In the supposed balmy days of summer there have been a number of technical documents which I have read alongside the latest Patricia Cornwall blockbusters.
The paper that nearly made me drop my glass of Pimms was the HM Revenue & Customs and the Association of British Insurers guidance note which sets out the rules for determining the VAT liability on adviser remuneration.
I believe this 10-page paper loaded with basic flow charts will, over time, undermine the intentions of the retail distribution review.
The paper states clearly that if a full financial healthcheck, investment allocation advice, financial review, etc are provided, VAT will be payable by the client.
But if the adviser arranges the purchase of a financial product. only this transaction is VAT-exempt.
If a purchase of a product occurs as a direct result of financial advice provided, VAT is payable only on the advice part of the service.
We hear from PR company Lansons that the FSA is not particularly proud of the RDR but, instead of losing face, it will continue with its implementation. The RDR survived an FSA executive meeting in March earlier this year.
We all know the FSA wants “remuneration arrangements that allow competitive forces to work in favour of consumers”. The move to separate the commission from the product cost is in full swing and many product providers can, after considerable cost, offer their products on a factory gate pricing basis.
IFA firms have worked over the years to move clients to a retainer or an ongoing fee basis, I used to offer all my IFA clients the choice of paying a regular retainer and many took up this choice of adviser remuneration.
Imagine if I had to go back them all to say they should come off the retainer as I would have to invoice 20 per cent VAT on each retainer fee they pay.
If I take an up-front fee, in the majority of cases it is 20 per cent cheaper for the client.
As protection sales are outside of the RDR, I expect there to be a emphasis on protection sales providing no or very little advice with maximum up-front commission.
As for investments and pensions, this new VAT issue will force financial advisers to push for the product sell and to charge an up-front fee in lieu of commission.
The client will then need to be told that any ongoing monitoring of performance by the adviser is subject to VAT.
I know many bright clients who will decline the ongoing monitoring service, saying they will do it themselves and this is where the problem lies.
No ongoing advice equals no fund-based remuneration for the adviser. If there were a downturn in performance, there will be no QCF level four qualified ongoing advice to keep a financial plan on track, resulting in consumers’ financial plans underperforming.
By defining VAT clearly on adviser remuneration, the industry will take a backward step while RDR tries to push on the industry forward.
Suddenly, the restricted adviser status option to sit alongside an independent fee-based offering looks more attractive as many financial advisers will aim to sell to clients who are not fee-tolerant an unadvised product with very little ongoing advice, then move on to another client – exactly what the FSA is trying to stop.
Kim North is director of Technology & Technical