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Traffic light guide to regulation – appendix

Further information on personal financial planning and the traffic light guide to regulation.

The Retail Distribution Review (RDR): Independent and restricted advice

From 31 December 2012, a new set of rules came into force for those giving investment advice to retail clients. The rules set out how advisers can describe their services to clients, as well as the criteria that advisers must meet to fulfil the new requirements.

These rules replaced the old regime of independent, whole of market, multi-tied and tied advice, with a view to simplifying terminology and increasing transparency for the consumer. Now, an advisory firm must describe its advice services as either independent or restricted.

In providing independent advice, a firm should not be restricted by product provider. It should be able to objectively consider all types of retail investment products that are capable of meeting the investment needs and objectives of a retail client. Restricted advice, which is advice that does not meet the standard for independent advice, will come in many different forms. While a firm needs to describe the nature of its restricted advice service to clients, it is free to choose the words that are appropriate for its service.

Independent advice

Independent advice is a personal recommendation to a retail client in relation to a retail investment product, where the personal recommendation meets the requirements of the rule on independent advice.

A retail investment product is:

  • a life policy;
  • a unit;
  • a stakeholder pension scheme;
  • a personal pension scheme;
  • an interest in an investment trust savings scheme;
  • a security in an investment trust;
  • any other designated investment that offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in the financial asset; or
  • a structured capital-at-risk product; whether or not any of any of the above are held within an ISA or Child Trust Fund.

The independence rule is as follows.

A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers are:

  • based on a comprehensive and fair analysis of the relevant market; and
  • unbiased and unrestricted.

Types of products

Firms offering independent advice need to assess "investment needs and objectives" on an individual client basis. In general they will need to provide advice on all types of retail investment products. A firm could decide that it will specialise in certain financial situations such as saving for retirement. However, this is likely to affect a firm’s independent status.

Product provider

The standard for independent advice centres on the twin tests of being "based on a comprehensive and fair analysis of the relevant market" and "unbiased and unrestricted".

If a firm cannot or will not advise its new and existing clients on a particular type of retail investment product in the market in which it operates, or can only consider products from one or a restricted number of product providers, then its advice will not meet the standard for independent advice. In other words, the justification for a firm excluding types of retail investment products from its range, be that by product type or product provider, must be centred on the needs of the client.

Restricted advice

Restricted advice should not be confused with the pre-RDR tied or multi tied advice. It can be very different. An advisory firm can restrict its advice proposition by either product type or product provider, or both.

A firm may decide to offer advice on all types of retail investment products, but be limited to a small panel of product providers. This is similar to the pre-RDR regime of multi-tied advice. Please see chart below.

Independent advice Independent advice
Tied advice Restricted advice
Multi tied advice Restricted advice
Whole of market advice Restricted advice

It may still be possible for an ICAEW chartered accountant to make a referral to a restricted advice firm. However, they must ensure that the client’s needs are addressed appropriately and that the advice given is objective and free from bias or conflict of interest. In these cases, the ICAEW chartered accountant would need to be on a very specific case-by-case assessment according to the investment needs of that particular client.

Adviser charging

The RDR also introduced new rules regarding the way advisers can be paid. Advisers can no longer be paid commission through a product charge by a product provider; instead, the firm will need to be paid an ‘adviser charge’ agreed with the client in advance. This fee can be paid either directly from the client (eg, by cheque), or can be deducted from the client’s investment. Advisers also need to provide their clients, upfront, with a clear charging structure and clear information on their charges.

It is the firm that actually provides the advice to the client. Whether a firm decides to offer independent or restricted advice, the same requirements regarding qualifications and adviser charging apply.