The UK’s“Retail Distribution

Review”

Il Salone del Risparmio18 April 2013

Julie Patterson, Director, Authorised Funds

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 advisersHowever, the scope of the review is

growing

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When?New rules on payments to advisers

took effect from 1 January 2013Rules 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

First, the “good”….

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

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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

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Final rules for AdvisersMust make certain disclosures to the client

about the nature of the service and chargesCannot 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”

paymentMay 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

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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..... 8

Moving to the “bad”…

“Legacy” InvestmentsThe new rules apply:only to new investments made after 1 January 2013but 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)

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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

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Further rules imminent…

Payments to “platforms” – the FCA proposes to stop payments out of product charges or by product providers

“Rebates” of fund charges in cash – the FCA wants to stop routine AMC rebates (ie retrocessions), even if they go to the investor

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What this will mean for funds

INVESTOR ADVISER

Investments via platform account

Platform invests in fund

FUND(a new share

class with lower AMC)

FUND SUPERMARKET Client cash account

FUND MANAGER

Fund Manager does not know investor and “rebates”

banned, so adviser charge cannot efficiently be

facilitated

Investor will have to pay into cash account so that adviser can be paid

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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

Platform invests in life and

structured products

ADVISERINVESTOR

Adviser charge facilitated via life or bank product

LIFE COMPANY/BANK

Platform facilitates payment to adviser, subject to agreement between adviser and client, by

reducing the amount of the insurance contract

Client cash account

LIFE/BANK PLATFORM

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…and the insurer/bank can continue to negotiate rebates/retrocessions with fund

managers

Platform invests in life and

structured products

ADVISERINVESTOR

Adviser charge facilitated via life or bank product

FUND MANAGER

LIFE COMPANY/BANK

Platform facilitates payment to adviser, subject to agreement between adviser and client, by

reducing the amount of the insurance contract

Client cash account

Rebated AMC

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

LIFE/BANK PLATFORM

FUND

Life Company/Bank issues a product

backed by its holdings of fund units, which it

buys at a cheaper AMC

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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 platformsBut it believes a client cash account (with payments in and out in real money) would be confusing for investorsTherefore, it proposed a system of “unit rebates” instead

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Which takes us to the ”ugly”

With unit rebates

INVESTOR ADVISER

1. Investments via platform

account

2. Platform invests in fund

FUND

AMC

FUND SUPERMARKET

FUND MANAGER

3. Platform (as a bulk buyer) is able

to negotiate an AMC rebate

6. Cash proceeds from unit redemptions used to pay adviser charge

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4. Rebate must be used to buy extra units

5. Extra units purchased.

But also, units

redeemed to pay adviser

charge

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!

And so to Europe…

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

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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