The FSA has published consultation paper 08/3, in which it seeks views on the proposed replacement of the current Initial Disclosure Document (IDD) and Menu, used as a method of providing retail clients with basic information about a firm, by a combined, and in part simplified and less prescriptive, new document, the "Services and Costs Disclosure Document". Since 1 November 2007, when the new COBS rules implementing MiFID came into force, the use of the IDD and Menu has been optional, meaning that firms are free to adopt alternative methods of meeting the disclosure requirements with regard to, in particular, a firm's status and charging structure, under the COBS rules. The proposed single replacement document would operate in the same way, as one alternative method of meeting the relevant COBS requirements (some of which would also be extended to the selling of packaged products to retail customers where this involves non-MiFID business).
The background to the proposal is the FSA's Depolarisation Disclosure Review, part of its wider post- implementation review of depolarisation. The research undertaken by the FSA reported that the IDD and Menu were not having the desired result of improved consumer understanding, in particular as to the status of the adviser and their remuneration. The proposed combined document does not do much about the former, for example, the problem of the confusion that apparently exists for many consumers between the scope of the advice offered by a multi-tied firm as compared with an independent financial adviser, though it does permit in this and in some other areas additional explanatory information beyond that mandated by the IDD. On remuneration disclosure, however, the Menu requirements to specify maximum commission rates and market average commission rates have been removed (though the commission rates disclosed must still include those relevant to the product and not be less than those actually retained in respect of a sale to the client), and the hope is that by simplifying the material and combining everything into one document the disclosures will have more impact.
Although, many firms can be forgiven for a touch of déjà vu when they hear about this proposal, after all it is only three years since the IDD and Menu became part of the disclosure regime, what the FSA is proposing is more evolutionary than revolutionary. The new document is essentially the old IDD with additional cost information. As in the case of the current IDD and Menu, it will not be compulsory to use the new document, and firms will be free to devise their own alternatives if they wish. Retaining a permitted format which provides a safe harbour, is likely to be welcomed by most smaller and also probably many larger firms, especially compared to one of the alternatives discussed in the consultation paper, namely getting rid of the IDD and Menu altogether and leaving it exclusively to firms to work out what form of disclosure documents to use.
Another alternative discussed is dropping the FSA's own guidance format and instead encouraging industry bodies to come up with guidance which could be approved by the FSA. Comments on this alternative are sought by the consultation paper, though the FSA's present thinking is that it would take too long to come up with approved forms of industry documents because of the need for consultation with consumer bodies. However, there seems no reason in principle why both FSA and industry standard forms could not exist as alternatives.
Comments on the FSA's proposals are sought by mid-May, with their coming into effect, if adopted, on 6 August 2008. There would be a transitional period until 31 August 2009 for firms to use up their old stocks of the IDD and Menu.