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FSA warns against payments which ‘work around’ RDR commission ban

FSA Letters 480

The FSA has sent a Dear CEO letter to 24 providers and advisers warning against payments which “work around” the commission ban under the RDR.

The regulator says its supervisory work has alerted it to “moves in the market which could undermine the RDR adviser charging provisions” and unfairly disadvantage advisers who are working hard to prepare for adviser charging.

In the letter, the FSA says: “We are concerned that non-commission payments and benefits, typically included within ‘distribution agreements’ between provider and distributor firms, may be indicative of firms seeking alternative ways of preserving features of the market that the RDR intends to eradicate.”

In a statement published alongside the letter the FSA says: “We are concerned certain firms may be looking to ‘work around’ the adviser charging rules by soliciting or providing payments/benefits.

“This might mean that advisers continue to provide ‘biased’ advice to consumers when recommending a product provider and also make some firms’ adviser charges look lower than others simply because of the deals and arrangements they have in place with providers. Money from these arrangements would effectively cross-subsidise the cost of advice and could cause firms to recommend certain providers and products over others.”

The FSA adds: “We will be challenging firms who are pursuing these deals and arrangements and we will take robust action where we see evidence that they are circumventing the rules.”

In its letter to firms, the FSA says examples of inducements that are concerning include:

  • Providers contributing to the costs of adviser training, conferences and seminars. The FSA says these payments could be seen as an inducement as they have the potential to impair compliance with the adviser’s duty to act in the client’s best interests, and may not improve the quality of service to the client.
  • Providers paying advisers for help with promoting the provider’s retail investment products. These payments should reflect the cost incurred by the adviser or risk impairing the adviser’s to pay due regard to clients’ interests.
  • Payments from providers to distributors for the development of software as part of an integrated provider/distributor IT solution. Where costs incurred by the adviser go beyond those necessary to run provider software, that part of the cost may impair compliance with inducement rules.

The regulator says it has seen distribution agreements with terms of up to five years ahead of the RDR deadline. It says where all or most of the benefits are going to be used by the distributor after 31 December, a portion of the upfront benefits may need to be treated as if it was made after 31 December and so be caught by adviser charging rules.

The FSA says the scale of the payments it has seen under some agreements are such that these payments may be subsidising a distributor’s general costs, which then may subsidise adviser charges. The regulator says this creates a market distortion which gives some advisers an “unfair competitive advantage” over those who do not receive these kind of payments.

The FSA has asked insurers, networks, and IFA firms to confirm details of any agreements in place or that are currently being negotiated are compliant with current inducement rules and prospective adviser charging rules.

Last November a Money Marketing investigation revealed providers were paying significant sums to advisers as part of long-term distribution deals being agreed ahead of the RDR. In February Money Marketing revealed the regulator was set to probe the way distributors compile their restricted advice panels.

Since then the FSA has issued repeated warnings about some of the distribution deals being secured ahead of the RDR. In July FSA technical specialist Rory Percival said advisers should “exercise extreme caution” when agreeing distribution deals, and in August the FSA said it was looking at ways to reinforce its adviser charging rules.

Click here to view the FSA’s Dear CEO inducements letter in full


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. The UK used to have the best financial services savings rates and protection in the world. It has been slowly eroded by the antics of the FSA and its co-horts.

  2. OMG The FSA still have their heads firmly up their Bums dont they? Europe will NOT have a commission ban, thats already been said, so do they not realise that come next year the UK will be bombarded from obscure european Insurance companies offering online advice with no adviser charging and rebating a good % of commission to the client so the client gets a far better deal? RDR was only ever going to work If it was a level playing field throughout europe. The FSA now have to man up and take it on the chin that a commission ban is dead in the water, being the only country in Europe with a ban is ridiculous. Advisers dont want it, clients dont want it, Europe dosnt want it. The FSA are on their own now!! Answer, and I wont charge £500,000,000 for the answer. Keep level 4 as the Minimum requirement but extend deadline another 12 months, Scrap the commission ban but put a cap on all lump sum investments at 4% commission upfront plus a alf trail povidind sevicing is proved, Allow all regular savings and pension commission to be indemnified.Everybody is then happy and there could never be a case where “Bias” is ever raised again. Simples!!!

  3. I believe the Netherlands and Denmark are also pressing ahead with a commission ban. The EU has simply decided not to include a ban in MIFID2.

