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FSA to ban DFM payments to advisers

FSA Front 480

The FSA is consulting on changes to adviser charging rules to ensure advisers do not receive “kick-back” payments for referring clients to discretionary fund managers after 31 December.

The regulator says under the RDR, advisers should only be paid for the personal recommendations and related services they provide to their clients through the charge agreed with their client. They should not be remunerated by discretionary investment managers.

The FSA has set out its expectations on DFM payment to advisers as part of its quarterly consultation paper published today.

The FSA says: “Payments from discretionary investment managers, or the provision of non-monetary benefits have the potential to bias advisers towards discretionary services and, if payments vary between discretionary investment managers, to bias advisers towards recommending discretionary services that pay the highest amounts.”

The regulator is planning to impose a ban on payments from DFMs to advisers where the adviser has referred a client to a DFM and also provided the client with a personal recommendation on a retail investment product.

If there are occasions where the adviser recommends a client to a DFM and maintains on ongoing relationship with the client, but never provides a personal recommendation to that client, the FSA says the adviser firm would be able to receive a referral fee from the DFM. However it is also consulting on whether the payment ban should extend to those firms as well.

At this stage the ban is only being applied to referrals set up after 31 December.

The FSA says its preference is to treat existing referral arrangements in the same way as trail commission, where payments can continue on business set up before the RDR deadline where there are no changes to the product.

The FSA says: “As with trail commission, our preference is adviser firms receive no additional remuneration post-RDR for recommending that a client invests more money through their discretionary-managed portfolio. The adviser firm could continue to be paid by the discretionary investment manager for the investment amount resulting from a pre-RDR referral.

“We are considering consulting separately on transitional arrangements for existing referral payment arrangements, including the possibility of carrying out a cost benefit analysis on our proposed approach. In considering an appropriate timescale for making rules for transitional arrangements, we will take into account the time required for firms to make the necessary system changes.”


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. So what if the client agrees for the adviser to be funded that way from outset in a formal agreement? Are clients no longer going to be allowed to choose how they pay for advice? Lets face it the FSA don’t want advisers to earn a penny, make advice for the elite minority & reduce the amount of firms it regulates. However they do not seem to realise that less firms = less income=less jobs for them!

  2. Come off it David
    I wrote this about a year ago and am hardly surprised that the Regulator has finally caught up. As ever it takes ages for them to ‘get it’.
    “Yes Mr Client I am going to shuffle you off to a very good DFM. He’ll do the work. He’ll charge you for it – and so will I.
    Client: So what are you doing for the money?
    IFA: Well I’ll hold your hand and have interminable meetings with you and bore you to death about lifestyles and Mr Kinder and all that stuff.
    If you can get away with that and the customer is happy and willing to pay – then good luck to you. But putting myself in the customers shoes – I wouldn’t stand still for that for a nanosecond.
    Now we have the case where outsourcing is the great mantra. How long before the Regulator starts looking at this and wondering exactly what it is we are doing to earn the ‘kick back’. I had thought that the main purpose of the RDR was to put an end to the ‘kick back’ culture.
    Also (as I understand it) you need to realise there is a vital difference in regulatory terms between outsourcing and referral. If you outsource – you too need to have the very same permissions as the firm to which you outsource. So unless you have the requisite permissions as a DFM yourself….
    On the other hand if you ‘Refer’ it implies no pecuniary advantage to the referrer. (As ever it would be helpful if the Canaries, instead of tweeting, could spell things out in clear, brief English).
    Perhaps I’m just dim and don’t see the ‘great opportunity’ in the outsourcing malarkey.

  3. If anyone was in any doubt up until now then they must now realise that the FSA is intent on closing down virtually every avenue for IFAs to survive in a post-RDR world.

    The FSA will be gone a year from now and there will be no-one to hold to account for the RDR debacle !

  4. Dont worry David once they have destroyed the IFA community they will suddenly become part of the Civil Service funded by taxes.

  5. Not SURPRISED anymore 5th October 2012 at 1:38 pm

    Proof positive that these people really are bonkers.

    The Stasi have nothing on these guys. We may as well just shoot ourselves now.

  6. Yawn… read the document, the FSA have ALREADY banned payments for personal recommendations and ‘related services’. This is clarification for those smart people thinking that DFM wasn’t a ‘related service’…

  7. Dont expect anything from the Regulators. The corruption is right at the very top. Hundreds of millions stolen for investors and pension funds by the bankers and not one criminal prosecution. No British government dont think of bringing in any form of criminal justice, in fact why dont you appoint say a couple of Goldman Sachs directors to the treasury, Oh you,ve just done that, Oh good we’ll all feel safer in the knowledge that the major banks control our government and the regulators. Until we see some meaningfull prosecutions the general public will have no confidence in any form of financial planning, why should they after sufferrring austerity measures and the theft of their pension funds and pension rights. Keep concentrating on teh soft target Regulators, those evil IFA’s

  8. Remember back in the 90’s the ads for:
    Mis-sold a pension when we were compared to icecream salesmen
    Well now in the near future:
    Mis-sold a career – who do we sue
    Surely our basic human rights have been breached?

  9. David Parkinson 5th October 2012 at 2:31 pm

    Harry if the client signs up to that then what’s your problem with that? There is often a bigger picture going on whereby IFA’s do alot of work for nothing for clients along the way & it’s a trade off. At the end of the day if the DFM messes up it’s the IFA who gets the complaint!
    I have no problem with RDR as I already [& have done for some time] disclose all the money I am likely to receive from those who CHOOSE a % related fee or commission route. Others who choose just fee per hour then great I get paid for everything I do down to the minute. Infact I think RDR is a good thing & great that we actually get to see how the cake is divided up. Unfortunately RDR has turned into an adviser bashing exercise.
    Yawn-If only we were all as smart as you! My point is that it should be client choice not dictated. As I have said I do not have issues with being honest. If only the regulators were the same!

  10. David,
    As ever one has to read the FSA’s papers very carefully…
    They are banning ‘referral payments’, i.e. where the DFM remunerates the IFA for a job done for the DFM (bringing them the business).
    They are NOT banning customer agreed remuneration, i.e. where the client asks the DFM to facilitate payments to the IFA for a job done by the IFA for the client.
    So in future what changes is that you’ll have to get a written authority from the client to the DFM to make the payment(s). The DFM just facilitates the payments.
    Hard to see how the principles of transparency and client consent can be too controversial.
    That’s for new referred clients, though. As ever, it’s legacy business that is the tricky area. Will we have to repaper to get written authorities from existing referred clients? The FSA says not, but then suggests that it may be necessary where the client subsequently tops up the portfolio – this is tricky for DFMs to monitor in practice, and it’s likely that they’ll just insist on a repapering of existing referred clients…

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