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FSA outlines plans to extend DFM payments ban

FSA Letters 480

The FSA has set out a range of options which look at extending the ban on “kick-back” payments paid to advisers for referring clients to discretionary fund managers.

The regulator set out plans in October to ban DFM payments to advisers where advisers refer a client to a DFM and also provide the client with a personal recommendation on a retail investment product.

The ban was initially applied to referrals set up after 31 December, but the regulator is considering extending this to pre RDR business.

It has also previously consulted on extending the ban to advisers that do not provide a personal recommendation but maintain on ongoing client relationship.

The FSA wrote to trade bodies last month outlining a range of options for how legacy DFM referrals should be treated under the RDR. The trade bodies approached were the Association of Private Client Investment Managers and Stockbrokers, Apfa, the Association of British Insurers, the British Bankers’ Association, the Investment Management Association and Which?

The briefing note, seen by Money Marketing, outlines four option for legacy DFM referrals:

  • switch off all referral payments following a transitional period;

  • allow referral payments for pre RDR referrals to continue, with payments banned for post RDR referrals;

  • allow referral payments to continue on the original investments, but switch them off following fund switches; and

  • allow referral payments for pre RDR referrals, but reduce the level of payments if a recommendation was post RDR to pay more money into the investments held by the DFM

The FSA says whatever option is chosen a reasonable transitional period will be required before the new rules come into force.

The option to switch off all referral payments would require all DFM referral payments to stop on pre RDR business after a given period such as a year or 18 months from when the new rules come into force. Additional referral payments on top-ups could continue until the end of the transitional period. Advisers who wanted to replace the lost income would have to negotiate and justify a fee with clients.

On the second option of banning post RDR referral payments, the FSA says its understanding from the industry is distinguishing between investments following a pre RDR referral and post RDR recommendations would be difficult, as fund switches would affect pre and post RDR investments.

The third option would echo the position on trail commission, but the FSA says this would be complex to administer and difficult to explain to the client.

The fourth option of reducing the level of payments made on DFM referrals post RDR would see payments lowered to perhaps half the previous rate.

Trade bodies had until 28 February to feed back to the FSA. The regulator will publish a consultation on DFM payments later this year as the Financial Conduct Authority.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Which? A trade body?

  2. When you think about it, it is entirely logical that all payments from DFMs should be stopped. How many layers ought there to be? The adviser + DFM + Fund Manager. That is one too many, wither the adviser is cut out or the DFM does his job properly and doesn’t use collectives.

  3. The adviser is there to provide advice. If that means referral to a DFM for ongoing management, it has to stop there. The adviser can charge the client for commenting on how the portfolio has grown and how it relates to the goals, but to then take a regular charge from the portfolio in not entirely ethical. It should simply be a separate fee.

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