Firms doing everything by the book to remain independent are only addressing half the battle - they must prove it too. Julie Hepworth of Perspective Financial Group explains how.
While the majority of adviser firms will have prepared well in readiness for the Retail Distribution Review (RDR) ‘go-live’ date of 31 December 2012, there may be some who were relatively relaxed about their compliance with the new rules and are currently labouring under the potential misapprehension they will be subject to a ‘grace period’ to get up to speed.
This is a dangerous presumption to make as everything that has been published to date suggests any action the regulator takes – be it the Financial Services Authority (FSA) or the Financial Conduct Authority (FCA) once it assumes supervisory control – will be retrospectively enforced back to 31 December 2012.
If firms have started off on the wrong foot, they can expect any censure or action to be dated from then. There is, of course, a difference between wilful negligence and overlooking minor operational aspects, but given the long lead-in time to the RDR’s implementation, the regulator is unlikely to be impressed either way.
Time to walk the walk
We recently heard Linda Woodall, the FSA’s head of investment intermediaries, announce that the regulator will conduct four thematic reviews in 2013, one of which will be description of advice.
It will look at whether firms holding themselves out as ‘independent’ are meeting the requirements of the classification and whether ‘restricted’ offerings are an accurate description of the service being provided. Proof of ability and competence are everything, and firms should be in no doubt the regulator will want to see clear evidence that independent firms are living up to the label.
Similarly, restricted firms will find themselves having to demonstrate the same in the provider and/or product areas in which their advisers are authorised to provide advice. Firms with a clear proposition and tight controls that keep detailed records to evidence their research across all retail investment products (RIPs), and demonstrate adviser competence across all RIPs, should find this whole process relatively straightforward.
However, it will certainly be beneficial for firms to adopt a two-pronged attack strategy in order to demonstrate their compliance with the independence rules. The first part of this is the need to display the fact all advisers have adequate knowledge to consider – and advise upon – all RIPs, whether it be in tangible form or through the undertaking of structured CPD.
If individuals study material on specific areas they were previously less familiar with and consolidate this learning through a test or similar, then it provides the regulator with clear evidence of a willingness to develop.
It is also worthwhile refreshing knowledge of areas where advisers may not conduct as much business so as to prevent, what we might term, ‘knowledge fade’.Repeating tests on a yearly or six-monthly basis could also be a useful exercise.
The second line of attack should be formed by advisers demonstrating they have the ability to research the whole of the market for all RIPs. Using existing sourcing systems and the like may not prove sufficient here, so firms may want to consider investing in extra research tools in order to consider the market more fully and include, what could be deemed, more obscure offerings.
Another important facet of the new RDR regime – and a further opportunity for firms to prove their independence – is the suitability report issued to clients. This should not become a ‘reasons why not’ letter which would unnecessarily elongate the document, but should regard client understanding as its priority.
The client file itself can be the medium whereby it is explained and documented why other investment products were not considered suitable. Advisers should consider including a pro forma in each file which captures the reasons why certain tax wrappers, products, underlying investments and composition were not deemed appropriate in each instance. Doing this will not only help demonstrate a firm’s independence, but will also prove invaluable if a complaint ever needs to be defended at a later date.
In a very true sense we are back to the old adage, ‘if it’s not written down, it does not exist’ and we could add the old phrase used by maths teachers, in that firms now have to show their ‘workings out’.
Much like students being examined, it is not sufficient to simply provide an answer with no detail about how that point was reached and advisers must therefore demonstrate properly how they arrived at such a decision.
Firms will obviously be doing everything by the book in order to stay within the guidelines of being independent, but that is only half the battle – they must prove it as well. If 2012 was a year of preparation and decision making in time for RDR, 2013 will be the year in which firms prove they are able to operate within the new regime.
At every turn, firms must be able to demonstrate the ability of their advisers, the overall capability of their firm and their knowledge and know-how. Do this and they will not only be looked upon favourably by the regulator, but they can rest assured they are making the best possible decisions for their clients as well.
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Reporting to Steve Hill
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