The Financial Services Authority (FSA) has finally published its new rules - known as RDR - to tackle commission bias from advice on retail investment products.
"If this market is to survive... people need to know their adviser is acting in their best interests and is well qualified to carry out that role," said Sheila Nicoll, FSA director for conduct policy. "Today's new rules are designed to boost confidence and trust in the retail investment market by removing commission bias, actual or perceived, and exploding the myth that investment advice is free."
The FSA's Retail Distribution Review (RDR) sets up new rules about the cost and nature of advice, including a ban on commission from the end of 2012, when firms will have to detail how much they charge for their services rather than hide the cost of their advice behind the cost of a product. One fundamental change is that the cost of the advice will be agreed between the consumer and the adviser, not between the adviser and the product provider. RDR also obliges firms offering independent advice to demonstrate that their recommendations are based on a comprehensive and unbiased analysis of the market, and that any product selection is made in their client's best interests.
The FSA's RDR policy statement states that the regulator has based its new definition of 'retail investment products' on the EC's Packaged Retail Investment Products (Prips) review and that the RDR rules might be changed 'when the final shape of European regulation is known'. In response to its consultation paper, the FSA has now created a new definition of 'retail investment product' in its handbook, which as well as packaged products now includes unregulated collective investment schemes, all investments in investment trusts, structured investment products and 'other investments that offer exposure to underlying financial assets, but in a packaged form'.
The regulator said it will include products outside its current definition of 'packaged products', despite objections from some respondents to its consultation. "We propose to modernise our current approach, applying the amended rules discussed in this paper slightly more widely to cover 'retail investment products' more generally, including structured retail investment products, unregulated collective investment schemes (including those that are exchange traded) and those investment trusts not currently captured, as well as the products that we currently classify as 'packaged products'," said the FSA. Some respondents expressed reservations that exchange-traded funds and structured deposits have not been included in the definition of retail investment products.
The regulator cited SRP data as it said its need to cover structured products was demonstrated by their growing importance in the market.