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Rob Reid: The problem with adviser charging

Following recent news in Money Marketing that HMRC is to rewrite the guidelines for consultancy-charging, Robert Reid, managing director of Syndaxi Chartered Financial Planners, points out some of the problems with the current rules

One problem with simple ideas is that their interaction with other aspects of life can lead to the most straightforward concept becoming convoluted and, in some cases, unworkable.

Paying for advice out of a product through adviser- charging and consultancy-charging could both fall into this category.

For some time, an informed majority of advisers have realised that the deduction of advisory charges from bonds, particularly offshore bonds, under a platform should actually form part of an individual’s 5 per cent withdrawals from a taxation perspective.

Where a person is not making any withdrawals, this does not seem a major issue, although it does mean you are compressing the availability of tax-free withdrawals for that individual.

This problem was subject to discussions between the Association of British Insurers and HM Revenue & Customs. However, HMRC decided not to grant any concessions in this area. This will drive more people to consider whether a cash account for fees is going to be the inevitable conclusion.

But for those focusing on pension contracts, I would argue the position is even more serious.

It is clear that it is technically possible to take an adviser or consultancy charge from a pension contract and, if this is done, it is essential you refer to the HMRC’s Technical Manual, in particular the section on member benefits, as it explains adviser and consultancy-charging in detail from a scheme administration perspective.

The technical note explains that the fees in respect of a member’s costs for pension advice could be paid from the pension plan itself. HMRC also confirms in these technical notes that this would not be regarded as an unauthorised member payment. It adds the important proviso that the fees are paid as a result of a genuine commercial remuneration agreement in respect of pension advice given in relation to that pension.

However, it is just not possible for that financial advice to be extended to cover products such as Isas, even though they relate to the individual’s retirement planning. More important, the costs for implementation would not be covered by any description of pension advice.

The notes go on to give an example where, as part of giving pension advice, an adviser recommends a client to switch from one fund to another within a pension scheme. The adviser then implements a recommendation on behalf of the member to switch and the adviser charges the client for undertaking that implementation work.

In this circumstance, the charges for implementation would not be seen as anything other than an unauthorised withdrawal by that member and taxed accordingly.

This obviously makes life extremely complicated when using adviser-charging in respect of pensions but things actually get worse if we now focus on consultancy-charging.

In the eyes of the HMRC, consultancy-charging is simply a label change for adviser- charging in group schemes. HMRC has made it clear to me that it sees no difference in consultancy-charging and adviser-charging with regard to unauthorised payments.

Taking the example of someone who is paying for advice in respect of their group personal pension, the cost for that advice could be deducted from their contract without any problems.

However, the cost for implementation cannot and, given that many employee benefit consultants are not giving advice but simply setting schemes up, this means consultancy-charging does not work for group schemes where no advice is delivered.

Even where advice is delivered, it is not going to be possible for charges in respect of other services to be taken from the individual’s account. It is not even possible to take it from the contributions made by the employer, as those contributions are again going into a personal pension.

This means the employer will have to pay directly or, alternatively, legacy schemes will be given a further reason to continue.

This is not necessarily going to fit in with what I believe the regulator was intending.

Even in schemes where advice is being delivered, what happens where the individuals who join are a percentage of those eligible? And for those who receive advice but do not join, who meets the cost of their advice?

From my reading of this technical note, it cannot be deducted from the plans of the individuals who do join because the advice being delivered is not to the benefit of the planholder but to the benefit of the non-planholder or his employer.

Consultancy-charging or adviser-charging and personal pensions, individual or group, is going to be very complicated.

It is simply not possible to operate bundled charging in this area. This then leads to the situation where someone could find themselves in a position to deduct the adviser charge on the pension contract but then face the fact that any charge for pure advice will be subject to VAT. Any unauthorised withdrawal is subject to a 55 per cent unauthorised payment charge.

Many will suggest the solution is simple – just take two cheques and, for smaller firms where the directors are the advisers, that is fine but what if you are an network? Do you trust all advisers in a two-cheque process? I think not and so for pensions, adviser-charging fails.

For many providers, the idea of checking what the adviser charge is for will be highly problematic and will lead to them possibly not offering it for pensions or requiring a sign-off from the adviser to keep them insulated from any complaint if the clients becoming subject to an unauthorised withdrawal charge.

