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RDR could be lost in the VAT

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


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Funny how different people reading the saem document come to different conclusions. There was apprantly a mistake in the wording in the document which one bright IFA questioned with HMRC. Other than that, I thought it looked like business as usual and I think that is what people like Gill Cardy were saying too.
    I’ll post below in a minute my response to what I originally read a week or so ago on the subject AFTER having read the actual document itself. I’d suggest anyone reading what Kim has written or I am posting below also go and READ the original document before commenting as there appear to be several different views on this already.

  2. My comments appear on page 4 of the posters on the MM article “VAT guidance contradicts RDR aim for advice
    11 August 2010 | By Nicole Blackmore”

    They appear along with many others including those of the chap who quried the wording with HMRC/ABII over product advice which DOES NOT lead to a sale, which is actually not VATAble either and is confirmed in the Q&As, but doesn’t appear in the flowchart.

  3. If Kim North has been charging a retainer for years and providing her turnover was in excess of the minimum for VAT registration, she should have been charging VAT all the time. The rules haven’t changed, it’s just that HMRC have clarified what has always been the situation.
    She might be getting a call in the near future.

  4. Sadly RDR is turning in to one of the most anti consumer pieces of legislation ever. Product providers are using it as excuse to reintroduce bid offer spreads via the back door all dressed up as adviser charging. The revenue are using it as a method of picking up a whole chunk of VAT.
    Some years ago M&S refused to accept credit cards. The result was that the consumer left product at the till and shopped elsewhere. M&S eventually decided to accept credit cards. In our industry some half wit would make it so that no shops would accept credit cards. Thus the consumer would have to fit the retailer not the retailer fit the the consumer. We have a regulator who sadly knows everything about systems but nothing about the commercial world!

  5. So, as you say from FAQ 2, if your client knows what he wants before any advice is given “I need a pension” then both advice and arrangement are exempt. As another adviser said nothing really has changed they just have tried to make it clearer, it’s always been safer to charge vat rather than not.

  6. The original HMRC guidance (which is where I’d look in preference to some notes from the ABI) makes it clear that if the various elements of your intermediation service are linked then (subject to the “loads of VAT-able advice and piffling investment” restriction) the whole service becomes VAT exempt.
    Given that the FSA makes it perfectly clear that intermediation can only follow from fact-finding, information gathering on existing arrangements, product research, preparation of recommendations and associated administration, including suitability letters, I have no problem in asserting that all of those elements are a necessary part of “intermediation” and therefore VAT free.
    What the HMRC guidance then helpdully stated was that if you have a menu (watch out all you FP Advance advocates) where each individual element is quoted, priced, and available according to the choice of the consumer then each individual element is assessed for its VAT exemption – and in this case, only that part directly related to intermediation is VAT exempt.
    And, whether the client pays in a lump sum up front or monthly is a total irrelevance too. It’s what they’re paying for that’s totally relevant.
    Do what most IFAs (except thosed banging on about separating out the financial planning) do and the HMRC words could not be clearer.
    And Phil is right – VAT is not conditional on a product sale actually taking place – so if intermediation is envisaged but the client doesn’t proceed that is still VAT exempt.


    So here is another industry figure speaking up against FSA’s RDR!

    Otto Thoresen – CEO Aegon: “The RDR is only helping wealthy customers”

    AXA April 2009:”We will lobby the FSA to make sure the RDR does not mean less are able to access advice”

    David Cox – SuuqeaMarch 2009: “Two million clients could be left without an IFA after RDR – 40% could leave the industry”

    FSCC January 2009: “Financial advice will be less widely available post RDR”

    Institute of Financial Services: “RDR will impair financial advice before improving it”

    Alasdair Buchanan Scottish Life November 2009: “Sales advice is a real cop out and extremely confusing to investors”

    Stephen Gay – Aviva June 2009: “The regulator has failed to consider the danger of adviser charging limiting access to advice for those on lower incomes”

