RDR Phase I Update

Part 1

Last week we looked briefly at TCF, Twin Peaks and the FSR Act as a background to RDR.

In November 2014, the FSB published a discussion paper on Retail Distribution Review. Against the background of the Treating Customers Fairly approach to regulating conduct of business in financial services, the document proposed far-reaching reforms to the regulatory framework for distributing financial products to financial customers.

With 55 specific proposals put forward, fourteen have been identified as ‘Phase 1’.  With the tabling of the Financial Services Regulation Act late last year and the Act becoming effective later this year, the RDR Phase 1 proposals are expected to be implemented from July 2016.

We will be looking at proposals included in Phase 1 in a series of articles.

In summary, the following proposals fall into Phase I:

  1. Amendments to the conflict of interest provisions to confirm representatives may not be appointed to more than one FSP for the same product category.
  2. Revised requirements for key individuals, in order to demonstrate that the KI has the necessary operational ability to carry out their responsibilities.
  3. Insurer tied advisors may no longer provide advice or services in relation to another insurer’s product.
  4. Restricted outsourcing to financial advisors AND certain functions permitted to be outsourced to financial advisors.
  5. General product supplier responsibilities in relation to receiving and providing customer related data.
  6. Product supplier commission prohibited on replacement life risk policies.
  7. Commission regulation anomalies and early termination values on “legacy” insurance policies to be addressed.
  8. Conflicted remuneration on retirement annuity transfers to be addressed.
  9. Equivalence of reward to be reviewed.
  10. Remuneration for selling and servicing short-term insurance policies.
  11. Conditions for short-term insurance cover cancellations.
  12. Binder fees to multi-tied intermediaries to be capped.
  13. Commission cap for credit life insurance schemes with “administrative work” to be removed.
  14. Outsourcing fees for issuing insurance policy documents.

In this article we will take a closer look at Advisor categorisation and the necessary amendments to the Fit and Proper Requirements for Key Individuals, the need for updating the conflict of interest provisions as regards representatives being appointed under more than one FSP and the provision of receipt and provision of client data.

  1. Advisor Categorisation

Although this is currently allocated to Phase III (early 2018), I have had numerous questions around this issue.  There is much debate around the advisor categorisation and whether to adopt a two- or three-tiered approach. Although still under consultation, it appears as if a two-tiered approach will be implemented.

  1. Product supplier agent (previously tied-agent) and
  2. A licensed advisor in their own right (sole proprietor) or a representative of a licensed advisor firm that is not also a product supplier.

An advisor or advisor firm will only be permitted to provide advice in one capacity and not both of the above.  Designations for the categories has yet to be decided.

The setting of any direct or indirect production or sales targets by product suppliers will likely be prohibited for all advisors other than the supplier’s tied advisors.

Should the relationship in any way impose restrictions on the advisor’s ability to provide or earn remuneration in respect of any other product supplier’s product, in respect of which the advisor would otherwise be able to provide advice, or if the relationship between the advisor and product supplier is directly or indirectly influenced by the product supplier in the recommendation of products, the advisor would not be considered to be independent.

Product supplier agents (previously tied advisors) will be permitted to provide advice on the products of one product supplier or product supplier group only. In the case of investment or savings products, this will include allowing the agent to also advise on products of “external” suppliers that are offered through an investment platform (LISP) administered by the primary supplier / group. RDR is considering allowing a product supplier agent to advise on one additional product supplier/ group per line of business.  Should this be approved, each product supplier would be responsible for any advice provided by the agent as regards their product.

Product provider agents may be permitted to exist as juristic entities but will have to adopt the branding and corporate identity of the principle product supplier. Should the juristic entities be allowed under RDR, they would need to meet the requirements of operational ability and financial soundness.  Product supplier agents (whether individuals or, if permitted, juristic entities) will not be licensed advisors in their own right but will operate under the product supplier’s licence.

