As the end of another year draws to a close, the Financial Services Authority (FSA) has implemented a series of reforms to the regulation of retail financial advice.
Today sees the implementation of the Retail Distribution Review (RDR) which improves standards of financial advice for all consumers.
The RDR implements three main measures.
Commission on the sale of most investment and pension products has been banned from today, 31st December 2012.
This means that financial advisers will have to agree advice charges with clients before providing any services. This new system of ‘adviser charging’ should result in a more transparent remuneration regime for advice, with fairer charges for advice which are proportionate to the services being provided.
All financial advisers need to be qualified to a much higher standard than before.
From today, if your financial adviser does not hold a Level 4 qualification (equivalent to a Diploma), they will not be able to provide advice.
Advisers will also need to hold an annually renewable Statement of Professional Standing (SPS) from a professional body, such as the Chartered Insurance Institute.
Finally, financial advisers will have to provide a service that is either independent or restricted.
The new standard for independent financial advice is advice that is genuinely free from bias, with all types of retail investment products considered.
Restricted advice will be provided by any adviser who does not meet this gold standard of independent financial advice.
Whilst these three changes being implemented by the RDR should result in better standards of advice for consumers, there are also some unfortunate inconsistencies and oversights.
The commission ban only applies to new products implemented from today, so existing products could continue to pay commission in the future.
It also does not apply to some insurance products, which means that financial advisers could continue receiving commission if they shift their focus to the sale of mortgages and insurance products only.
Execution-only investment platforms, where no advice is provided, are also exempt from the commission ban for the time being, until new rules are introduced in 2014.
Despite these inconsistencies, we believe that the Retail Distribution Review should result in better outcomes for the consumers of retail financial services.
Photo credit: Flickr/maccath
