Retail distribution review Key issues

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Retail distribution review Key issues

• Compliance Institute summit
• Simon Morris
• 17 October 2008

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These nine slides are the introduction
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Whats it all about?

• FSAs retail objective
• Ensuring customers get a fair deal
• Challenged by
• Serial firm failure
• An unsustainable model
• Commission bias
• Poor quality sales
• So

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RDR the 2007 model
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What did FSA do?

• Five industry study groups
• Chaperoned by FSA
• June 2007 paper proposed
• Higher training prudential standards
• Reduce commission selling
• New polarisation
• Full advice
• Primary advice

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The full advice model

• Independent advisers
• Fee based/customer agreed remuneration
• Favourable prudential treatment
• General financial advisers
• Commission
• Higher regulatory burden
• Less favourable prudential treatment

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Primary advice

• Primary advice
• Limited analysis to fit main characteristics
• Limited products?
• Simplified advice?
• Lower regulatory requirements

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RDR the 2008 model
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Interim Report April 2008

• Concepts intact
• Advised sales or
• Guided sales
• But
• Greater focus on advised sales
• New eliminate provider-determined remuneration

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The three retail tiers

• Advisers independent
• So investors can distinguish sales
• Sellers no advice
• Money guidance
• Plus (implicitly) direct non-advised sales

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And over to you

• Providers to stop determining how distributors
  are remunerated
• Industry develops common standard on
  qualifications
• Industry devises rule regime for non-advised
  sales
• While FSA will
• Review its proposals
• Feedback November any rules/guidance

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These five slides are to introduce an
advice/bancassurance session
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Advice
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Advice

• What FSA had said
• Increase adviser standards
• Paid by CAR (may be commission)
• But can be WOM/panel/tied
• What FSA now says
• Increase adviser standards
• Paid by CAR with no provider input
• Must be whole of market

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Advice the consequences

• Increased training
• Increased compliance
• Will customers accept fees/CAR?
• gt Further reduction in distribution

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Must advice be WOM?

• This is a basis for further consideration
• Would end all tied sales
• Issues for providers
• Issues on exclusion
• Currently
• Addressed by disclosure
• FSA depolarised in 2004 what problems?
• Weak argument to justify, and
• Does this mean tied/panel breaches TCF?
• Can address through remuneration

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Remuneration

• April 2008 provider should not determine
  adviser remuneration but
• Can pay it from investor funds
• Can front-end load
• CAR
• Factory gate pricing
• methods of remuneration should not be closed
  down
• June 2007 contemplated commission as CAR
• Tied eliminate product bias

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These 11 slides are to introduce a guided selling
session
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Guided selling
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Guided sales

• Less emphasis than June 2007
• Moved on from primary advice
• Cant have second-rate advice
• clear blue water between sales advice
• To enable consumers to make simple
  straightforward choices
• Extend to protection products. Mortgages? GI?

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So what actually is guided selling?

• FSA thought (in 2007)
• Generically suitable
• Off the peg, not bespoke
• You will say
• For someone like you
• If you tick the boxes then this should work
• Risk is that I will hear
• He told me it was suitable
• I thought she said I needed this

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An inescapable background

• Principles
• Skill
• TCF
• Clear, fair not misleading
• COBS
• Honestly fairly professionally
• The law
• Reasonable care skill

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And this is what we had last time

• A straightforward product
• Associated with a financial choice
• Sold without advice
• Mainly over the telephone
• called PPI
• So what lessons must we learn?

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Selling needs

• Identification of generic customer requirements
• Can be proactively done/persuaded
• Disclosure of product features
• Help the customer to match 1 with 2
• Statement of limitations
• this is not advice
• this is not a personalised service
• we have only taken into account
• this will only work if
• A controlled environment

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The key issue can you sell without advice?

• Ensuring customers understand what they are
  getting
• Clarity of limitations
• Proactive/persuasion gt advice?
• Does it matter if it is advice?
• Impact of rules
• Complaints
• Protecting against this
• Controlling the process at all stages

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The selling regime

• Do we need a rule change?
• making a personal recommendation to a retail
  client
• advice presented as suitable
• APER/TC seller qualifications
• SYSC supervision
• COBS potentially
• Disapply suitability
• Process
• Disclosure
• Products

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Can selling be FOS-proof?

• How does FOS determine a complaint?
• Fair reasonable in the circumstances
• Taking into account the law the rules
• What does FOS look at?
• Contract terms
• Attitude to risk
• Suitability
• The Ombudsman would view the general law as the
  lowest point for primary advice in taking any
  decisions FSA Board minutes 26.7.07

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Selling product design

• Manage generators of misselling
• Risk profile
• Purpose
• Cost
• Commitment
• Saleable automatically
• Profitable but not too dear

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Selling distribution issues

• Identify sellers
• Can an adviser become a seller?
• Train supervise
• Carefully choose lifecycle products
• Manage selling

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And these four slides are to finish the session
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Capital for IFAs
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Capital adequacy

• Non-MiFID advisory firms
• Capital resources must deliver certainty
• Changes from thrust of June 2007
• Firms will not be individually risk-assessed
• Will not be risk-based capital but
• Adviser-based
• Expenditure-based
• Regulatory dividend dropped
• PI can be acceptable

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Winners losers
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Winners losers

• Upmarket advisers
• Firms with branch networks
• Manufacturers
• IFAs networks
• Providers who sell direct
• Bancassurers
• Consumers