FSA Issues Retail Consultation Paper – Snares UCITS and Structured Investments

The FSA has developed a reputation within the retail sector for issuing consultation papers, undergoing a call for responses and then doing whatever the mandarins had decided upon in the first instance anyway.

Retail advisers recall only too well that Alistair Darling was intrinsically involved in implementing commission disclosure and performing the role of hatchet man to the retail sector, which has seen the number of advisers shrink exponentially from the heady days of the 1980’s. If the insurance sales sector had been the mining industry, New Labour would never have touched it in such a cavalier fashion nor have been re-elected so many times.  

Here and now, the FSA has moved on from the idea of commission disclosure to a fee-based, no commission fudge as the industry model. This is the thrust of the new consultation paper entitled, “Distribution of retail investments: Delivering the RDR”, and December 2012 is the proposed implementation date for the new rules.  

“RDR” refers to the Retail Distribution Review which has been underway in one form or another for at least ten years.  

Moving hungry insurance salesmen and advisors to a fee-based remuneration model may not seem such an earth shattering change but the consultation paper envisages new rules embracing more than the traditional packaged products. So called “adviser charges” will be agreed upon between advisor and client upfront and taken from the funds invested rather than the client writing a cheque for the advisor’s invoice.  

Hang on a moment!  

Instead of a commission set by provider and paid to the advisor there will be a “commission” called an advisor charge, set by the client and paid to the advisor – and what happened to fee-based advisors being paid directly by clients?     Fee-paying retail clients are almost non-existent while virtually every packaged product on the UK market has commission flexibility, and clients are made aware of of commissions upfront so this all seems to be splitting hairs … or is it?  

UCITS and Structured Investments Caught  

Also to be included are unregulated collective investment trusts (UCITS) and structured investment products.  

In other words, unregulated and structured investment providers are now being drawn under a further, additional, regulatory umberella and this writer believes this is the true intent of the FSA. Practically, UCITs and unregulated investment providers will be required to:  

  • cease paying commissions (it will be a dual ban on commissions with advisors not allowed to receive them and product providers unable to lawfully offer them)
  • account for “advisor charges” paid to advisers from customer receipts;
  • monitoring and validating advisor charges

As funds will need to provide for varying advisor charges different share classes will need to be created to cater for them – while complete flexibility is precluded by having an infinite number of share classes available, it is envisaged that sufficient will be created to handle a menu of advisor charges.  

Oblique Consultation Paper Has All the Potential for Creating a Jam!  

Last night (July 14th), FSA supremo, Adair Turner addressed the regulator’s financial capability conference in Cambridge and made it clear; too much choice for consumers is not a good thing!   I’d like to say I made that up but I didn’t.  

Turner used an analogy of a supermarket research study (true or apocryphal I don’t know) in which he cited two taste tables – one had 6 jams and one had 24 jams. While more customers visitated the larger selection, fewer actually went on to buy any jam – giving consumers choice, Turner argues, leads to buying inertia by consumers.   What utter tosh!  

Turner goes much further than jam: in his speech he stated, “radical questions” are being asked, including whether too much innovation and product complexity is leading to a sales barrier or consumer fear.  Further, Turner discussed whether product complexity should be grounds to ban the marketing and selling of such a product as well as FSA control of pricing.  

What hedge funds and derivatives are doing getting mixed up in retail distribution is one thing, they back some of the more sophisticated packaged products and are a fund manager tool for virtually all of them; but do they really qualify for requiring retail distribution regulation?  

Or is the FSA playing a different game?   

Retail Distribution Made Easy

In a business, your primary goal should always be to decide or assess just exactly who your target audience or market is. Once you have determined who this is, the other aspects of your business would be able to fall in place. This should also be true in a retail distribution system. When planning or starting to offer your merchandise to the retail market instead of or in addition to the wholesale market, then you would be needing to make sure that your system would be in place and would be ready to go way before you start opening your doors.

Although wholesale customers are generally a bit more patient, retail customers have a tendency of wanting to have their purchases immediately. This would mean that you would be needing a good and effective retail distribution system so that you would be able to keep track of all your orders, backorders and shipping so as to always keep your clients updated and informed.

You need to first take the time in deciding when or which days you would be shipping on. You could then take the time to make sure that your shipping company knows your shipping schedule. This would be able to save you the hassle of loading the packages yourself and then taking them to your shipping company. Make them come to you to save a great deal of time. Also, you would need to look at your product inventory to be able to know what you need to package and ship them.

Retail distribution also encourages you to make use of nicer-looking packaging because you would be trying to make good impressions on your clients. However, you need not spend a whole lot on supplies because you would still need to control your costs. Just make sure that you are doing whatever it takes to make everything a good experience for your customers while generating more revenue for your retail business.