If HMRC does not review its position, the impact of consultancy-charging is even worse. As many businesses in the group market operate on a no advice model, this means payment out of the pension fund cannot work as they cannot debit pension plans where they give no advice.

Were the ABI and or the FSA representatives that took part in these discussion with HMRC ignorant of this or did they think we could all kid on that it was a deduction for pure advice at all times?

Any payment for pure advice not taken from the pension would become subject to VAT, the very thing that the recent agreement with the HMRC sought to avoid. Who said the HMRC was one body?

The sooner professional practitioners are involved in these meetings the better.

Robert Reid is managing director of Syndaxi Chartered Financial Planners

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. How very predictable. More appalling consumer outcomes.

  2. 7 1/2 months to go and this area is still not nailed down. Astonishing really.

    It seems to me that the only clear way forward is to charge the client for each element (advice and implementation) separately. This shouldn’t be a big deal though – Networks will just need to get their systems sorted.

  3. Simon Webster 14th May 2012 at 1:31 pm

    We’d missed this and the potential outcome is hugely worrying.

    The onus does seem to be on HMRC though – at one stage commission came out of a plan and covered these services – now it is an adviser charge for the same service. Surely the powers that be can join the dots – but then again perhaps not!

  4. Terence P.O'Halloran 14th May 2012 at 2:00 pm

    Keep up everyone. These arguments were put to the CII and the FSA following the first 101 page document on the subject of RDR.

    The whole problem is that simplicity does not employ a vast workforce , or litigation lawyers. Regulatory regimes need complexity to survive. They produce NOTHING. They absorb and deflect much.

    You voted for this Robert, against my advice and (better) judgement. Now what do you want?

    Always be wary of what you wish for.

    We now have a lot of qualified individuals ( thanks to the RDR initiative) and a vast wasteland of people needing advice from too few advisers. Perhaps Prudence would tell us to stop wasting the experienced talent that we have left in business in the UK, dump RDR, for the useless burden that it has become; and get this country and it’s financial services industry back on the rails producing successful outcomes for needy people.

  5. OK, OK,

    Who let the socialists take over Canary Towers?

    We did! That makes it all our fault.

    The RDR never was about improving outcomes for the consumer. It’s ALL ABOUT TAX. The objective all along was to get more tax into the Treasury.

    Gordon Brown taxed pension funds to finance his spending spree. THAT is what RDR is about — MORE TAX from the consumer to finance out-of-control GOVERNMENT SPENDING.

    The FSA has lied all along about this. Now that we have had a change of government one would have hoped that they would have realised the detriment that is about to be unleashed on the poor unsuspecting British consumer.

    A truly disastrous state of affairs.

    Heads will roll but too late, alas, for many fine businesses that will fold under the mountain of paper and confusion that is RDR.

  6. Well well yet another unintended consequence of consumer detriment regarding the RDR. Is there anyone out there can put a list together of all of the unintended consequences in one place so we can email a list to our MP’s and get them to take this to TSC. Martin Wheatley must put a stop to this ludicrous event before it happens. Its not good enough trying to piece meal it together after the thing goes live.

  7. @ Larry

    Totally agree with you apart from 1 point ! heads wont roll as the majority of the ones who put RDR in place have now left for sunnier climes or fixed themselves up at the likes of PWC, etc,etc etc

  8. Soren Lorenson 14th May 2012 at 3:34 pm

    Peter Smith, Margaret Cole, Hector Sants. They designed RDR and they left the FSA before it was implemented.

    I think we all know why.

  9. What a bunch of moaning old fools 14th May 2012 at 4:24 pm

    Instead of using this as a way of bashing RDR again, how about some ideas about how we overcome this problem.

  10. You miss the point 4.24 pm : they LIKE being a bunch of moaning old fools.

    I’m sure they realise that HMRC will sort the matter out in due course because of course no-one wants to see AC leading to hundreds of thousands of pension policies being deemed “unauthorized”. And if they don’t, the rest of us do.

    But, there are some people around who have just got a hang-up about RDR and spend some time every working day on a message board (or sometimes more than one) just having a general moan to…well anyone who may be listening. Pointless of course, but they like it and it harms no-one really I guess.

