9 February, 2013


Legal News & Analysis – Asia Pacific – Hong Kong – Investment Funds


Funds being sold on a retail basis into the UK will need to comply with Retail Distribution Review (RDR) provisions being implemented by the Financial Services Authority (FSA). Most of the provisions came into effect on 31 December 2012.




The RDR changes seek to:


  • improve the clarity with which firms describe their services to consumers;
  • address the potential for advice and remuneration to distort consumer outcomes; and
  • increase the professional standards of advisers.


Due to its impact on commission arrangements, it is the changes under the second bullet point which are of most concern to managers of funds that are distributed in the UK.


Under the RDR provisions, commission payments to intermediaries will be prohibited in respect of advised sales to retail clients of a retail investment product. The intention is that the intermediary will be remunerated by an 'adviser charge' specifically agreed with the client.


Options for institutional funds


For the manager of an institutional fund, possible options would include:


  1. ensuring the distribution arrangements are not within the scope of RDR, or
  2. ensuring the distribution arrangements facilitate adviser charging.


Ensuring distribution arrangements are not within the scope of RDR


The RDR provisions will apply where advice is provided to retail clients in respect of a retail investment product. A retail client is defined as a client who is not a professional client or (in respect of eligible counterparty business) an eligible counterparty. There are prescribed criteria for professional clients – encompassing certain categories of entity such as authorised entities or entities that are of a certain size (termed "per se professional clients") and clients that are assessed as being sufficiently sophisticated (termed "elective professional clients").


Facilitating adviser charging


Alternatively, if within the scope of the RDR provisions, fund managers may need to ensure that they offer a range of share classes with different charging structures so that, for RDR scope investors, there is a share class with a lower charges to reflect that there will be no rebate or commission paid by the manager to the intermediary. The details of the structure is best discussed with proposed distributors before it is implemented.


Future RDR development


The FSA has proposed extending the RDR principles to platform service providers: prohibiting cash rebates from providers to customers using platforms on a non advised basis and preventing platforms in both the advised and non-advised market from being funded by product providers. The intention is that the platforms will be remunerated under an unbundled fee structure – with a 'platform charge' agreed with the client.


In addition, the FSA plans to follow through on its plans to ban cash rebates from product charges to advised consumers. The draft rules propose a ban on the rebate of product charges in cash to retail clients, not just products sold through a platform, for all advised sales of retail investment products by way of new business from the date of the change in the rules. The FSA takes the view that cash rebates hinder transparency and potentially provide a mechanism for commission to continue being paid. Note that rebates could still be made through additional investment into the product (unit rebating).


Due to the interaction between banning cash rebates and payments to platforms, the FSA decided to introduce both changes simultaneously.


The expectation is that these changes will be implemented at the end of 2013 although the FSA's policy statement with final rules on these matters is still awaited.



For further information, please contact:


Kirstene BaillieField Fisher Waterhouse LLP 

[email protected]





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