The FSA has published a consultation paper on professional standards, adviser remuneration in the corporate pensions market, and the applicability of the Retail Distribution Review (RDR) proposals on advisers of pure protection products. The industry will welcome some aspects of the consultation paper, in particular the significant concessions that have been made in relation to professional standards.
This e-bulletin summarises the key proposals and next steps.
- The FSA will govern professional standards – a Professional Standards Board will now not be established
- Professional bodies will be expected to play an important role in raising standards
- More flexible methods of assessment methodology will be introduced for existing investment advisers, as alternatives to written and oral exams
Corporate pensions market
- Product provider commission will be banned
- "Consultancy charging" will be introduced
Pure protection advice
- Adviser charging will not be extended to advisers of pure protection products
- Advisers will be required to disclose commission received from product providers where a pure protection policy is sold alongside investment advice
- A labelling regime for pure protection advice will be introduced
- Increased professionalism standards may apply
Governance of professional standards
- The FSA will govern professional standards for advisers. This means that the Professional Standards Board, which had been previously proposed, will now not be established. This is based on feedback that the FSA should make better use of its existing powers and avoid incurring potentially duplicative operating costs. It is also said to be consistent with the FSA's aim to adopt a more intensive approach to supervision and to focus on individuals in key positions within regulated firms.
- The FSA will expect professional bodies to play an important role in raising standards, by ensuring that investment advisers obtain and maintain qualifications, keep their knowledge updated and adhere to professional standards of behaviour that at least comply with FSA minimum standards. A new requirement will be imposed on firms to obtain independent confirmation that employees have met requirements for attaining and maintaining technical competence. The FSA will "recognise" certain professional bodies, so that firms which have employees who are members of these bodies will be able to rely on that membership for this confirmation. The FSA will consult on the criteria that professional bodies must meet to achieve recognised status.
- The FSA has provided a concession for existing advisers of retail investment products, in that more flexible methods of assessment methodology will be permitted, as alternatives to written and oral exams. The FSA had originally proposed that experienced existing advisers who would prefer not to take written exams, but believed that they could demonstrate knowledge at QCF Level 4, could undergo an oral version of the written industry examination, as an "alternative assessment". This alternative applied only to investment advisers in practice as at 30 June 2009, and would have been withdrawn after 31 December 2012. The FSA now believes that oral assessments are too restrictive and that other assessment methods can be used, provided they meet the requirements of the relevant qualifications' regulator. These methods will be permitted on an ongoing basis, as opposed to being a transitional measure. The FSA has stated the criteria that such assessments must meet.
- The FSA had previously proposed that advisers who are on course to complete, or already hold (at least) QCF Level 4 qualifications, can fill any gaps with the future appropriate examinations, using structured continuing professional development (CPD) undertaken before 31 December 2012, rather than further examinations (known as the "no regrets" provision). The FSA has now helpfully produced a list of "transitional" QCF Level 4, or equivalent, qualifications. It has also given further clarity on how CPD can be used to fill any knowledge gaps.
- The FSA has proposed to define an "existing adviser" to be an individual who has been deemed competent at or before 30 June 2009. The FSA originally envisaged the cut-off date to be 31 December 2010.
- The FSA has proposed to extend the ban on product provider commission to the corporate pensions market (which includes personal pensions, group stakeholder pensions and group self-invested personal pensions, collectively referred to as GPPs). This ban would apply irrespective of whether advice is given to individuals or whether sales are made by direct marketing information without advice. Commission would be permitted to continue on existing GPPs set up before the ban is implemented, including in respect of new members and increases in existing members’ contributions. The ban would be extended to prevent product providers paying commission on investment products linked to occupational pension schemes sold as alternatives to GPPs.
- The FSA has proposed to introduce "consultancy charging" previously called "arranger charging") in the corporate pensions market. All firms that assist employers with setting up or administering corporate pensions will have to agree their charges with the employer, rather than receiving commission set by the pension provider. Unlike the FSA's proposals for adviser charging in relation to other investments, "consultancy charging" will apply regardless of whether the end investor (i.e. the employee) receives advice. Full disclosure would be required by advisers to employers of the potential fee, including the likely total. The ban on factoring already proposed for individual investments, including personal pensions, will extend to adviser remuneration in relation to GPPs.
Applicability of RDR proposals to advice on pure protection products
- Pure protection products are defined as term assurance, critical illness cover and income protection - payment protection insurance has so far been excluded from the FSA's analysis. The FSA does not view remuneration structures to be a key driver of problems identified in the market for pure protection products. Further, it believes that the existing regulatory approach provides a sound basis for protecting consumers from inappropriate sales. There are therefore no proposals to extend adviser charging to advice on pure protection products.
- The FSA has proposed a requirement for advisers to disclose commission received from product providers where a pure protection policy is sold alongside investment advice. The FSA hopes this will make it clear to customers as to what is included in the fee for the investment advice, and how the adviser is remunerated for the pure protection element of their advice.
- The FSA believes that there is merit in adopting a labelling regime for pure protection advice (i.e. "independent" or "restricted" advice). The FSA has not proposed an explicit requirement for advisers to consider the full range of pure protection products when assessing suitability. However, the FSA envisages that an "independent" adviser should be required to consider the full range of possible ways of meeting a customer’s protection needs in making their suitability assessment. Should advisers choose to limit their advice to one type of pure protection product, they would have to label this advice as "restricted".
- The proposed labelling regime for advice in relation to retail investment products has proved controversial given concerns (inter alia) that it may confuse consumers. The FSA's latest proposal to apply a different labelling regime for advice in relation to pure protection products, may cause even greater confusion.
- The FSA is open-minded as to how the increased professionalism standards for advisers providing advice on retail investment products may apply to pure protection advisers. It will consider whether: (1) advisers of pure protection products should be subject to the same professional standards as those advising on retail investment products, and (2) whether there should be specific professional standards for pure protection advisers who do not give advice on retail investment products.
Next key steps
- Comments are invited by 16 March 2010.
- The FSA will make the final decision on the governance of professional standards in Q3 2010 and will also provide feedback to the questions on CPD and ethical standards then.
- A Policy Statement will be published on the implementation of "consultancy charging" in the corporate pensions market in Q3 2010.
- A Policy Statement and final rules on adviser charging and service proposals contained in the previous consultation paper (CP09/18) relating to advice on retail investment products will be published in Q1 2010. This will also include feedback to questions on simplified advice and associated qualification requirements.