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Retail Distribution Review
On 27th June, FSA announced details of the long-awaited RDR, which is a discussion paper covering the retail investment market.
Whilst FSA insists there is no read-across to the mortgage and general insurance market, there are clearly similarities in the markets and questions will inevitably be raised when one market is changed by the RDR, and the other remains unaffected.
We must remember that the RDR is a discussion paper and not a policy statement. The consultation period is six months and over this period AMI intends to give the consultation due consideration and will formally respond on behalf of our members.
In the meantime, this is a summary of some of the questions raised in the review which could eventually have read-across to the mortgage industry:
One of the major concerns relates to the interrelationship of professional qualifications, remuneration methods and the title ‘independent’. At present, mortgage intermediaries who can access the whole of market and offer a fee-only option can call themselves independent; an IFA has similar requirements.
Under the terms of the RDR, an IFA would have to be highly qualified and offer ‘Customer Agreed Remuneration’ (CAR). CAR is defined as ‘any advisory remuneration derived in discussion with the customer and not influenced by the product provider’. This includes fee, fee-offset and so-called factory-gate pricing. However, it doesn’t include commission, and the logical read across would be to question the basis of procuration fees. In terms of professional qualifications, there seems to be little current scope for advisers to expand their professional qualifications, beyond CeMAP, MAQ/CF6 or AdvCeMap. However, qualifications have been highlighted as crucial in the IFA sector by the RDR so questions on this subject could follow.
The RDR also considers the market as a whole, and fundamentally breaks it down into four sectors. The ‘top’ two sectors are Professional Financial Planner and General Financial Planner. PFPs would be able to retain the independent title and only charge on a CAR basis. GFPs would be more qualified than the current industry benchmark, could offer CAR or could accept commission, but wouldn’t be independent.
The third level is ‘Primary Advice’ which is more basic. For example, advice would be limited to ‘simple products’, albeit without a charging cap. Where mortgages could one day fit in a definition of ‘simple’ is unclear. Advisers in this area would be able to accept commission, maintain existing qualifications but not retain the use of the independent title.
The forth proposed area is ‘Generic Advice’ which is similar to the current ‘Basic Advice’ regime. Broadly, the suggested terms for GA will not be advice, but instead ‘financial guidance’ for consumers, without resulting in a specific product recommendation.
The discussion of a fifteen year long-stop on claims for poor advice is something for which AMI has been campaigning for some time. At present, a consumer can complain about advice and seek recompense at any time, although there is a three-year time limit from when they realise, or ought reasonably to have realised, that they have a compliant. By putting a fifteen year long-stop in place this would allow advisers to build intrinsic value into their businesses, and is one part of the RDR that we welcome.
Overall, the RDR offers a useful opportunity for the industry to consider a number of key issues. Whilst investment market based, we would recommend that mortgage advisers consider the discussion paper and consider how any changes in the IFA community could filter into the mortgage sector.
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