  11. Thats easy, scrap RDR..

  12. @IFA

    It’s not about the RDR, it’s about freedom – the freedom for a client to pay for goods or services how they choose — not how some unelected bureaucrat decrees is best for them.

  13. 14 May 2012 4:24 pm
    Is it possible you work for the FSA OR HMRC? and you can’t sort it out so you want us to do it for you?

  14. As Terry O’Halloran points out, these are not unintended consequences, they have always been a component part of the changes, which needed to be addressed and resolved within the RDR project. The fact that such matters are rearing their head at this seemingly late stage suggests that the due diligence required has, perhaps, not been as robust as it could have been, or maybe that a pause for reflection is required.

    The question is, whether or not the powers that be have the will or humility to accept this (shouldn’t be a problem if a lot of the original decision-takers have gone or are going!).

    For anyone (see previous) to criticise IFAs’/Advisers for acknowledging the nonsense of this issue and ‘moaning’ about it, beggars belief. The suggestion that it is for us to wrestle with, or resolve such matters, is absurd. ‘This is not our remit’, to quote a well-known architect of the RDR. It is the remit of the people who are introducing the RDR structure, to put in place the REGULATORY practices and applications surrounding such matters and given the seemingly limitless financial resource that has been at their disposal, one would expect that there will be no stone unturned come December 31st.

    Our hands are already full preparing ourselves for RDR, what we need is to have a clear direction as to the working practices that will be in place in 2013 and ideally well before the implementation date please.

    If there is ANY danger that vagaries may still exist after that time, then there should be no question that matters should be deferred. The last thing this industry needs is to score yet another own goal!

  15. RDR Unintended Consequences
    1. Firms will fold leaving client with no adviser. Result poor consumer outcome.
    2. Orphan clients who would have been serviced under the commission’s already paid face paying a fee to a new firm for on-going advice on existing contracts. Result poor consumer outcome.
    3. Orphan clients and a large percentage of working and middle classes are not likely to pay for advice. Result poor consumer outcome.
    4. Client’s that are willing to pay fee’s will also pay VAT. Result poor consumer outcome.
    5. Firms advising on pensions may have difficulty getting paid. Result less firms advising and arranging pensions. Result poor consumer outcome.
    6. RDR = less consumer choice. Result poor consumer outcome.
    7. RDR = Reduction in adviser numbers. Result poor consumer outcome.
    8. RDR = More pressure on financial compensation scheme paying for claims of failed authorised firms. Result poor consumer outcome.
    9. Higher compliance costs as a result of RDR will be reflected in the charges clients pay. Result poor consumer outcome.
    10. All unintended consequences of RDR that are yet to be discovered. Result poor consumer outcome.

  16. Blobby, blobby, blobby!!

    What is Mr Blobby complaining about today folks?

  17. Yes, John, now those WILL indeed be unintended consequences!!

    It doesn’t fill one with joy when it’s put like that either.

    The thing I wrestle with in all of this is that, unless products and markets start to perform and in a sustainable fashion, customers will lose their appetite for investment and as such, no amount of professional posturing will increase our income and the profile of our industry.

    Maybe we should spend more time addressing that than worrying about RDR and exams, because that is a very real, palpable and current issue!

  18. I don’t see how taking a list of “unintended consequences” to the TSC would help matters. We know the FSA will not take any notice of the TSC – or anyone else for that matter – they are accountable to no-one – and that, my friends, is the crux of the whole debacle.

  19. QUANGO

    Q.U.A.N.G.O

    Quickly Usurp And Neutralise Government Oversight.

  20. David Bashforth 21st May 2012 at 11:57 am

    I wrote to my MP, Nick Clegg, two weeks ago highlighting all these points and the direct results that we have already seen, redundancies from Barclays, HSBC and more recently Coutts. My concerns have been referred to Mark Hoban. Personally I can’t believe that the wider press seem blind to FSA policy which has already put thousands out of work and where that is just the tip of the iceberg.

  21. Silly me, I thought the government wanted businesses to create more jobs to help the economy. We’re in a good position to employ one more staff, possibly two, but with RDR looming I’m looking at redundancies instead…

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