Tony Watts outlines a number of major changes for investment advisers aimed at improving consumer protection and confidence in retail financial services
The Retail Distribution Review
On 31 December 2012 major changes were introduced by the Financial Services Authority (FSA) in relation to how investment advisers are regulated, in the long-awaited implementation of the FSA’s Retail Distribution Review (RDR).
Because of the significance of the changes for the financial services industry, the House of Commons Treasury Committee suggested that (among other things) the changes be deferred until 2014 but the FSA pressed on with implementation.
Santander Bank was reported to have temporarily withdrawn 800 staff from giving investment advice while it continues to ensure they are fully able to comply with the new rules.
To what do the changes apply?
The changes involve a new regime for investment advisers advising on retail investment products. Retail investment products include most common financial products sold by investment advisers to clients who are individuals. Specifically, this includes life policies (with some exceptions described below), unit trusts, investment trusts, personal pensions and certain structured investment products. There are also “catch all” provisions intended to cover products which have a similar risk profile, however they are structured.
The changes also extend to unregulated collective investment schemes. This category includes a wide range of investments not formally approved for retail distribution to the public, such as most hedge funds. However, under different proposals on which the FSA has issued a consultation, in the future it may not be possible to sell such products to ordinary retail clients at all.
When do the changes not apply?
In summary, the RDR changes do not apply to:
The FSA’s stance is that if there is any doubt regarding the application of the RDR changes then investment advisers should assume that they apply.
Summary of RDR changes
The changes are in the following areas, and apply when personal recommendations are made in respect of retail investment products:
Accompanying this are detailed rules on conduct of business and an increase in minimum capital requirements for personal investment firms.
The FSA will hand over its responsibilities to a new body, the Financial Conduct Authority (FCA) during 2013, though this is not likely to involve any change to RDR requirements in the short term.
There are, however, developments at the EU level. In reviewing the Markets in Financial Instruments Directive (MIFID 2), it seems that the European Parliament’s Economic Affairs Committee do not accept the need for a ban on payment of commission by product providers to advisers. This may lead to future changes in the UK regulatory regime introduced by RDR. The European Commission is also proposing new rules on disclosure in relation to Personal Retail Investment Products (PRIPs) which may also involve UK changes.
The Retail Distribution Review has been a flagship initiative of the FSA which has been several years in preparation. It is likely that it will be rigorously enforced by the FSA and its successor body, the FCA.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.