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Introducers taking commission: A loophole that will be allowed?

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Firms setting themselves up as introducers can potentially still receive commission payments after the RDR and FSA platform rules are implemented. But is this a loophole the regulator is likely to put a stop to?

Chartered accountants Stafford & Co last month launched a platform for direct clients whereby investors can donate commission payments to charity.

Powered by the Cofunds platform, INVESTaid acts as an introducer, allowing investors to donate whatever percentage of the initial commission they choose to charity. INVESTaid then keeps 80 per cent of the ongoing trail payments, donating 20 per cent to the client’s chosen charity.

Because INVESTaid acts as an unregulated introducer it can continue to collect commission on investments after the FSA platform rules are introduced at the end of 2013, under current proposals which are still being consulted on.

At present, INVESTaid takes its commission payment through the Cofunds platform but after the end of 2013, it would have to take payments directly from the fund manager.

In its platform consultation paper published in June, the FSA is pushing ahead with plans to ban fund manager and cash rebates for both advised and execution-only platforms but did not mention payments to introducers.

Cofunds head of proposition Verona Smith says: “INVESTaid is introducing the investor to the Cofunds service. Under cp12/12, execution-only platforms will be banned from receiving payments from product providers or fund managers. There is nothing saying that if you are an introducer, your commission stops.

“Obviously we would have to make sure that INVESTaid is doing nothing but introducing and we will look at that once the final rules are published”

An FSA spokeswoman says the regulator does not propose to ban commission payments to platform introducers but would be looking to ensure anyone acting as an introducer was not carrying out any further duties.

She says; “There is nothing in the FSA proposals preventing introducers from taking payments from product providers. Where concerns would lie is if it is billed as an introducer but might be more than that. If the “introducer” firm was arranging any custody or dealing, therefore carrying out platform activities, then that is not just acting as an introducer.”

There is also the question of whether fund managers would be prepared to pay commission directly to INVESTaid after the platform rules are implemented.

Ignis Asset Management head of UK retail Austin McBride says the firm is sceptical about paying introducer fees.

He says: “Introducers in this space are not very common and I think it is a grey area. We much prefer to see business coming through financial advisers and we are very nervous about paying introducers. I do not think it is something we would support.”

A challenge for INVESTaid is that it requires funding in order to continue to operate and attract customers. The firm wants to raise £150,000 and attract investors to back the project but wants IFAs to be the main source of backing for marketing and development.

The firm is trying to raise the majority of backing through crowdfunding, a concept borne in the United States where large groups of individuals pool resources to support initiatives, often startup businesses in return for small amounts of equity.

INVESTaid director Mike Stafford is using Seedrs, the only FSA regulated crowdfunding website to help raise funds and in particular is looking for advisers to take a stake in the business.

He says: “We are seeking funds to promote it nationally and interested IFAs are invited to take a stake in the company through Seedrs.”

He adds the firm’s business model and remuneration structure is compliant with current FSA rules.

“Our current understanding is that commission is allowed to continue for introducer websites that are introducers as opposed to a platform in their own right.”

The venture is partnering with a variety of charities. So far nine have signed up with more expected to be added in the coming months.

Lang Cat principal Mark Polson says the FSA should be wary of anything which allows the continuation of commission payments after the end of 2013.

“I think this is probably a loophole the FSA would look at and have some concerns about. It feels a bit like something that may be permitted for a short time after the platform rules come in next year but would probably be prevented by the regulator at the earliest opportunity.

“I think it might also be difficult for INVESTaid to ensure they are not providing any advice or platform service whatsoever in this instance also,” he says.

Bloomsbury Financial Planning partner Jason Butler says: “I think giving to charity is something you do because you want to and not something I would necessarily look to mix with an investment.”

Jacksons Wealth Management managing director Pete Matthew says: “It feels a little bit like this is flying in the face of the RDR. Although the notion of giving money to charity is good, I think it seems as though it should be against the rules to take commission for merely introducing.”

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Comments

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

  1. Surely this is a dead duck after RDR as the company receiving the business can only make a payment based around its fees. The introducer is not making a recommendation and therefore cannot charge a fee and therefore any payment to the introducer from the provider is an illegal payment under the RDR, simple as that! Surely the regulator should close this firm down after 2013 unless it is going to become regulated and charge clients a fee for investing through their service.

  2. I think a lot of people are going to come unstuck if they think they can just go the introducer route.

    And any IFA who does have ex IFA’s as introducers may want to beware

  3. There is a caucus of IFAs and tied advisers who have not taken the exams, nor are they willing to charge fees, who have hitched their wagon to the expectation of being able to continue by offering Term assurance and other less regulated offerings, supplemented by what they hope will be introducer fees.

    Is the FSA going to permit the bottom feeders to flourish?

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