With the RDR deadline less than two months away, IFAs could be excused for hoping the details of adviser charging would have been finalised by now and they could get on with any final preparations their businesses need. However, yet another issue with advisers charging has cropped up, that of decency limits.
If there is confusion amongst IFAs about the use of decency limits, this may be connected to the contradictory approaches that provider firms have taken.
Put simply, decency limits are caps imposed by providers to limit the maximum amount they are willing to pay under adviser charging.
In a consultation paper in 2009, the FSA suggested that providers would be expected keep an eye on the amounts they were being asked to pay and report excessive payments to the FSA.
Earlier this year, Money Marketing reported that the FSA had returned to the issue but this was rejected by providers as they would not know how much time the adviser had spent with the client and the quality of the service they received.
The FSA’s position on decency limits has since reverted to a more neutral position.
An FSA spokeswoman says: “The FSA is not a price regulator so we haven’t set any cap or said the provider can’t pay above a certain level. We really think it is up to firms to set their own charging structures and develop their own sort of business models to provide a fee to the client for the cost of advice.”
The only limit is firms are not allowed to promote theselves in a way which could be seen as playing up against competitors in order to encourage IFAs to use them if they are offering a higher maximum limit.
This hands off approach to the issue has lead to a sharp division between providers who are implementing a cap and those that are not.
Prudential and Just Retirement are two providers which have confirmed they will go ahead and impose decency limits. They have not yet confirmed what the limits will be only that they will be in place.
Prudential product director John Warburton (pictured) says the use of decency limits is not intended to interfere with the conversation between the client and the adviser but it is a decision they took due to concerns about the company’s reputation.
He says: “We are not trying to make a judgement on whether the services an adviser is charging are appropriate or not. We do not feel, a, that it is our role and, b, that we are actually equipped to make that assessment. The way that we looked at decency limits is more through the lense of a Pru brand point of view. Is there a limit that we think it could cause damage to the Prudential brand in the longer term if we were to facilitate that level of adviser charging?”
Other companies such as Scottish Life say that any limit they introduce will be “commercial limits” to prevent the product being adversely impacted, while many platforms already use payment caps.
Skandia already limits payments on its platform to 4.5 per cent initial commission, 1.5 per cent ongoing commission and 3 per cent switch commission. These have been in place since 2007 and Skandia said it will continue with these limits post-RDR.
Head of investment marketing Graham Bentley says: “We recognise adviser charging is an agreement between the adviser and the customer and we are simply acting on the client’s instruction to facilitate that payment. However, as a responsible provider we have an obligation to ensure the level of charges taken from our products are not set at such a level that would mean the product is unlikely to achieve the objectives for which it has been designed.”
However, many providers such as Zurich, Standard Life and Aviva are against setting decency limits, with a view that providers should have no involvement when it comes to adviser charging.
Standard Life director of UK retail RDR Graeme Bold (pictured) says: “We have not imposed any limits on an adviser’s remuneration. The adviser charging level is decided between the adviser and their client. The introduction of adviser charging to replace commission signals the end of provider influence over adviser remuneration, making the amount, timing and funding of any adviser charges a matter purely for advisers and their clients.”
Zurich UK Life head of government and industry affairs Matt Connell says: “We think it makes far more sense for the regulator, rather than providers, to monitor adviser remuneration. The FSA took steps to make this happen in November 2011 with PS 11/13.
“With this new approach, the FSA can monitor the full relationship between a client and the adviser, without unnecessary intrusion from providers.”
To further confuse the matter, some providers may not be setting maximum limits but will still have the right to refuse to pay a full adviser charge if the believe it is excessive.
Aegon head of regulatory strategy Steven Cameron (pictured) says: “We won’t promote a maximum but we will monitor the situation and if we were asked to deduct something that was so high that there would be so little money left that it wouldn’t make sense financially to have the business and it wouldn’t deliver a benefit to the customer, at that point we would say we are not prepared to facilitate that advice or we would certainly question it with the adviser.”
Some IFAs are frustrated at providers setting maximum limits and many feel it is an intrusion of the relationship between the client – the very thing the RDR is supposed to promote.
Informed Choice director Martin Bamford says: “I think it is important that it is that there are some safeguards in place to ensure clients aren’t ripped off, but also in a sense I think it can go against the RDR. There shouldn’t really be any interference from product providers when it comes to setting the remuneration levels. As long as there is an agreement between the client and the adviser, this should be sufficient.”
Evolve Financial Planning director Jason Witcombe says he understands provider concerns.
He says: “It is not their business what I’m charging my client. But from an insurers point of view, if someone was getting a very large percentage of a pension fund or an ISA fund, it could be misinterpreted or misreported further down the line and the insurance company could end up being bad-mouthed in the press.”
However, Cameron says he has faith that the majority of advice firms will give no reason for providers to cap their charges. He says: “I’m optimistic that advisers will come up with adviser charging levels in shapes that are appropriate for the advice they are giving. Therefore there shouldn’t be any need for the provider community to get involved or to question other than in extreme situations.”