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Proposed categorisation of financial advisers – Seven focus areas identified under RDR

The FSCA recently published RDR Discussion Document updates and, amongst others, requested input on various aspects of the adviser categorisation model.

The seven key focus areas of the document are:

Section 1: Terminology to describe adviser categories

Appropriate terminology is required to designate the two proposed adviser categories in order for customers to understand who they are dealing with. The FSCA has proposed potential designations based on consumer research and suggestions.

Section 2: Practical implications of two-tier adviser categorisation

You can only be a PSA (product supplier agent) or RFA (registered financial advisor), not both. Entities licensed to provide financial advice will have to indicate clearly which adviser category they will operate in, and be licensed accordingly. However, exceptions were proposed in certain scenarios, and respondents raised various problems they had with the “either-or” approach.

The FSCA outlined its view as follows: Both PSA and RFA models will be allowed to operate within the same group of companies (i.e. a holding company and all of its subsidiaries), provided they are operated through separate legal entities.

The FSCA also elaborated on the juristic representative model and asked specific feedback on whether these entities should be allowed, or not.
A question is raised whether a PSA, who may provide advice only in relation to its own group’s products, would be permitted to provide non-advice intermediary services in relation to “external” products or product suppliers.
The FSCA reaffirmed its position that advisers may not act as representatives of more than one adviser firm.
Another aspect considered is that the COFI Act will introduce an activity-based licensing framework under which each financial institution will hold a conduct licence, which will in turn authorise the financial institution to perform one or more specifically defined activities.
Changes in contractual relationships also raised a few questions, especially around the extent to which advisers who change their contractual relationships will be able to continue to service existing customers and around their entitlement to ongoing remuneration. A few scenarios are discussed.

Section 3: Limiting product supplier agents’ advice to home group products and services

In this section the FSCA explains its current thinking on the range of products and services on which a PSA may provide advice. It also clarifies that retirement funds will be reviewed for adviser categorisation purposes. Furthermore, it points out the implications for cell captive businesses as per the regulatory proposals set out in a recent FSCA Position paper. Additionally, it proposes the removal of the current “no gap filling” exception for insurance policies in a class of products for which the insurer is not licensed.

Proposed requirements relating to referrals and leads by PSAs are also discussed in detail.

Section 4: Use of the designation “independent”

A number of the changes to the FAIS General Code were informed by the RDR reforms. RDR related changes include a new section 3.5 of the General Code, which disallows any FAIS licensed FSP or its representative from describing itself or the financial services it renders as “independent” in certain situations.

Section 5: Use of the designation “financial planner”

The FSCA confirms their intent to acknowledge the professional status of qualified financial planners by reserving the use of the designation “financial planner” for those holding a formal professional designation in this discipline. Therefore, the proposal is to disallow advisers who do not hold a professional financial planning designation from describing their services as “financial planning” and describing their recommendations as a “financial plan”.

Section 6: Product supplier responsibility

This section discusses various approaches to the product supplier responsibility for RFAs. In particular a distinction between product supplier responsibilities for RFAs that are “independent” of the product supplier and those who are not.

Section 7: Considering a “multi-tied” advice model for different product classes

According to the FSCA, although a “multi-tied model” would be a partial deviation from the two-tier categorisation approach, it is worth considering as it potentially allows some degree of flexibility around the otherwise strict “no gap filling” limitation, while avoiding the legal complexity and potential conflicts of interest in allowing a tied adviser to also offer products of competing principals.

Comments to the FSCA are due by end March 2020. If you have strong views on any of the seven points summarised above, please read the discussion document for more detail, and share your views with us.

Click here to download the Retail Distribution Review: Discussion Document Categorisation of financial advisers and related matters.

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