    Lord Lipsey: “Consumers in the middle (not high net worth or money guidance fodder) to be sold products by banks under the contradiction that is sales advice”

    Walter Merricks former Chief Ombudsman: “I think it would be unwise to count on the assumption that complaints from the retail investment world are suddenly going to go down as a result (of the RDR)”

    Deutsch Bank report August 2009: “There has been industry talk of 30% or even 50% if IFAs exiting the industry post 2012, which is not impossible”

    Paul Selly HBOS: “Bancassurers set to benefit”

    Richard Howells Director Zurich LifeJune 2009: “The big question mark is still around what benefit it will have for the ultimate consumer. I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can really hang my hat on.”

    Martin Lewis Money Saving Expert June 2009: “There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash. What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment mis-selling, investment mis-selling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.”

    Janet Walford OBE, Editor Money Management Sept 2009: “I am not paranoid enough to believe that the FSA has a hidden agenda to do away with small IFAs, but the law of unitended consequences may well mean that this will be the result. This is especially the case when set alongside the myriad of other proposals that are costing some £430 million to set up, with ongoing fees of £40 million pa thereafter, a mind boggling amount of cash.

    Peter Hamilton barrister, Source: Money Management Oct 2009, Scrapping the FSA by Marie Jennings MBE: “The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be….It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified.”

    David Hazelton of Tax Incentivised Savings Association(TISA) 30/10/09: The RDR could be detrimental to consumers both in terms of higher product charges and an increase in the cost of advice, warns the Tax Incentivised Savings Association(TISA). Implementation costs for the RDR are being “seriously underestimated” and product charges will consequently have to be raised.

    Bankhall managing director David Golder 03/11/09: “We say write to the regulator, write to your MP. Do not let the FSA get away with some of the things that will lead to the widespread decimation of our industry.”

    Robert Kerr, head of retail distribution development at Scottish Widows says: The RDR could have the unintended consequence of “disenfranchising” the majority of consumers from financial advice. “Our key concern is the RDR proposals will act to drive advice upmarket, with financial advice becoming the preserve of the wealthy leaving mass-market consumers un-served,”

    Nigel Waterson when Shadow pensions minister : “While no-one can object to raising the standards of training and competence, should an emphasis on exams take precedence over on-the-job training and experience? Is the 2012 implementation date practicable given the extra qualifications and changes in systems that will be required to be in place?
    Richard Hobbs Director Lansons Regulatory Consulting 16/07/10: “I have to say, it (RDR) only just survived an executive committee meeting in March 2010 at the FSA. The FSA are not particularly proud of the RDR but it is a question of losing face, so I think they will carry on.”


  8. Is the FSA listening ? Good intentions leading to unintended (but easily foreseen) consequences.

  9. Incompetent Regulators Awards Team 24th August 2010 at 3:54 pm

    CPS Leviathan at Large 2000
    CPS Leviathan still at Large 2005

    Leviathan uncontrollably at Large with no direction 2010

  10. Steven Farrall (Adviser Alliance) 24th August 2010 at 4:33 pm

    Ho Ho. This paper destroys two arguments. One, that the RDR has any logic to it whatsoever, and two that VAT is a tax on sales and is neutral on destroying trade. It’s not. VAT is a direct tax on comapny profits, just as CGT is a tax on income.

    Truly, the FSA and the Government are utterly incompetent.

  11. What a mess

    Truly incompetent and set on destroying what is left of consumer choice and ability to look outside of targeted high pressure sales arena so they will be flogged that flavour of the month product now lets see, recently big ones have been Barclays and Aviva and N&P and Keydata there are others due to the excessive commission agreed at national level for set amounts of new business.
    No wonder the FOS is gearing up to handle millions more complaints in the next few years.

  12. Happily, in my mid 50s, I’m now looking in from the outside, having left the financial advisory sphere in 2005.

    It seems, from my perspective, that the RDR is an enormous sledge hammer whose purpose, really, is no more than to introduce fees instead of commission and raise the standard of the benchmark qualification.

    The whole thing has got out of hand.

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