Tier 1 and Tier 2 Financial Products: What RE5 Candidates Need to Know

Not every financial product carries the same risk for a client. A funeral policy and a discretionary share portfolio are very different things. Board Notice 194 recognises this by sorting products into Tier 1 and Tier 2, and by asking less of people who work only with the simpler ones.

The idea

• Tier 2 products are simpler and generally lower risk for the client.
• Tier 1 products are everything else: more complex, longer term or carrying investment risk.

The tier affects which competence requirements a representative must meet.

Which products are Tier 2?

The Tier 2 list is short, so learn it and treat everything else as Tier 1:

• Long-term insurance subcategory A (such as funeral and assistance policies)
• Long-term insurance subcategory B1-A and B2-A (the simpler versions of B1 and B2)
• Short-term insurance personal lines A1
• Friendly society benefits
• Short-term deposits (a term of 12 months or less)
• Long-term deposits (a term of more than 12 months, that is not a structured deposit)

Typical Tier 1 products

• Long-term insurance subcategories B1, B2 and C
• Short-term insurance personal lines and commercial lines
• Structured deposits
• Pension fund benefits and retail pension benefits
• Participatory interests in collective investment schemes
• Shares, bonds, derivatives and other securities
• Health service benefits
• Forex investments

Exam traps

A fixed deposit for 18 months at a fixed rate. The term is over 12 months, so it is a long-term deposit, which is still Tier 2. A fixed interest rate does not make a deposit "structured".

B1 against B1-A. The "-A" subcategories are Tier 2. Plain B1 and B2 are Tier 1.

Personal lines against personal lines A1. A1 is Tier 2. Personal lines generally, and commercial lines, are Tier 1.

Friendly society benefits against pension fund benefits. The first is Tier 2, the second Tier 1.

Why the tier matters

For a representative, the competence requirements are a recognised qualification, the regulatory examination, class of business training, product specific training and CPD.

A representative who works only with Tier 2 products is relieved of several of these: the regulatory examination, the recognised qualification, class of business training and CPD do not apply to them. Product specific training and the honesty and integrity requirement still do, and the FSP must still be satisfied the person is competent for what they do.

The same lighter treatment applies to a representative appointed only to perform the execution of sales, on conditions: the representative has at least a Grade 12 or equivalent, works to a script approved by a key individual and the governance structure, operates under the direct oversight of a key individual, the calls are recorded, and controls ensure that no advice is given.

What happens when the role changes?

This is where care is needed. Suppose someone starts in 2020 selling only Tier 2 products and in 2024 is first appointed to advise on a Tier 1 product. Their time limits for the regulatory examination run from the date they were first appointed to render financial services, other than the execution of sales, in respect of a Tier 1 product. The earlier years do not count against them, but from the new date the clock is running: two years for the examination, and six years for a recognised qualification for that product.

Until those requirements are met, the person works under supervision.

Tier and licence are different things

Do not confuse the tier with the FSP's licence category. Category I, II, IIA, III and IV describe the type of FSP: ordinary, discretionary, hedge fund, administrative and assistance business. The tier describes the product. A Category I FSP can be licensed for both Tier 1 and Tier 2 products.

Quick self-test

1. A 6-month notice deposit: Tier 2 (short-term deposit).
2. A unit trust: Tier 1.
3. A funeral policy: Tier 2 (long-term insurance subcategory A).
4. A structured deposit linked to an index: Tier 1.
5. Commercial short-term insurance: Tier 1.
6. Friendly society benefits: Tier 2.

If you got all six, this section of the exam is yours.