The December 2016 Retail Distribution Review update provides clarity on matters which appeared slightly confusing in earlier proposals. The Regulator did away with the “multi-tied” category of adviser – in future, you are either tied or independent, although the formal title is yet to be determined.
The proposals to distinguish between various types of advice, including simplified advice and non-advice sales execution, is still in its infant shoes, but needs serious consideration to ensure that it does not achieve the opposite of what it is intended to do.
Types of advisers
Product Supplier Agents (PSAs)
These advisers will not be licensed in their own right to provide financial advice. Instead, they will provide advice as agents of a financial institution that provides financial products. That product supplier will in turn be licensed to provide advice, over and above any other licence it holds to issue financial products. The PSA will therefore operate on the product supplier’s licence, with the product supplier bearing full responsibility for both the advice provided by its agent and the product it has provided.
A PSA may provide advice only on the products of the product supplier by whom it was appointed as an agent (the “home product supplier”) or other product suppliers forming part of the same group as the home supplier. A definition of “group” will be stipulated for these purposes.
“Gap filling is being considered as a means to enable PSAs to recommend products of other suppliers where the home supplier’s product range does not meet customer needs for various reasons. This will be subject to the approval of the home supplier.
Registered Financial Advisers (RFAs)
“Untied” advisers will be licensed in their own right to provide financial advice.
A RFA may be either a natural person (a sole proprietor) or a legal entity (a RFA firm). An RFA firm will in turn appoint financial advisers to provide advice on its behalf, and will be responsible for the advice provided by those representatives. The RFA licensing model is therefore similar to the current Financial Services Provider licensing model under the FAIS Act, except that RFAs will not also be product suppliers.
Advice provided by RFAs should not be subject to influence by or bias in favour of any products, product suppliers or other third parties, but should be informed solely by identified customer needs. As certain legitimate business arrangements may pose unavoidable risks of conflicts of interest, including perceived conflicts, it must be mitigated, including providing clear disclosure of such relationships.
No financial adviser may act as both a PSA and a RFA (or representative of an RFA).
The terms PSA and RFA will be subjected to consumer testing.
For my money, using “representative” and “independent adviser” will do the trick.
“Low” (simplified) advice
Stakeholder feedback on earlier RDR consultation material has been mostly in favour of formally recognising a “simplified” advice process in certain circumstances. Support for this approach is typically based on arguments that the current FAIS provisions (and the way they are interpreted by the FSB and the FAIS Ombud) impose a complex, “one-size-fits-all” suitability analysis requirement which makes compliance unduly onerous where a customer’s particular financial need is straightforward and / or a full assessment of the customer’s personal circumstances is not necessary. The current thinking is that this could be linked to specific client needs, e.g. credit or travel insurance.
Remuneration for simplified advice would also need to be reconsidered, in view of the fact that it would not really warrant an “advice fee.”
Non-advice sales execution
A proposed definition of “execution of sales” was included in the draft amendments to the FAIS Fit and Proper requirements.
“execution of sales” means an intermediary service performed by a person on instruction of a client that results in the conclusion of an agreement to buy, sell, deal, invest or disinvest in, replace or vary one or more financial products.
The Fit and Proper requirements set specific competency standards where sales execution is effected through a predetermined “sales script”.
To be eligible for the relatively less onerous competence requirements applicable to such scripted sales, rigorous governance, oversight and monitoring requirements must be satisfied. These include a requirement to ensure that the sales practices and techniques employed are not misleading, false or inappropriate to the expected target customers and will not result in unfair outcomes for customers.
We have raised certain concerns in this regard in our feedback to the FSB and will report back once we receive the Regulator’s response.