Before the implementation of RDR on 1 January 2013, there was much debate about the likely impact on structured products.
A key message was: “If a structured investment product would best meet the client’s needs and risk profile, then an independent adviser should have sufficient knowledge of these products to be able to recognise this and make a recommendation to buy this product.” (FSA consultation paper CP09/18 –Distribution of Retail Investments: Delivering the RDR, June 2009).
Now that the regulations have kicked in, the advice landscape is far from clear. Advisers who thought structured products were complicated enough – let alone difficult to advise on – have been none the clearer since 1 January. One challenge in particular relates to independent or restricted advice.
The Retail Distribution Review requires all advisers to take into account all investment options when making recommendations to clients.
That being so, an independent adviser will have to include structured products in his research process and make a judgement on the appropriateness of its use for a client. The FSA has produced some helpful guidance on this with a “Suitability of Advice” assessment template, which contains some 10 pages of detailed fact-finding and risk assessment. This is a clear marker as to the seriousness with which the regulator views this area of advice.
The problem is compounded by the regulator’s reshaping so that certain structured products are governed by RDR rules whereas others are not. As I understand it, those structured products that are “deposit- based” are not governed by RDR regulation, whereas plans that are “investment-oriented” are covered by the new rules.
In a 2012 study, Inside Structured Products, Defaqto produced some powerful business intelligence on the FSA view on such plans in the post-Lehman Brothers world: “The key outcome from this document was that any companies wishing to promote structured products must be clear on where the client’s money is invested, clearly explain counterparty risk, prominently state that capital is at risk when relevant, use language the advisers and investors are likely to understand and avoid using the terms ‘guaranteed’ or ‘protected’ if thought to be misleading.”
Another consequence of this differentiation between structured products is that advisers who have adopted a “restricted advice” business model may take the view that they are effectively excluded from having to advise on structured products.
This may help to reduce advice risk to their business but could also be seen as negative and may mean clients miss out on the opportunity.
The proof of the pudding will be when true clarity emerges on what a “restricted advice” model looks like. This is at odds with one of the aims of RDR, which I believe was to make investment advice and products clear and fair, and not misleading.
