In the next few weeks, the Financial Conduct Authority will publish a paper summarizing what can and cannot be included in marketing packages. These packages allow product manufacturers to hand over money to large adviser groups: networks, nationals and support service providers, in exchange for promotional activity. That could include presenting at events, advertising online or in magazines or purchasing useful management information.
One of the debates on this matter is whether support service providers should be caught by the same rules. I have always assumed they would be and every provider I have ever dealt with has assumed the same. The reason is fairly straightforward, but little understood.
The reason is to avoid providers subsidising, and therefore obscuring, the true cost of advice. Whether this is the right or not is another debate. What is beyond question, is if the regulator banned, or dramatically reduced, the payment of marketing packages to networks, but allow support service providers to receive large sums of money to reduce their charges and enhance their own offerings, this would create a significant advantage over their regulated brethren.
Directly authorised firms have, for some time, been able to purchase suspiciously low cost support from some support providers, who have been generating significant income from marketing allowances and using this to subsidize their own costs, making the provision of ostensibly the same services as a network, very cheap.
Don’t get me wrong. Networks have been playing the same game for years, and costs will undoubtedly rise with the reduction of marketing allowances. Whilst a number of large networks have limited potential for manufacturers, as the levels of business written within networks is far less than the DA market, they do sit on large back books of business which provide vital revenue for a number of providers. It is the past, not the future, which drives these payments.
To date, everyone understood the rules (except the customer, of course, the advisers purchasing services) and there has been an equal, if not healthy, apportionment of marketing spend, regardless of regulated status, unofficially linked to business volumes. To put this in perspective, for some firms this is more than half of their revenue, and for most they would cease to trade without it. We are talking millions not thousands. In addition to the forthcoming guidance, a cap on the total amount received based on turnover would be prudent.
The arguments against made by support service providers seem little more than a restatement that they are not regulated, so there. True, but the providers writing out the cheques are, and the FCA can easily stop this at source. The reason for tighter control is nothing to do with a desire to punish non-regulated businesses, but a need to avoid passing on a subsidy of the cost of advice to advisers via a support service provider, when that same subsidy has been stopped via networks. It would not take much for a network to set up a separate non-regulated business to accept payments, if this was allowed.
Since the ‘Dear CEO’ letter issued on this subject in October I have seen little actual change in practice, as there are still too many loopholes to exploit. There are plenty being exploited right now. Closing this one down should be simple, if the right argument is found.
Phil Young is managing director of Threesixty