The first RDR consultation paper was released almost 6 years ago in October 2014 and contained 55 proposals affecting financial advice and the distribution of financial products.
In December 2019, the FSCA published an update and it is clear from this paper that there has been a lot of progress made even though there are still a number of proposals that have not been finalised. We have stated before, and would like to reiterate that it is pleasing to see that the regulators are not just pushing through with what they initially proposed – there are plenty of examples where they have, after receiving input from various sources, changed their thinking and in other instances they have decided not to move forward with some proposals.
Two Key Proposals
Two of the RDR proposals relate to the long-awaited consultation papers on Advisor Categorisation and Investment-related matters. The first paper is about what advisors should be called and what they can do, while the second paper deals with the activities of investment management and the relationship between various entities in that space.
The industry was given until the middle of May 2020 to submit comments on these papers – as Masthead, we submitted feedback and think it is important to unpack the main points coming out of the proposals and consider how they may affect all or some advisors.
We will run a series of 4 articles that will deal with the key aspects of these two consultation papers. First, we’ll deal with the Advisor Categorisation and then we’ll cover the Investment-related matters.
(Masthead members can read the full RDR feedback submissions on Masthead Connect)
Advisor Categorisation – Part 1
In this Part 1 on Advisor Categorisation we will look at the labels or titles that advisors will be allowed to use, and we will consider what products PSAs and RFAs can provide. In Part 2, we will look at proposed restrictions on licensing for both reps and KIs. We will also consider what happens if an advisor moves from one FSP to another and discuss the clients’ ability to “switch off” product commission. Lastly, we will refer to the regulator’s expectations of product suppliers.
PSA or RFA – what does this mean? What can you call yourself? What can/will your business card say?
In their early version of the RDR proposals the regulators proposed a three-tier model for financial advisors, namely tied, multi-tied and IFA. In their latest paper, the FSCA has committed to a two-tier model, with two categories of licensed advisors, namely (1) Product Supplier Agents (PSA) and (2) Registered Financial Advisors (RFA). On the one hand, a PSA is essentially a tied agent as we know it today and typically works for a product supplier. On the other hand, an RFA is what we would refer to as a broker, mostly working for themselves, although an RFA can be part of a financial services group of companies.
The regulator’s strong view is that advisors will either be PSA or RFA … they cannot be both. So, a PSA cannot “sit in two entities” and entities licensed to provide financial advice will have to indicate clearly which adviser category they will operate in and be licensed accordingly. These PSA/RFA terms are working titles and the regulator is inclined towards including a descriptor of what the advisor does.
So, a business card could potentially have the following labels and descriptors:
- PSA – [name] is authorised to provide advice on the financial products and services of the ABC Group.
- RFA – [name] is authorised to provide advice on the financial products and services of a range of product suppliers.
Can I call myself “independent”?
The use of the word “independent” cannot be used to describe a PSA. It can only be used by RFAs as long as there is no actual or potential influence exercised by a product provider over an RFA. In simple terms RFA FSPs or their reps will not be allowed to describe themselves as “independent” where:
- there is a significant ownership relationship between a product supplier and an FSP that distributes its products (these are common in large financial groups),
- an FSP receives some form of financial interest from a product supplier, other than regulated commission/fees (e.g. outsourced or binder fees), and,
- there is a material conflict of interest between the FSP and the product supplier. This limitation or qualification will be regulated by changes to the FAIS General Code of Conduct.
What about “financial planner” or “financial planning”?
These terms do not relate to licence categories but are rather labels that describe what the FSP/advisor does. The thinking is that both PSAs and RFAs can call themselves financial planners as long as they meet the standards set down in regulation. The FSCA is proposing that only CFP-qualified advisors will be allowed to use the designation “financial planner” and only CFP-qualified advisors will be allowed to say that they provide “financial planning” or “financial plans”. The regulators say that non-CFP advisors will need to use different terms/words to describe their services and recommendations. Therefore, if the name of your firm/FSP includes the words “… Financial Planning”, unless you and ALL your advisors are CFP-qualified, you will not be allowed to use that name.
We are concerned with the position that so-called “non-CFP advisors” should not be allowed to call themselves “financial planners” and particularly may not be allowed to use the terms “financial plan”, “financial planning”. We think that the term or description “financial planning” or “personal financial planning” is not unique to, or the sole preserve of a single body. Even more so, “financial plan” can have a very wide set of meanings and since there is not a single and common definition, we do not agree with the proposal to limit the use of the terms to a small group.
Lastly, in relation to these terms, the regulator is proposing that … other derivatives of “financial planner”, “financial plan”, and “financial planning” should also be reserved for use by qualified CFPs. They have not defined what these derivative terms are, but at this stage we think such a restriction or proposal is far too wide to be a reasonable regulatory rule or principle.
The regulators have set out some clear rules, particularly where there are PSA and RFA channels in Financial Services Groups of Companies. For instance, each channel needs to be run in a separate legal entity and should be managed as a separate and discrete business. Further, these channels need to identify, manage and mitigate any conflicts of interests.
As a PSA, what can I do? What products can I offer?
PSA advisors will only be allowed to provide advice and non-advice intermediary services in respect of financial products of the product supplier under whose licence they operate and the products in the product supplier’s group of companies.
PSAs will not be able to advise on products that fall outside their “home group” – there will be no gap-filling. However, in order for the client to get access to a suitable product solution or product brand, PSAs will be able to refer clients to product suppliers outside their own group of companies or to an RFA advice channel in terms of a referral agreement These agreements would need to be at the FSP, business-to-business level (not at advisor level) and PSAs would be allowed to be paid for such referrals, but they must disclose the fee arrangements and how much they are being paid.
As an RFA, what can I do? What products can I offer?
RFA advisors may advise on a range of product suppliers and products where their FSPs have broking agreements.
Where the RFA brokerage forms part of a group of companies though, the regulator will monitor closely to ensure that advisors and/or management do not bias their advice and product solutions towards home group products. For example, they will also look at what products are sold and whether RFA channels are being incentivised to promote group products.
The impact of these proposals may differ depending on the way in which an FSP is structured. While these are just proposals, they may change as a result of the consultation process, and it will also be some time before we see anything formally introduced through regulation, advisors should be thinking about how their business could be affected or how they would like to position themselves or their business in the future.
This concludes Part 1 of our series on RDR Developments relating to Advisor Categorisation. Keep a look out for Part 2 in our next issue of Mastering Compliance.
Masthead members can read the full RDR feedback submissions to the regulator on Masthead Connect. The documents submitted are:
- Categorisation of Financial Advisers and Related Matters
- Investment Related Matters
Log in here and follow this path to access the documents: For Members > MHFAA > Regulatory input by Masthead.