In case you thought this may be a rather painful dissertation on what a dentist does, think again.
In the Retail Distribution Review, the Regulator aims to provide for situations where tied agents, or Product Supplier Agents (PSAs) are unable to comply with clients’ needs as their employer does not offer the product the client requires.
This was always one of the main bones of contention between independent brokers and tied agents, with the former charging that a PSA cannot provide clients with comprehensive service. There is also the little issue of objectivity. If you know that company A offers better benefits, but you are employed by company B, then you should do the right thing and refer the client to someone else who can, not so?
What then is Gap Filling?
The initial RDR Proposal R stipulated that a PSA would not be permitted to provide advice on any financial products other than those issued by its home supplier or another product supplier forming part of the home supplier’s group. Some commentators argued that the approach should be relaxed to allow PSAs to “gap fill” by recommending products of other suppliers where the home supplier or its group’s product ranges does not meet customer needs for various reasons. Such an agreement would be subject to the approval of the home supplier.
The problem that arises concerns product and advice accountability. Under the proposed new dispensation, the product supplier who employs the tied agent accepts full accountability for his or her actions, but what now if there is another supplier involved?
- A PSA will be permitted to provide advice on investment portfolios of “external” product suppliers offered on the platform of an Administrative FSP that forms part of the home supplier’s group.
- Tied agents of long-term insurers will be permitted to offer the products of another long-term insurer only in cases where the home insurer is not licensed under the Long-term Insurance Act to issue the class of policy concerned. This is an interim measure being introduced in Phase 1 of RDR to ease the transition from the current model to the final stricter approach to gap filling.
Other Possible Deviations
- Consideration is currently being given to a model in which a PSA of one product supplier will also be permitted to act as a PSA of one or more other product suppliers operating in a completely separate, non-competing line of business or financial services sector. Intermediaries, in the whole, favoured this approach while product houses did not.
- Some commentators argued that “gap filling” should be permitted in respect of highly commoditised products, where product pricing is the only real product differentiator. Fixed interest compulsory annuities, as published every week in this publication, were highlighted as a particular example of this, where products of different suppliers are identical other than as to their publicly available annuity rate from time to time.
Further consultation with the industry will take place on all four considerations.
A Matter of Choice
Concerning adviser selection, the FSB notes:
We believe that a financial customer who chooses to obtain advice from a PSA should have the assurance that the product supplier concerned is accountable for the advice provided, the design and performance of the relevant product, and the ongoing customer experience, throughout the lifecycle of the product. In other words, the product supplier is held accountable for delivery of all six Treating Customers Fairly outcomes, rather than sharing this accountability with other players. If a PSA were to be permitted to recommend another product supplier’s products this would not be achieved as the home supplier’s accountability would be limited to the suitability of the advice and exclude actual product and service responsibility.
Regulation by Exemption
Under FAIS we saw a number of instances where practical considerations forced the Regulator to exempt advisers from complying with certain regulations and deadlines, for instance the level II regulatory exams and “bespoke” exams for certain licence categories.
Whilst it is heartening to see the Regulator trying to address practical considerations, there is the direct danger that a horses for courses approach may very well lead to the same complexity for both Regulator and those being regulated as is currently the case.
This is of critical importance in an outcomes based environment.