  4. whether or not we think the RDR is misguided ( and i do) this development has to be a good move, otherwise we get into a terrible mess

    how long before some of the corporate players get the phone call ?

  5. To Richard

    I think you will find that if the advice is given to UK resident then UK law applies even if the service is provided online from another country. Therefore the commission ban will still apply as it is UK jurisdiction of where the product is taken out, and more importantly for the intended use of a UK citizen. I should imagine the FSA and Trading Standards will be all over this, which will be more than enough to put off any major European company seeking to circumvent UK jurisdiction.

    I remember a few years ago the NatWest Three the got in trouble over the Enron collapse and got sucked in to US jurisdiction, even though they conduct the business in the UK. We may be a part of Europe but each individual countries laws still apply.

  6. Things one rarely hears (no. 47):

    For once, the FSA is doing a good job!

    Rather than merely pontificating, the FSA is ensuring that firms do not subvert the core intention of the RDR.

    Hopefully, ‘Sherriff’ Wheatley will take his lead from this, and start focussing on certain ‘upmarket’ sales forces that use sophistry to get around the spririt of the rules.

  7. man on the moon 1st October 2012 at 2:19 pm

    Lets have a level playing field FSA.

    Make it happen, do not allow RDR distortions to hide costs to clients.

    A certain upscale advisory group is stating it will pay an advisor allowance and still invest 100% for investors. How does that work?

    Make the competition level and without opacity, transparent and without downright lies.

  8. @ Peter Herd, Not sure about that, watch this space it will happen, Jersey are not going ahead with RDR either, but UK residents will still take products and advice from Jersey wont they, It will just be unreguated advice and unregulated products people are buying! You cant have the whole of Europe on one system and us on another. Plus how confidant really are the FSA that the european commision will now allow us to ban commission, the Euro commission want a level field and Denmark and Holland are now having second thoughts.

  9. Once again we see how the incompetence of our regulator has sprungt the surface. I do believe that I recall Hector the protector saying that although the FSA didnt know what was in MiFID 2 he was sure the RDR was going to be compatible. Hector I am not sure how to put this but errrrh you were wrong AGAIN. Lets face it the noly reason the FSA pressed ahead with this ludicrous project was to save face. Not for clients beneifts – they dont want it, not for our benefit – we dont want it and not for the industry benefit – they dont want it. The architects have gone. Those in place now should be strong enogh to say there are too many unintended consequences and it will not be of benefit to consumers. We will however impose max commission of 4 plus a half etc etc and those who want to continue to develop their business on a AC basis should do so.

  10. Richard

    Whilst I agree with some of your earlier comments re retaining a standardised level of commission, choice and higher adviser qualifications (a previous post I tried to write commending you didn’t upload), I have to disagree re Jersey. I am a Jersey based adviser and whilst we are not getting RDR, we are getting our own almost identical version, just one year later – Review of Financial Advice (RFA). The logic was that institutions would have staff moving between the two jurisdictions and we should all be on a level playing field.

    So I have had to do the UK exams even though our taxation structure is completely different (and I’m now chartered level 6 well done me), and think it has been a valuable experience. And I can assure you, the exit of advisers is just as significant here as in the UK, as many don’t wish to study again.

    I hear that Guernsey may not go down a commission ban route (they are considering their options whilst they observe the effects of RDR), but think its unlikely they will use this to market into the UK.

  11. To Richard

    If a product is sold in the UK and the money is still in the UK and it comes under UK regulations. If the money is moved offshore that comes under that jurisdiction but I don’t see the average investor rushing to move all their money offshore particularly with the revenue cracking down on offshore investments.

    The average man in the street isn’t going to want to go to that amount of effort just to get round paying an adviser fee. If you’re talking about unforeseen circumstances I wonder how many clients that go ahead with offshore investments declare the necessary level of tax. I really do think that the average man on the street is just going to pay the adviser fee after all it’s still coming out of the investment so I still don’t know what the fuss is all about!

    Eg 100,000 investment £3000 fee = £97,000 investment So what?

  12. Final Point are we the advisers the one with the problem as I really do not get why people are so concerned about disclosing their fees after all we disclose commission don’t mean!

  13. Aaahh, the old provider training/seminar wheeze… but how do you get an invite to the plush hotel and drinks on account I hear you cry…. surely not from selling enough products.

    Didn’t you just love the flyers for these… it counts towards CPD as well don’t you know.

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