There is a notable piece of the old regulatory framework that remains in the FSA handbook: regulatory update 64. It lives on under the auspices of treating customers fairly, so this article looks at the application of this guidance in the post-retail distribution review world when commission can no longer influence an adviser’s judgement.
Introduced under the old Personal Investment Authority, RU64 has not been amended to reflect the new financial environment and seems likely to remain as it is for the foreseeable future.
Commonly referred to as the RU64 test, it is written into the conduct of business rules (sections 19.2.2 and 19.2.3) and in essence dictates that a stakeholder arrangement must be considered first and be fairly and properly discounted before recommending a personal pension arrangement.
A sufficient number of providers have confirmed that they will continue to offer a stakeholder arrangement post-RDR, guaranteeing that a viable market will continue in the absence of any regulatory change.
However although providers will continue to offer such a product, it may or may not facilitate adviser charging and a key principle that has been established is that advisers cannot discount the stakeholder on the basis that it does not.
This is further supported by the fact that the FSA stated that firms may not discount a product from its panel research on the sole basis that facilitation was not offered.
Additionally it may well be that the providers reduce their stakeholder charges even further to take into account the fact that there is no commission, making it even more difficult to justify another product when looking at possible solutions.
Greater flexibility and fund choice are often quoted as reasons for the personal pension, but such considerations can be undermined if it is not equally clear why the client needs them and how they will benefit from a potentially more expensive arrangement.
For example, clients without the resources to build up sufficient funds to meet their desired or required retirement income within their risk tolerance and who are likely to annuitise when crystallising benefits, could typically be expected to be most suited to a stakeholder arrangement. Further they will more commonly, but not exclusively, be associated with more transactional arrangements.
Where it can be demonstrated that a contract offering the client with a better solution can be provided at an equivalent or lower cost, this would be acceptable. That is, your file should evidence the comparison at a ‘factory gate price’ and then disclose and show the impact of adviser charging.
The regulatory requirement is that the recommended product is ‘at least as suitable’ as the stakeholder. Therefore if the cost to the client for the personal pension product is the same or lower, this should meet the test. That being said, your report, suitability letter and the file must evidence this thought process and research.
Additionally you need to consider the cost of your advice in the overall suitability. Where the client has a requirement and appetite for the benefits offered under a personal pension, perhaps supported by some level of ongoing advice, then this needs to be justified within the suitability letter. Providers have helped by modernising their personal pension contracts and reducing the charges they carry.
