Advisors must decide – tied or independent

Advisors must decide – tied or independent

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Advisors must decide as the FSB refines its proposals for RDR’s implementation.

The Financial Services Board (FSB) has clarified some of its thinking with regards to the upcoming implementation of phase one of the Retail Distribution Review. At a media briefing on Friday, the regulator provided more detail on the intended categorisation of advisers.

The initial proposals put forward by the FSB were that advisers would be categorised as tied, multi-tied or independent, depending on their relationship to product suppliers. However, Leanne Jackson, the head of market conduct strategy at the FSB, said that a lot of the feedback they had received on the proposal was that this three-tier model would not help customers to better understand what to expect from their advisers. The concept of a ‘multi-tied’ agent was just too complicated.

The FSB’s current thinking is therefore to use a two tier model, which distinguishes only between a tied agent and an independent adviser.

Deputy Executive Offier: FAIS at the FSB, Caroline da Silva, said that the critical issue was for customers to know whether or not the advice they were receiving was influenced by their adviser’s relationship with the product supplier.

“You can only be an independent broker if you are free from product supplier influence,” Da Silva said. “And we deal with all elements of influence, including ownership structures, targets or contractual requirements, and binder relationships.”

Binder arrangements are particularly prevalent in the short term insurance industry, where insurers outsource certain administrative functions to the adviser. Da Silva said that the intention was that these allegiances must be clear and the conflicts of interest in current models must be stripped out.

Being independent will also not be dependent on how many different supplier’s products one can advise on. This was originally part of the proposals, but a number of responses highlighted that this may lead to the unintended consequence of advisers giving inappropriate advice “just to make up the numbers”.

“Product supplier influence is the most important issue,” said Da Silva.

Jackson was also clear that while an adviser may move between categories during their career, they cannot be both at the same time. Specifically she highlighted the confusion that is caused when a tied agent gives advice on another supplier’s product, either because there is an agreement between the suppliers, or the supplier to which the agent is tied does not offer a product in a specific area.

“It must be absolutely clear to customers and everyone else in the industry in what capacity an adviser is providing advice,” Jackson said. “At the moment, the same person can be a tied agent for a product supplier for one thing, and call themselves independent for other things. That becomes very difficult.”

This is not only confusing, but also blurs where the responsibility lies if something goes wrong. The FSB wants it to be clear that if an agent is tied, then the product supplier must stand behind the advice given. If however they are independent, then it is the adviser themselves or their advice firm that is ultimately responsible.

The FSB also said that, although this would not be part of phase one of RDR, it would be looking at the issue of advisers who hold category two discretionary fund management licenses and run their own white labelled unit trusts. There are concerns around the conflicts of interest this creates if advisers are putting clients into their own funds.

Da Silva noted that in phase two of the implementation of RDR, the regulator will be looking at the question of whether such funds run under a category two license should be seen as product suppliers. This would make the advisers who run them tied agents.

The FSB also intends to look at the remuneration models for investments, specifically where there are multiple levels of fees. It may also look at how category two licenses are issued, to differentiate between advisers who have a fund management mandate and true asset managers.



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