20 July 2012

RDR and offshore products – The long arm of the FSA

On the face of it, the FSA has no powers to regulate non-UK firms but, by widening the scope of retail investment products and insisting all advice is explicitly paid for by the client, RDR has effectively outlawed commission payments from offshore providers to UK advisers from the end of this year.

Bruce Davidson of Altus Ltd continues with his article in Global Banking and Finance Review:

That includes offshore bond providers and fund managers alike and, whilst some of the bigger Transfer Agents have recognised this and are working on solutions, others are still unaware that they are impacted and may be in for quite a shock in January 2013 when commission cheques get returned. 

Addressing this urgent challenge is not as simple as just turning off the commission tap though. Payments are still allowed for advice on exactly the same funds to other distributors in Europe and can continue for both non-advised and legacy business in the UK too, at least for now.

Neither is it a case of establishing clean share classes for every fund sold into the UK. Many of these offshore funds are sold infrequently to UK retail clients at levels which do not justify the costs associated with launching and maintaining a new retail share class – typically £10-20,000 per annum.

The precise solution to this tricky challenge will vary according to circumstance and technology but will almost certainly involve ring-fencing holdings within existing accounts according to their RDR commission treatment. Designing this segregation in software is a significant undertaking but implementing it across a varied distribution and client base is even more difficult. 

At the moment the location or MiFID status of an investor has no impact on how the distributors of funds are remunerated. With the advent of RDR this changes and, whilst the business logic is fairly straightforward, most fund managers do not currently capture sufficient information to make the necessary distinctions. 

First, the fund manager needs to identify the location of the client. That sounds simple but many offshore accounts are held at an omnibus level and contain a mixture of UK and non-UK clients - whose business now needs to be treated differently for commission purposes. Assuming, the distributors can be persuaded to split out the UK clients into a separate account, the fund manager then needs to know about the MiFID status of the UK clients to identify retail business – information which is not commonly shared today. 

Last but not least, they need to establish the advice basis on which each investment transaction was made. Whilst this is not a difficult concept to grasp, it is not something which is currently included in many of the STP trading links to fund managers and would therefore require significant change to systems.

Full article

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