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FSA: We’ll stop small IFAs being undercut by backdoor deals

Nick Poyntz Wright MM blog

Some time ago the FSA indicated it would be surveying the marketplace in the lead up to the RDR and monitoring any signs of firms seeking to circumvent the incoming rules. We want to ensure that no unintended consequences arise as a result of the changes that everyone in the industry has worked so hard to achieve. The last thing we would want to see is an uneven playing field where some firms offering retail investment advice have an unfair advantage over others.

But there is a real threat that this may be the result of some of the moves we have seen in the market. Some firms are looking for ways to circumvent the adviser charging rules by soliciting or providing payments or benefits that do not look like traditional commission, but are intended to achieve the same outcome: to secure distribution. These arrangements are not in the spirit of the RDR.

You will have noticed that the letter we sent to firms was addressed to some of the larger players in the market. As you will know, distribution agreements are common in this sphere – but the size and scope of some of these deals appears to be well beyond what we have ever seen before – sometimes three to four times the typical levels. It cannot be a coincidence that product providers and advisory firms are scrambling to put these arrangements in place now, three months before the RDR implementation deadline.

If we allowed these payments and benefits to continue, a few of the larger distributors would be able to undercut the adviser charges of the smaller distributors, simply because of the deals they have in place with product providers, winning business away from the smaller firms. And that would result in biased advice because some advisers would continue to recommend those products which provide them with the highest levels of payments or benefits.

Let me give you an example of this. Firm A is a large national distributor with offices across the UK and thousands of appointed representatives. It has an arrangement in place with a product provider and uses the money from this arrangement to push down its adviser charge – the cost of its advice. This means that Firm A can charge, say, £150 for a full financial assessment. In contrast, Firm B charges £400 for a full financial assessment because its adviser charge reflects all the costs it incurs, from I.T. to stationery. Firm A looks cheaper but its adviser charge does not reflect all of its costs because for example, the product provider is paying for the entirety of its I.T. systems.

Now in this situation where is the consumer going to go for advice – to Firm A that charges £150 or Firm B that charges £400? The consumer may be persuaded to go for the cheaper option, but could be on the receiving end of biased advice and limited choice. And they will not necessarily benefit from a cheaper service: the provider’s charges may actually end up being higher to compensate for the cost of the distribution agreement.

The 24 firms we have written to have had until 15 October to provide detailed information on any agreements they have in place or are currently negotiating. We plan to scrutinise this data and take action against firms whose deals and arrangements circumvent our rules. We want to ensure a level playing field where firms can compete upon the basis of the quality of advice they provide to their clients; not the deals they have in place with product providers. In a truly competitive marketplace, the firms which provide the best advice to their clients will be the winners – not those who benefit from backdoor payments.

Nick Poyntz-Wright is head of life insurance supervision at the FSA’s conduct business unit


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There are 25 comments at the moment, we would love to hear your opinion too.

  1. Sounds great but there is at least one distributor promising its semi tied advisers that commission will continue post RDR…

    Nick knows the industry so it will be interesting to see if the FSA can now deliver a level playing field.

  2. I truly hope he can deliver on what he says, however given some of the sharp practices of the larger industry models over the years and the continuing evolving of these deals I doubt it somehow.

  3. wakey wakey FSA, ban one thing it gets paid as something else. Should have been obvious from the start.
    There is a new bribery law, does that apply?

    Or surely, I’m not mistaken here and this is the FSA standing up for the small IFA, I think I may have just fainted.

  4. How does this tie in with the Barclays Wealth story today that reveals they are seeking to charge admin fees to fund managers to be on the fund buy list?

  5. Hey, hey. This is one time we should be cheering the Regulator. How often have we heard that the Regulator is out to destroy the small firm? This rather adds credence to their oft denials and is a move that should be heartily welcomed by all small firms.

    It seems that at long last the Regulator is beginning to recognise that small is beautiful! Up till now small firms have been able to wipe the floor on price and charges compared to the big boys and long may that last!

  6. I really don’t see how they will be able to do this ?

    The movement to fees is going to create the biggest dutch auction amongst IFAs and other sources going ! everyone is going to looking for a competitive edge by undercutting each other.

    Clients after a time will just pit one off against another like car or house insurance

    Cash will be king ? and we know where that will lead.

  7. This is commonplace in networks – distributing term assurance under the guise of “independent” – but actually presenting a higher premium to the customer than the next door IFA. Of course it is the increase in premium that is paying the higher commission rate, but the customer thinks the premium is fair representation of the marketplace. Why wouldn’t she? She just bought it from a broker who shopped around the marketplace for her.
    This is fraud against the customer. But it goes on day after day right under the noses of the FSA.

  8. PS

    And it’s a smack in the face for the tied (oops I mean restricted) advisers. And therefore support for independence. Yipee!

