View more on these topics

Rebate conditions

Looking at the legal position on GPP commission rebates.

Lindsay-Concannon.gif

Unscrupulous advisers have been encouraging employers to choose a group personal pension scheme based on how much commission the adviser will share with the employer. This commission rebate to the employer may come at the expense of higher ongoing charges for the employees who invest in the scheme.

As well as arguably breaching a position of trust, employers who accept rebates in this way risk committing a criminal offence punishable by an unlimited fine and up to two years in prison.

Personal pension schemes are investment products regulated by the FSA. Arranging deals in and advising on such products are regulated activities that can only be carried on by “way of business” by persons authorised by the FSA or where an exemption is available. Most employers are unlikely to be FSA-authorised, and unfortunately no usable exemptions are available.

As an employer will satisfy many of the criteria describing “arranging” or “advising” if he gives staff the opportunity to invest in a group scheme, how does the employer avoid committing a criminal offence? The crucial saving grace here is that most employers will not be deemed to be arranging or advising “by way of business” as they do not receive any form of commercial benefit from providing the scheme. Where there is no commercial benefit, there is no regulated activity and therefore no criminal liability.

The FSA states a commercial benefit includes receiving commission. If an employer does receive commission, then, by virtue of FSA’s own clear guidance, the employer is acting by way of business. If all the other elements are satisfied (and the FSA’s own guidance suggests they would be), then an employer in receipt of a commission rebate commits a criminal offence by arranging or advising in relation to its group scheme.

There are also restrictions on promoting such products to potential investors (the same need for authorisation or exemption, with the additional option that written promotions can be approved by an authorised person such as the adviser). However, unlike arranging and advising, the FSA assumes that employers are, in fact, acting in the course of business when promoting their group schemes to employees.

Most employers try to come within an exemption that allows them to promote to employees, provided they satisfy certain conditions – namely that the employer contributes to the scheme, informs employees that they have the right to obtain independent financial advice and the employer does not obtain any direct commercial benefit from promoting the scheme. If an employer cannot fulfil the conditions, then the exemption is not available. He cannot make any verbal promotions and must have all written promotions pre-approved. A breach of these rules is a criminal offence.

This issue does not seem to be on the FSA’s radar at the moment. However, based on the FSA’s own guidance on the subject, the legal position does at least seem quite clear.

Lindsay Concannon is an associate in CMS Cameron McKenna’s financial services team

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Barbara Windsor 22nd April 2010 at 2:10 pm

    Thanks to both of you for this! Keep up the good work!

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com