This briefing note outlines the key regulatory changes proposed by the Financial Services Authority ("FSA") in the UK which changes the way retail investment products are distributed to retail clients in the UK and how this may affect Irish fund clients.

The Retail Distribution Review ("RDR") conducted by the FSA has led to the introduction of new rules which are intended to ensure that firms compete upon the basis of the services they provide to clients and not by reference to the deals they may have in place with product providers. These rules are relevant to those Irish funds which distribute units or shares of UCITS funds through UK firms.

The changes contemplated by RDR are to take effect by 31 December 2012 and will have a significant impact on the provision of investment advice and payment for that advice for retail clients in the UK. The new rules aim to ensure consumers have trust and confidence in the advice they receive and that advisers are not simply recommending to clients those providers which pay the highest commission.

Summary of the key proposals

There are three elements to the RDR rule changes.

  • Improving clarity for consumers about advice services: Advisory firms will be required to identify clearly to clients whether their services can be regarded as "independent advice" or "restricted advice". Independent advice is given where the adviser genuinely makes recommendations based on comprehensive and fair analysis of their clients' needs. Where advice is given to clients only on a limited range of products this is restricted advice.
  • Addressing the potential for remuneration bias: Firms giving investment advice will be required to set their own charges for the advice they provide and the fees must be agreed with their clients. Product provider commission will no longer be paid to advisers in order to prevent advisers automatically recommending products that pay commission and products that pay the highest commission.
  • Increasing professional standards of advisers: The minimum level of qualification for investment advisers will be raised to a new, higher level. They will be required to abide by a code of ethics and will need to adhere to additional standards for continuing professional development.

Firms and products are affected by the RDR

The RDR rules apply to all UK authorised firms (and also branches of EEA licenced firms with a UK branch) involved in producing or distributing retail investment products and services which include units in a UCITS. This includes independent financial advisers, wealth managers, fund managers, private bankers and stockbrokers.

Relevance for fund clients

Units in an Irish UCITS fund fall within the definition of a retail investment product. From 31 December 2012, where an investment in the Irish fund is the subject of investment advice given to a UK retail client, the relevant adviser will be subject to the new rules under the RDR. In such circumstances, for new investments as and from 31 December 2012, it will not be possible for an Irish fund to pay commission to any adviser that provides advice to retail clients in relation to the fund. Any adviser that provides advice to a retail client relating to the fund will need to be remunerated for that advice by way of an adviser charge paid directly by the client.

For existing investments in an Irish UCITS fund made prior to 31 December 2012, there is some scope for trail commission to continue to be paid to the adviser, but only in certain circumstances. However, if advice on an existing investment occurs after 31 December 2012, this may affect the ability to pay trail commission.

Where Irish funds are distributed through a platform/fund supermarket, similar rules will prevent payments being made to platform providers but these proposals are still under consultation. A policy statement is expected to issue in relation to platforms at the end of 2012 with the new rules coming into force on 31 December 2013.

Conclusion

For those Irish fund clients who distribute UCITS to UK retail investors using UK firms it is important that as and from 1 January 2013 UK investors can only subscribe for share classes in respect of which no commissions are payable by the fund to those who sell or distribute the funds.

We recommend that Irish fund clients who are affected by RDR seek UK legal advice on the impact of RDR on their business and discuss the establishment of RDR-compliant share classes with us.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.