  9. I really hope that it removes the ‘Pay to Play’ that goes on with Panel/Strategic partner situations with certain national IFA’s etc!

  10. ken170647 youtube 18th October 2012 at 5:16 pm

    Regulator understands there will be “unintended consequences” that will destroy IFAs…

  11. “…..We want to ensure that no unintended consequences arise as a result of the changes that everyone in the industry has worked so hard to achieve…..” You are a bit late with this statement. There are so many it is just not funny. I do hope you can live with yourselves with such a calamity looming with the RDR

  12. The consequence of RDR, unintended or not, is that the rich will continue to benefit from independent financial advice and the general public can go f**k themselves, as it’s no longer financially viable to deal with them.

  13. FSA: We’ll stop small IFAs being undercut by backdoor deals

    That’s right – putting small IFA’s out of business is the FSA’s job after all.

  14. I’ll be very interested to see the names of both the distributors and providers who are doing these deals.

    In the interests of transparency, TCF and the spirit of the RDR to name just three tenets, I think this information should be in the public domain. Harry K is right, the FSA should be applauded for this.

    On a previous occasion the regulator hid behind the ‘commercial sensitivity’ shield when the issue of naming firms who had whittingly used projection assumptions that were way out of sync, it must not do that here or trust will be shattered. Be bold and name the names!

  15. A bit of common sense from the FSA or have they realised how much revenue they are about to loose?
    As the old saying goes ‘too little too late’. Closing the doors at the end of the month after 26 years.

    Bye bye

  16. So let’s hope the FSA investigate why a certain “upmarket sales force” with a fancy sounding name are telling their salesmen, sorry, “partners” that they will be able to avoid the RDR rules…

  17. …help me Obi Wan, you’re our only hope.

  18. “ken170647 youtube | 18 Oct 2012 5:16 pm
    Regulator understands there will be “unintended consequences” that will destroy IFAs…

    It was always intended that RDR would pervert the market, take out a major proportion of transactional based IFAs and hand over the distribution of financial products (without advice) to the banks, building societies, direct providers and comparison websites.

    The consequences were not “unintended” they were deliberately conceived and implemented to the detriment of consumers, the majority of whom have always preferred the transactional route to investments and pensions.

    If National IFAs and large networks can through prudent financial arrangements maintain their businesses and profits I can see no impediment to doing so and no consumer detriment.

    After all, who does their weekly shop at the corner shop anymore ?

    Times are a changing, not all the changes are going to be good and the devastation the RDR commission ban will wreak on smaller IFAs and less well off consumers is a given.

    Does the FSA care?

    NO ! If they did care, they would halt this train wreck in its tracks and put a hold on implementation of RDR until someone has the guts to realise that this is not the way to grow a market, nor is it the way to bring about more confidence in financial services and products.

    The providers hold a large part of the blame for this mess as do the major networks CEOs, if they had an ounce of gumption, they would have collectively refused to go along with this stupid scheme.

    My father once told me when in times of stress or distress, it would better to “Be Bold and Mighty forces shall accompany thee”

    Not many bold people in this industry at the top strata of management is there, otherwise we would not be faced with losing our business and the publics trust in us.

    In a few years time I can foresee a clients complaint containing the following phrase “This FEE HUNGRY sales person sold me the wrong type of investmet and his / her only motivation was the adviser charge levied against my investment”

    You couldn’t make this up it is far too real.

  19. Hello Darlings!

    Er….. Doesn’t this sound just like a government-run cartel?

    What about economy of scale, competition and free enterprise?

    It’s only a matter of time before some journo accuses IFA’s of running a cartel.

    Nothing that comes out of Canary Towers should ever surprise us after this.


    Larrykins xxx

  20. RegulatorSaurusRex 19th October 2012 at 11:25 pm

    I am a bandy extinct dinosaur, couldn’t catch a pig in a poke.

  21. Will they force providers to offer the same level of service regardless of how much business an entity generates for them? If providers can’t influence a 3rd party distribution channel, they will just cut them out altogether and market directly. Why bother dealing with somebody who may or may not send some business your way?

  22. Does this also mean that platforms such as Cofunds will not be able to charge smaller fund groups a ‘minimum fee’ essentially for having their funds available on the platform. This has the effect of pushing up TERs in those funds disproportionally and essentially means that clients investing through other platforms are subsidising Cofunds. Surely this is also against the spirit of RDR in exactly the same way.

  23. Does this mean True Potential, for example,will not be able to continue to offer asdvisers “free” back office systems, in return for placing business on their wealth platform?

  24. boo hoo I’m little. Look if you’re struggling to compete with the big tied then you need to look in the mirror. The fSA is not your friend, it is always easier to regulate a network than 500 small firms. The FSA does not care about small IFAs it only cares about looking tough and avoiding accountability. Its an authority, not a person.

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