As some advisers' RDR concerns are growing, so too are the number of misunderstandings and misinterpretations. Here, Prudential director of distribution change Russell Warwick has attempted to bust some of the more common myths...
"We need to be members of a professional body"
Not necessarily. Being a member of a professional body will not be a requirement for advisers to receive a Statement of Professional Standing. However, being a member of a professional body may provide a number of key benefits for employers, including guidance on how to satisfy the regulatory requirements.
"We will still be able to call ourselves ‘independent' if we offer an independent service alongside a restricted advice service."
No you won't. Since depolarisation it has been possible for firms to offer different services within the same entity. However, a key requirement is that you do not mislead your client on the types of advice which your firm offers. Therefore you will not be able to use the term 'independent' in the title of your business, or describe your business as independent, if you also offer a restricted advice service.
"We will need to inform the regulator before 2013 of the type and level of advice we will offer."
You won't need to inform the regulator of the types of advice you offer, although as part of your quarterly Retail Mediation Activities Report (RMAR) you will be required to include details of the types of advice you have offered and your charging mechanism.
Ten RDR misunderstandings clarified
"The adviser must send a copy of the Adviser Charge Agreement to relevant product providers."
The product provider will not need to know whether the client has paid the adviser directly for the advice they have received and will not need to see the Adviser Charge Agreement. However, the product provider will need to know if a product sales is advised or non-advised.
"Commission is adviser charging by another name, if it comes from product deductions."
No. Post R-day, product deductions from the initial investment, as part of an adviser charging agreement, will be treated as a normal encashment of units. This may have tax implications for some clients, in particular regarding tax deferred allowances on bonds and qualifying life products. Potentially, a capital gains tax liability may be triggered by an early encashment of units. To avoid this situation, product providers may decide to allow adviser charges to be deducted before the premium is invested; alternatively, the customer may decide to pay the adviser separately for their advice.
"If the client exercises their right to cancel a product during the ‘cooling off' period, the provider must return all of the client's premiums and claw back any adviser charges from the adviser."
Not necessarily. Product providers have potentially two options: (1) refund the client's fund value including the amount paid on to the advisory firm - this will need to be reclaimed by the provider; OR (2) just the amount invested - here the client will need to pursue the balance with their adviser. For pension transfers and annuity vestings, only option (1) is permissible - if the client cancels during the cooling off period, the product provider must ensure that the ceding scheme is able to reinstate the pension as if no transfer had taken place.
"Deducting charges from pension products will interfere with tax relief?"
No. HMRC and the FSA have confirmed that deductions from pensions products will be treated as "administration charges" and as such will not interfere with any tax exemption. HMRC and FSA will be monitoring how this is applied.
"Adviser charges need to be taken as a fee or a product deduction?"
Not necessarily. These methods may also be used together. Essentially it will be up to you and your client to agree the amount and method of payment for initial and ongoing services. However, the FSA has introduced guidance which requires advisers to consider the total cost of giving advice when making a recommendation - this may influence how much you charge for simple transactions.
This information was produced by Prudential
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