also be a cash account outside the Pension Product Boundary. Adviser fees will be allowable without being classed as unauthorised payment for Pension purposes, if inside the Pension Product Boundary, and would also gain tax relief. It would therefore be in the client’s interest to pay adviser charges from the Pension Product Boundary and not from the external Cash Account. How does this fit with rule 6.1A 8?
Regular Premium contracts
The method, as described by the FSA, for deducting AC from regular premium contracts risks some products becoming non – qualifying – do we presume it is the adviser who must ensure that the payment of AC does not render the product non-qualifying?
Technology
We presume that the FSA is aware that most technology has been developed for Adviser use and may not be suitable for customer use and that there are issues with the legal control of technology being used by advisers post RDR.
We also presume that the FSA is aware that the technology changes needed to support these operational changes are almost certain to be not delivered in the timescales remaining. Is this correct?
Does the FSA have an answer to the problem of on-going charges becoming a discretionary expense and that many customers may choose to “orphan” themselves i.e. not appoint another adviser. Many providers and very definitely “platform service operators” do not have resources to deal dwith customers directly. Has this been considered?
Platforms
We do not see any change in the way that TERS are calculated. Depending on how Fund Managers respond to RDR are we correct in assuming that if they create “no AC load ” share classes alongside existing classes an adviser would have to recommend the new class for new purchases? Best execution rules would suggest that this is the case.
If a platform class of share is created to accommodate a platform we assume that it would not be in the customer’s interest to recommend that class if it meant that the share was now tied to that particular platform.
Share classes which contain bundled charges are going to produce higher TERS. Do we know if the KID proposed by UCITs IV makes any change to this?
Vat
The new guidance from the ABI/HMRC did not exactly clarify the position and most IFAs are unsure where this has been left. In obtaining validation of the payment of an adviser charge will it include whether the payment is inclusive of VAT?
A Blog for RDR
23/03/2011
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