One of the first major issues to emerge from CP121 was the defined-payment system that must be adopted by those advisers wishing to remain truly independent, essentially requiring the charging of fees for giving independent financial advice.
It is this measure more than most that has led to the capital conundrums that have arisen for many firms.
Whether these fees are paid directly in cash terms or raised through the valuable alternative of fund-based fees (trail commission in today's language) a financing issue clearly confronts those IFAs who would prefer to remain independent but who currently rely on initial commission for a significant share of their revenue.
Although, for many financial advisers, the initial reaction has been to seek a “sugar life office”, others have been interested in exploring the detail of the proposal. One area under much discussion is whether fees could simply be deducted from the investor's contribution in much the same way as commission.
Although the disclosure requirements are anticipated to be harsh, this route would have the obvious, if soft, benefit that the end client does not physically have to write a cheque for the service offered. There is also a further possibility that VAT will be avoided although financial advice may well become exempt as a compromise, in any case. So far, so good.
Sorry to spoil the party but I feel there are two less discussed taxation reasons why this approach will not be adopted and why the physical invoice/cash approach will be required.
The first reason is the very real income tax position of investors. By paying a fee for advice by means of a deduction from the product, the investor avoids the need to pay for that advice from taxed income.
In an environment in which the Government is keen to drive personal investment, it is easy to obtain a feel for the magnitude of tax avoidance that could prevail.
In whose interests is it for financial adviser remuneration to be effectively tax-deductible?
If the situation is adverse for life and straight asset management products, it is even worse for pension products. Here, the client would obtain double tax relief on the fee as a direct consequence of tax relief being available on the entire contribution.
A further and perhaps more modest tax issue that applies to life products is that of life office taxation.
Readers will be aware that life business is taxed on an I-E basis, meaning that the greater the level of expenses for a given level of investment income, the less the amount of tax due on investments.
By allowing life offices to consider fees as acquisition expenses, there is a clear likelihood for the overall tax take to be relatively diluted against the proposals.
Could it be perhaps that CP121 is just another stealth tax? I actually think not although there is no doubt that the industry tax take should increase.
At this point, I should acknowledge that I appreciate that the issues I have discussed may be circumvented by clear rules and much system development – it all seems just a bit too much work for no clear consumer or Government benefit.
Furthermore, while this may seem at odds with the availability of tax-free, trail-based fees, this should come as no great shock. The key difference is that this method of payment is clearly aligned with the investor interest whereas initial fees/commission are directly opposed.
I cannot help suspect that this has been the main driver in this proposition and will, therefore, be the cornerstone that remains, even once some of other details have been shuffled around.
So, what will we end up with? I think it is hard to call although I also find it difficult to see beyond the initial proposals.
The cocktail of tax consequences and the FSA's desire to see an alignment of interests will blow the middle ground away.
David Ferguson is a director at the Abacus