Get Ready for Some Big Changes: FSA

Alanna Petroff: The Retail Distribution Review, or RDR in short, is coming into effect in 2013 and it was put in place by the Financial Services Authority, or the FSA. The FSA put this in place because they wanted more transparency within the industry and joining now to talk about these changes and how they could affect you as an investor is David Geale. He is the Head of Investment Policy at the FSA. So David, thank you very much for coming in.

David Geale: Good morning. Pleasure.

Petroff: Now, let's go over a specifically RDR and why you put this in place?

Geale: Okay. Well, RDR was put in place really to address some of the deep-rooted problems in the market and to try and restore trust and confidence that consumers can have in the financial advice that they receive. So we were concerned about the lack of clarity around the services that advisers were providing, the misalignment of incentives where you could give advice to an individual but be paid by a product provider, and the varying degrees of professionalism in the market.

Petroff: Okay.So it seemed like you were getting free advice before, but in fact, these IFAs were getting commissions from the fund providers that you were buying those funds from.

Geale: Absolutely. Advice has never been free, but it looks that way sometimes to consumers when it is actually being paid for by the product provider. The fact that you can receive varying amounts from different product providers for different products creates quite a serious misalignment of incentive.

Petroff: Now, are you happy with how the industry has been progressing so far in working towards RDR?

Geale: Yes, I think that a huge amount of work has gone on both in adviser firms, provider firms and in the FSA itself in actually helping to move people towards the deadline when these new rules come in 1st of January and we're hugely grateful for that.

Petroff: Are there any laggards in the industry that aren't quite keeping up to pace and getting their act together ahead of 2013?

Geale: There would always be those with any change who leave things to the last minute. Some research we did back in April of this year suggested that around 90% of advisers were either ready or would be ready by the deadline and we've done some work to try and shift that figure even higher.

Petroff: Is there any concerns that you have in terms of one particular area where people might be lagging in?

Geale: I don't think there is any one particular area of concerns about people lagging, I think the focus is largely being on getting qualified, which is essential to be able to continue to give advice from the 1st of January and what we would encourage firms to do is to actually think about their charging structures in terms of what structure they want to put in place that would be a sustainable business model to them and also fair to their clients.

Petroff: Okay. Now for individuals, moving onto the individual realm and away from the industry as a whole, if I am an individual and I bought a fund from my IFA in 2011, that fund I'm paying annual management fees and some of those fees are going back to the IFA as a commission from the fund company. Will those trailing commissions continue into 2013?

Geale: Okay. In some cases depending on the agreement you had with your adviser then there will be a trail commission being paid and that would continue to be paid unless you do something to change that. What we would expect is that when you see your adviser post-2013, that what you would do is have a conversation about your portfolio and if it's in your best interest to switch out to a different share class that no longer pays the trail commissions, that's what we expect the conversation to be between you and your adviser.

Petroff: So you can go to your adviser and say, ‘I don't want to pay that trailing commission anymore. I want a different kind of fund or I want the clean share class that doesn't pay you that commission’. But then they might say, ‘well, give me an upfront fee for my advice instead’.

Geale: From 1st of January, we expect that all new advice will be payable by fee that's agreed between the customer and the adviser, whether that's facilitated through the product or whether it's actually paid in an upfront fee is a decision for both those party to make, but certainly you could have that conversation.

Petroff: Okay. Now that brings us to negotiations, because the FSA has been saying to individuals ‘negotiate with your IFA’. But how much wiggle room do individuals really have when the IFAs have a business model already planned out? Is there negotiating power there?

Geale: Okay. We'd expect IFAs to have a good idea of what they need to charge for particular services, but then that’s something for them to agree with their individual clients. What we're doing is providing transparency around this and putting the client in control of that assessment. If you're not prepared to pay the level that that IFA is charging, then you've got the power to go and look at other charges and to see what other advisers are offering, and to actually do something different. So what we're hoping is that competition will start to take effect based on the services that advisers are providing, rather than where it is currently, around the amount of product providers will pay.

Petroff: Okay. One last question for you regarding lower net worth clients Now, there is lot of concern that people with portfolios of, let's say, £50,000 or less … IFAs will be turning them down because servicing them will not be very profitable, and furthermore, people with smaller portfolios might not want to speak with IFAs anymore. They don't want to maybe pay those upfront fees. So is there concern that people with smaller portfolios will not be getting any advice?

Geale: I think what we expect to see is a number of different business models. A lot is said about people or IFAs chasing high net worth, but there is only a limited pool of high net worth people. So we expect a number of different business models to emerge. If IFAs price their services effectively, then there is no reason why those people still shouldn't be able to take and get advice.

If you're making a lump sum investment, then you've got money available, which is there to pay the adviser charges, whether it's to invest. If you're looking at a regular premium investment, then there is the ability to facilitate that charge through your product as well. So I don't see any reason why there should be any problem in people getting advice.

Petroff: Okay. Thank you very much for speaking with me today.

Geale: Thank you. You are welcome.

Alanna Petroff: That was David Geale from the Financial Services Authority. I'm Alanna Petroff, and thanks very much for watching Morningstar.