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The UK’s “Retail Distribution Review”

The UK’s “Retail Distribution Review”. Il Salone del Risparmio 18 April 2013 Julie Patterson, Director, Authorised Funds. It covers four areas. Minimum adviser qualifications Capital requirements for advice firms Disclosure of nature of advice

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The UK’s “Retail Distribution Review”

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  1. The UK’s“Retail Distribution Review” Il Salone del Risparmio 18 April 2013 Julie Patterson, Director, Authorised Funds

  2. It covers four areas • Minimum adviser qualifications • Capital requirements for advice firms • Disclosure of nature of advice • Rules on “inducements” paid to or received by advisers However, the scope of the review is growing

  3. When? • New rules on payments to advisers took effect from 1 January 2013 • Rules expected very soon on payments from product providers to “platforms” • FCA expected to consult on whether the rules on payments to advisers should be extended to execution-only brokers, wealth managers and insurance companies

  4. First, the “good”….

  5. Covers all types of advice/adviser • Independent = based on a comprehensive and fair analysis of the relevant market; and “unbiased and unrestricted” • Restricted = not independent, ie if the adviser considers products only from a limited number of product providers or only products of a certain type There is also an option of “simplified advice, where pre-scripted questions are used. But this is still advice and is still caught by the new rules

  6. Covers all types of RIPs Retail Investment Products (“RIPs”) are: • Life policies • Funds • Personal pensions • Certain closed-ended investment companies • “Structured capital-at-risk products” • Other products offering exposure to underlying financial assets in a packaged form

  7. Final rules for Advisers • Must make certain disclosures to the client about the nature of the service and charges • Cannot solicit or accept commissions (even if passed to clients) • Must have an appropriate charging structure for clients • May not vary according to product type or provider • May not be influenced by provider “facilitating” payment • May not receive payments spread over time, unless there is an ongoing service (agreed by the client) Note: the rules do not apply where the client is outside the UK

  8. Final rules for Product Providers The rules apply even if the retail client is not a direct client of the product provider The rules do not apply if the client is outside the UK Provider must not offer or pay any form of commission, remuneration or benefit And must take reasonable steps to ensure a clear distinction between product charge and adviser charge BUT.....

  9. Moving to the “bad”…

  10. “Legacy” Investments The new rules apply: only to new investments made after 1 January 2013 but not if they are additional investments into an existing product and no new advice has been given Everything else is “legacy” business and commissions can continue to be paid ad infinitum Also, if an insurance product was bought before end-2012 and if it allows investors to “switch” between underlying funds, then these switches are regarded as legacy (whereas switches between funds bought direct are subject to the new rules)

  11. Final rules for Product Providers A provider can “facilitate” the adviser’s charge for advice at the point of sale from the investment and can facilitate ongoing adviser charges “from the product”, provided it: Obtains and validates instructions from the retail client Offers sufficient flexibility in the payments it facilitates Does not pay out in advance or in a materially different way from what the client has agreed And there is an exemption for regular contribution products, including eg saving plans into funds

  12. Further rules imminent… • Payments to “platforms” – the FCA proposes to stop payments out of product charges or by product providers • “Rebates” of fund chargesin cash – the FCA wants to stop routine AMC rebates (ie retrocessions), even if they go to the investor

  13. What this will mean for funds INVESTOR ADVISER Investor will have to pay into cash account so that adviser can be paid Investments via platform account FUND SUPERMARKET Client cash account Platform invests in fund Fund Manager does not know investor and “rebates” banned, so adviser charge cannot efficiently be facilitated FUND FUND MANAGER (a new share class with lower AMC)

  14. What about life/bank wrapped funds?Bank and insurance products are caught by the same rules, but they can “facilitate” payments to advisers by reducing the value of the policy/investment ADVISER INVESTOR Platform facilitates payment to adviser, subject to agreement between adviser and client, by reducing the amount of the insurance contract LIFE/BANK PLATFORM Client cash account Platform invests in life and structured products Adviser charge facilitated via life or bank product LIFE COMPANY/BANK

  15. …and the insurer/bank can continue to negotiate rebates/retrocessions with fund managers ADVISER INVESTOR Platform facilitates payment to adviser, subject to agreement between adviser and client, by reducing the amount of the insurance contract LIFE/BANK PLATFORM Client cash account Platform invests in life and structured products Adviser charge facilitated via life or bank product Life Company/Bank issues a product backed by its holdings of fund units, which it buys at a cheaper AMC LIFE COMPANY/BANK Rebated AMC FUND FUND MANAGER Life Company/Bank invests in fund as principle (i.e. it is the beneficial owner of the fund units). Therefore, rebate of AMC can be negotiated ,as adviser charging rules do not apply

  16. So, yet further FCA proposals… The FCA accepted that investors ought to be able to benefit from lower product “prices” negotiated by wholesale purchasers such as platforms But it believes a client cash account (with payments in and out in real money) would be confusing for investors Therefore, it proposed a system of “unit rebates” instead

  17. Which takes us to the ”ugly”

  18. With unit rebates ADVISER INVESTOR 6. Cash proceeds from unit redemptions used to pay adviser charge 1. Investments via platform account 4. Rebate must be used to buy extra units FUND SUPERMARKET 2. Platform invests in fund 3. Platform (as a bulk buyer) is able to negotiate an AMC rebate 5. Extra units purchased. But also, units redeemed to pay adviser charge FUND MANAGER FUND AMC

  19. What’s happening? Platforms began to install systems to offer “unit rebates” (having previously installed systems to operate client cash accounts) We still do not know for certain how platforms are to be paid Meanwhile, HMRC have decided that any form of rebates to investors (whether in cash or in units) are taxable, including from legacy investments Therefore, IMA continues in intensive dialogue with both the FCA and HMRC!

  20. And so to Europe…

  21. The impact on non-UK UCITS? The FSA cannot impose requirements on non-UK UCITS or management companies But the rules apply to UK advisers selling non-UK UCITS Therefore, UK advisers cannot receive manager-determined retrocessions from EU UCITS

  22. The proposed ban on inducements only to independent advisers will have widely different effects around Europe Note: much of the IFA business in the UK now comes through B2B platforms

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