New rules for IFAs kick in on New Year's DayRDR bans commission payments to financial advisers

29 December 2012

1 January will mark the implementation of the Retail Distribution Review (RDR), which will change the way consumers pay for financial advice and will ensure advisers are qualified to a higher minimum level.

The RDR affects three areas of advice – how it's paid for, adviser qualifications and advice types. For more information on where to seek financial advice, phone the Which? Money Helpline.

The RDR and types of financial advice

Pre-RDR, advisers were either tied advisers or independent financial advisers (IFAs). Tied advisers were attached to financial institutions like banks, so could only recommend products from a limited number of providers. IFAs have access to the whole market.

But under the new rules, advice will be split into three new categories – independent, restricted and simplified.

  • Independent. This category will include advisers who recommend products from all providers and who can advise on all areas of consumer finance. However, they will have to be qualified to a higher level than they were previously.
  • Restricted. These advisers will either focus on just one area, or will advise on a number of areas but with only limited product access. They will have to meet the same qualification standards as independent advisers.
  • Simplified. This aims to address basic financial needs. It covers automated and online advice, but still carries the same liabilities and has to meet the same standards as independent advice.

For some products, you can, of course, also do product research yourself, without using an IFA. For straightforward products like savings, credit cards and car and home insurance, Which? Recommended Providers are a good place to start your own research.

The RDR and qualifications

Before January 2013 there were no easily recognisable universal qualifications consumers could use to help them select an adviser. But the RDR will introduce a new system.

All advisers will have to meet Qualifications and Credit Framework (QCF) Level 4, which is the equivalent of the first year of a degree. Before this, advisers only had to reach Level 3 – the equivalent of an A Level.

The RDR and charging

Newly arranged commission payments have been banned under the RDR. Advisers used to be paid commission by product providers, but the regulator was concerned that this could lead to bias towards products that pay higher commission, meaning that consumers weren't always getting the most suitable products.

Under the RDR, payment for advice will have to be agreed with the consumer before the advice is given. Charging can now work in three ways:

  • Flat fee. A one-off charge that covers everything.
  • Hourly fee.
  • Ongoing management charge. This is allowed for ongoing work, like investment reviews. It's expressed as a percentage.

Trail commission under the RDR

New trail commission, an annual percentage charge taken from consumers' investments for ongoing advice, has also been banned. The Financial Services Authority (FSA) thought trail commission also left room for bias, but trail can still be paid on advice that was given before the RDR.

Which? research shows you’re more likely to get good advice from an independent adviser, but finding a good one can be hard. For Which? members, the Which? Money Helpline and Which? Local are a good place to start.

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