Commission on investment products was banned under the RDR, so it was surprising to learn last week that structured deposits continue to be able to pay commission.
The FCA says structured deposits are out of the RDR’s scope because it regards them as banking rather than investment products. But is this the end of the story?
More than a few advisers will be scratching their heads at this move. The RDR sought to drive out behaviours that resulted in customers being treated unfairly, and the ban on commission was a key plank of the reforms.
Structured deposit providers have chosen different approaches to the continued commission option. Some pay no commission, while others pay commission ranging from 0.6 per cent to 3 per cent. But if the payment of commission on investment products was seen as a possible influence towards anti-TCF outcomes, surely paying commission on structured deposits might create the same possibility.
Structured deposits, as distinct from structured products, share many of the traits of deposit accounts: fixed term, capital security, depositor protection and so on. In practice, though, it is unlikely the purchasing process is the same. Unadvised customers may be perfectly able to understand they are tying their money up in a five-year bond and sacrificing access during that period in return for 3 per cent a year interest. The same customers might struggle with how returns are described on a five-year structured deposit bond: “100 per cent of any growth (after averaging) in the FTSE 100 Index up to a maximum of 35 per gross (5.13%/ AER*) of the original investment.”
And the description of averaging makes things even more complex: “The growth of the FTSE 100 Index will be measured using the initial level of the index at close of business on a given date and the average level of the index in the last 12 months of the investment based on monthly averaging using 13 average points.” The investment element of a structured deposit product would, for most people, make it something wholly different to a deposit account – especially given the opacity of the possible return and the opacity of what the return is contingent upon.
Providers who offer commission on structured deposits, or plan to, give advisers the option to waive commission, which would be rebated to the client, who is then charged a fee. Some advisers are choosing to rebate commission for their clients’ benefit. For those that do not, there is an argument that commission bias could exist when comparing alternatives.
While it is right that deposit-based accounts and investments should be treated separately, structured deposits are in a grey area. For the sake of clarity and a level playing field, let us hope the market will act in the spirit of the RDR. If not, how long will it be before the FCA reviews its present stance?
Richard Leeson is director at D&W Management Consulting