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Clarity begins at home

The much discussed and potentially fundamentally important FSA

consultative paper CP121 is certainly exercising the minds of many in

the financial services industry and will continue to do so for some

time to come.

The scenario planning that was undoubtedly being undertaken by

product providers and financial advisers ahead of the issue of the

paper – leading some to take pretty serious action – will now, no

doubt, be carried out with a little more clarity about the scenarios

being planned for and with some greater certainty over timescales.

What seems clear (leaving aside the proposal for a lower tier of

financial advisers to expand limited advice at the lower end of the

market) is that none of the proposals, if implemented, are likely of

themselves to dramatically change the number of persons giving advice

on and/or distributing financial services products. At least, not

initially.

What also seems clear is that, regardless of whether an individual is

an independent financial adviser, an authorised (or whatever phrase

is decided on) adviser, a (multi-tied) distributor or tied adviser,

continuing commercial success will continue to be determined

substantially by the strength of the relationship that the individual

has with his or her clients.

However the depolarisation debate shakes down, there is no getting

away from the fact that, if human interaction is involved in the

movement of a financial services product to a customer, it is

essential within an increasingly charge-constrained world that some

value is added along the way.

Of course, some kind of charge will need to be made for this and

CP121 treats with importance the need to unbundle product costs from

the cost of advice. For an IFA, this is what the principle of the

defined payment system is all about. For the distributor or tied

person, explicit unbundling of the cost of advice from the cost of

the product in the product information will be essential. So what has

all this got to do with tax planning? Well, I believe that tax and

tax planning need to be considered on two levels when thinking about

CP121.

The first is the role of tax and tax planning in the overall context

of giving financial advice. I do not think for a minute that the

impact – whatever it may be – of CP121 will be to reduce for

advisers, in any way, the relevance of having a good understanding of

tax and tax planning so as to deliver better quality financial advice

and financial solutions, regardless of their distribution status.

Just because one is a distributor as opposed to an IFA, for example,

does not mean that there is no need for and no client value added by

the incorporation, where appropriate, of tax planning into a

financial solution. Clients will rightly expect it as part of the

package.

The knowledge and CPD requirements continue just as strongly as

always. By being a distributor as opposed to an IFA, the indirect

benefits rules may, however, be a little less important so that the

cost of being technically competent may be able to be defrayed, with

the companies to which one is multi-tied picking up maybe more of the

responsibility for this than they would (or could) for IFAs.

Second, and on a more specific level, some of the possible outcomes

of CP121 in connection with how advisers are remunerated themselves

give rise to tax considerations. The subject of VAT and fees has had

a relatively frequent airing in the press. This will continue to be

an issue and is one that the FSA acknowledges in its paper along with

the surprising acceptance that many buyers of financial services

products are not enamoured with paying separately for advice out of

taxed income.

It will be interesting to see how any shift from IFA to multi-tied

distributor status affects their ability to secure introductions of

clients from professional advisers. On the face of it, it would seem

that only IFAs could continue to receive such introductions.

Another important issue – with the understandable expectation that

fees within a defined payment system will only actually be paid by

the client to the extent that any commission payable on any products

bought to implement a solution falls short of the fee – will be that

of the taxation treatment of rebates, cashbacks and so on.

No doubt, product providers will also need to review their

commission-paying systems carefully to ensure that they are as

flexible as possible to cope with the potential upswing in the need

for self-select or variable commission that will presumably be

desirable for IFAs operating a defined payment system of remuneration

with their clients. I aim to look at some of these issues in the

coming weeks.

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