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.