All advisors that are not product supplier agents, will fall into the second tier – i.e. they will be categorised as “registered financial advisors”. These will be advisors that are either licensed to provide advice in their own right, as sole proprietors, or are registered representatives of a firm that is licensed to provide advice (where the firm is not also a product supplier).  They are subject to the mitigation controls as regards conflict of interest.

A registered financial advisor may only describe itself or its advice as “independent” if:

  • it has not entered into any binder agreement with any insurer
  • it does not earn any remuneration, directly or indirectly, from any product supplier for outsourced services provided on behalf of that product supplier
  • it does not hold any ownership or similar interest in any product supplier
  • no product supplier holds any ownership or similar interest in it

Where these criteria are met, the registered financial advisor or firm may use the term “independent” in its designation, or to describe itself or its advice. The designation “independent” will not however be a separate licence category.

Both registered product supplier agents and registered financial advisors may, in addition to any other required designations or descriptions, describe themselves as a “financial planner” – provided they meet the standards for financial planning to be developed in respect of the relevant RDR proposal.

The principle that the extent of product supplier responsibility for customer outcomes should be aligned to the extent of product supplier influence over advice, will be retained.

The responsibilities of any product supplier who has a binder, outsourcing or ownership relationship with a registered financial advisor in relation to any advice provided on its (or its group’s) products will be more rigorous than the responsibility imposed on product suppliers where these relationships do not exist.

  1. Advisors may not act as representatives of more than one juristic intermediary (advisor firm).

Two exceptions to this proposal have been highlighted:

  1. Where an FSP would like to add product categories to the license but do not have persons that meet the necessary Fit and Proper requirements, an advisor may be placed as a representative on the license of another FSP under supervision in order to gain the necessary experience
  2. In the case of a financial services group comprising of multiple FSPs providing advice on different categories, in order for a particular advisor to offer advice across the range of products or services offered by the group, the advisor may need to be appointed as a representative of more than one of the FSPs concerned.

Under these exemptions, a representative of an FSP will only be permitted to also act as a representative of another FSP in respect of product categories for which the first FSP is not licensed.  Exemption ii will also result in a single legal entity only being permitted to hold only one FSP licence.

The above exemptions are not at this stage the only exemptions that will be allowed and the Regulator has made provision for the application of motivated exemptions in addition to the above. The Regulator will be making amendments to the Conflict of Interest provisions ensuring disclosure and transparency as to which entity is responsible for the advice given to a client

There are serious concerns as to the practice of ‘rent a Key Individual’ where the KI is merely appointed to meet the Fit and Proper requirements and is not involved in the daily oversight and management of the FSP. This will be addressed by means of revised Fit and Proper Requirements for Key Individuals and increased supervision of the level of involvement of the Key Individual in question.

  1. General product supplier responsibilities in relation to receiving and providing customer related data

Not much comment was received as regards this issue and thus it will be implemented as is.

In order to achieve the shared responsibility for fair customer outcomes required by the TCF framework, an appropriate level of information sharing and co-operation between advisors and product suppliers will be essential. Standards of conduct will ensure that product suppliers will have adequate access to customer data held by intermediaries, to enable them to monitor TCF outcomes for customers. This includes customer data held by binder holders or other outsourced service providers.

Conduct standards relating to appropriate levels of customer information that product suppliers will be required to provide to IFAs or multi-tied advisors, when authorised to do so by customers, will also be put in place.

A fair balance needs to be achieved between enabling advisors to access sufficient information to enable effective customer advice and service on the one hand, and on the other hand recognising that product suppliers need to reasonably satisfy themselves that advisors interacting with their existing customers have the requisite product knowledge and are acting in the customer’s best interests.

The FSB has proposed a requirement that where a product supplier receives a request for customer information from an advisor with whom the supplier does not have an intermediary agreement, and the release of such information is authorised by the customer, the product supplier may elect to either:

  • Comply with the request; or
  • Decline to provide the requested information to the advisor concerned, but must then provide the client with the information together with a fair and objective explanation of why the information has not been provided directly to the advisor.

In Part 2 we will look at the remuneration and commission updates.

RDR Phase I Update

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