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Retail Distribution Review (RDR)
The RDR rules come into force on 31 December 2012 with the ultimate aim of ensuring better outcomes for consumers. Here, we set out the key changes for firms that give investment advice and explain what you need to do to get ready.
The RDR affects all firms that give investment advice. The key changes are:
- increased knowledge and professional requirements;
- a new requirement to describe your service as either independent or restricted; and
- the introduction of adviser charging.
Increased knowledge and professionalism requirements
The new requirements mean that you will need to attain an appropriate qualification which may include gap-fill.
When gap-filling, the three areas your documentation should cover are:
- the learning gap;
- the activity you are going to carry out to fill that gap; and
- evidence of how the activity filled that gap.
All gap-fill needs to be structured. This includes seminars, e-learning courses, lectures, conferences and workshops. You do not need to be tested on what you have learned, but you need to be able to evidence and demonstrate that the gap has been filled. Accredited bodies will use this information to issue your statement of professional standing (SPS), which will show that you have met the level 4 requirements. Accredited bodies will be required to sample a minimum of 10% of advisers to ensure that they have met the professionalism requirement.
Advisers will need to identify, undertake and record a minimum of 35 hours continuous professional development (CPD) a year. At least 21 hours of this must be structured learning, as described above.
Description of advice services
All advisers will need to disclose their advice service as either independent or restricted.
If you want to carry on calling yourself an independent financial adviser you will need to consider all retail investment products. This is wider than the current range of packaged products. It includes structured products, unregulated collective investment schemes (UCIS, exchange traded funds (ETFs) and investment trusts. We are not saying that you have to advise on all of these products, but you need to remain able to advise on them if required. You may want to use your CPD to maintain your knowledge on these products.
Alternatively, you can declare your advice as restricted. You can either do this by restricting the provider that you use or the range of products that you choose to advise on. Restricted advice is still advice and firms choosing to offer this option must meet all our other requirements. It should not be viewed as a lesser option.
You must set a charging structure before 31 December 2012. You will not be able to take commission for new advice and providers will not be able offer it.
You need to disclose upfront how much your advice will cost and how it will be paid.
Every firm is different, so your charging structure should reflect the service that you provide and what your clients are willing to pay. There are several different charging structures to consider, including:
- deduction from a client’s investment;
- cheque from the client;
- fixed fee;
- hourly rate;
- percentage of funds invested; and
- menu of pricing options.
The transition from a commission-based to a fee-based model can take time, so start assessing your business model now.
Using your current procedures
You can use your existing systems (perhaps these were implemented as part of your demonstration of TCF) for the RDR, for tasks such as:
- keeping your knowledge up to date so you meet the required 35 hours of CPD;
- researching suitable products, whether you offer independent or restricted advice; and
- using your management information and client feedback to help devise an appropriate charging structure.