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Employers could face jail over commission rebates

Employers could face unlimited fines and two years in jail for taking rebates from corporate advisers setting up pension schemes for their employees.

Money Marketing last week highlighted concerns that some corporate IFAs have been providing commission rebates to employers at the expense of pension scheme members who generally face higher charges as a result.

Money Marketing understands some advisers are recommending employers transfer pension funds into new schemes earning the maximum commission of 30-35 per cent of the first year’s premium. They then split commission with the employer. Some cases are believed to involve rebates of more than £500,000.

But a pension lawyer warns that employers could be hauled before the courts under the Financial Services and Markets Act 2000 for performing a regulated activity without authorisation as they are seeking to make a profit by setting up the scheme.

The FSA’s perimeter guidance manual says “to need authorisation you would need to be carrying on the arranging activity on commercial lines.

This means you would need to be expecting to obtain some form of commercial benefit from providing your staff, or a third party such as the intermediary who sets up the scheme for you, with services”.

Fishburns Solicitors partner Harriet Quiney says: “An employer who selects a particular pension scheme on the basis of the amount of commission being rebated could be carrying out a regulated activity and be at risk of unlimited fines and imprisonment.

“I am surprised the FSA has not shown more interest in this dubious practice as employers whose motivation is based on commission rather than finding the most appropriate scheme are clearly not acting in the best interests of their members.”

Standard Life head of pensions policy John Lawson (pictured) says: “Employers are effectively breaking the law and advisers rebating commission are unwittingly leading their employer clients into that breach. This behaviour is morally wrong and the FSA should be doing everything in its power to discourage it.”

Hargreaves Lansdown head of pensions research Tom McPhail says if employers end up getting pursued under the FSMA, then advisers are also likely to have a case to answer.

He says: “They are going to find the FSA asking them some awkward questions or the employer is likely to pursue them for giving negligent advice. Meanwhile, who is standing up for the employees in all of this?”

An FSA spokeswoman says: “We cannot comment on specific circumstances and each case would have to be assessed.”


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Once again the FSA has been advised of dubious practice. What’s it do – nothing. Why nip something in the bud when you can have an expensive review years down the line.

  2. Well done Helen excellent article. When oh when is our industry going to stop shooting itself in the foot. When oh when will the FSA listen to the concerns of people actually involved in our industry and take action.

  3. What about other people that recieve rebates like people selling overseas property and getting people to transfer to SIPPs. I have flaged this up with the FSA before and had no interest what so ever. Some of the people involve in essex are high pressure sales people working with IFA’s that should know better.

    This is the next mis-selling review but are the FSA doing anything. Answer NO.

  4. So on what basis does a corporate IFA ‘rebate’ commission. It is in effect a bribe paid to the company (or more probably to one or two directors personally) for setting up a scheme with a particular provider.

    Surely the principle we used to use of giving ‘Best Advice’ would have covered this. ‘BA’ being defined as best for the client, in this case ultimately being the scheme members.
    Unfortunately in the area of corporate schemes it is the ‘company’ that is seen as the client! Members of the scheme just pay the inflated fees and are told to be thankful that their employer has been so good as to set up the scheme ‘for their benefit’!
    The harsh fact is the only way to prevent this type of abuse is if the IFA is remunerated by way of a ‘fee’ only.
    It is probably also right that company directors should be take to court under the Financial Services and Meerkats Act. Simples!

  5. Dermot Brannigan 15th April 2010 at 11:55 am

    Much as I don’t agree with this in theory. I think we’re getting a little carried away here.

    Firstly, we don’t know that higher charges exist in each new scheme, and secondly higher charges do not necessarily mean lower returns.

    This sort of practise goes on in almost every other industry, and many business owners understand the value of negotiation and ‘what’s in it for me?’

    You’ve only got to spend some time at a local authority planning meeting to discover the ‘incentives’ that are offered to make schemes go through quicker.

    And for a provider to state that it is ‘morally wrong’!!! Well, now who suddenly gave Standard Life the moral compass? A provider that will pay a slightly higher commission rate to attract business. A provider who will advertise a cash fund, which isn’t.

    Lastly, we have a newspaper that sends copies to advisers for free!! Who pays their wages then?

  6. Don t MPs get upto 5K per week for ”Helping” businesses but they only get a slap on the wrist for manipulating the law.
    Incentives have always been there in one form or another is that not part of selling?WHAT ARE the FSA INCENTIVE BONUSES I like to know?

  7. This has been going for years and the FSA has done and said nothing because they take the view that an employer is free to stop and place his contributions where and with whom they like, often every two years after all initial commission has been paid and is past the clawback period!. Transfers are done on an excecution only tick box basis and whats more the regulators played a major role when there was a mass move back into final salary scheme post their so called person pension mis-selling review. An IFA jumps through hoops on a personal basis and the corporate planners get away with regularory murder with a simple tick of a box and big fat back hander to the boss!

  8. As I sit here reading this I am also reading a mailshot from Hargreaves Lansdown. It reads:

    HL Pension Scrappage Scheme: Up to £250 cash back if you transfer your old pension to the Vantage SIPP by 5th May 2010.

    The letter goes on the sell the merits of their scheme and invites me to sign an “execution only” application form saying that they have give no advice in spite of the enclosed “SIPP Times” being packed full of advice.

    My compliance people tell me that the FSA do not accept “execution only” pensions advice and I am forced to labour over housr of compliance work whilst these boys mop up with a tick of pen.


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