In March this year, policy statement PS10/6 presents the regulator’s final rules on the first two elements of the Retail Distribution Review:
- improve the clarity with which firms describe their services to consumers
- address the potential for adviser remuneration to distort consumer outcomes
In this week’s blog I will look to summarise the area of remuneration.
Adviser Charging
The regulator has confirmed the introduction of a system of ‘Adviser Charging’, which means that all firms that give investment advice through a personal recommendation to retail clients must set their own charges. Advisers will no longer be able to receive commissions from product providers in return for recommending their product.
The intention being to create a structure where the charge made to the client reflects the service they receive and not the product provider or product being recommended. The new rules restrict advisers from receiving commissions from product providers, even if they intend to rebate the payment to the client.
The rules also confirm that ongoing charges should only be applied to clients where they are paying for an ongoing service such as a regular review of their investments. Such charges must be made clear to clients along with guidance on how they can cancel the service and the associated charge if they choose to do so.
If a firm therefore recommends a portfolio of funds and suggests that it will rebalance the portfolio on an ongoing basis, the firm must explain the service the client will receive; the charge and the implications of not taking the ongoing service. We must remember that this then has a knock on effect on the firm’s internal systems and controls as they will need to ensure that the client does actually receive the ongoing service they are paying for. For now, the rule is that non-advised sales will not be subject to adviser charging.
It might be helpful at this point to have some examples of best practice/poor practice in relation to adviser charging and this is something the FSA is considering, however they have already highlighted a number of issues that firms may need to consider when putting together their tariffs:
- whether they should charge a fixed amount for a particular service
- whether they should adopt a price tariff based on the amount of money to be invested (e.g. a percentage of the portfolio)
- whether their charging structure should reflect the time taken to provide the service
- whether they should make a separate charge for any initial discussions or meetings before the personal recommendation is given
- the reasonableness of any separate charges
- whether they should make a charge irrespective of whether their advice is accepted or not
- how they will deal with clients who take up a recommendation but cancel within the cooling off period
Discretionary Management Services
So, what impact does this have on discretionary management services? The rules depend on the situation:
- A discretionary investment manager makes a personal recommendation –Where a discretionary investment management firm selects an investment product after reviewing their personal circumstances, this would be classed as a personal recommendation and so the firm would be caught by Adviser Charging.
- A discretionary investment manager does not make a personal recommendation – Where for example a firm is instructed by the client’s IFA, this would not be classed as a personal recommendation and therefore the firm would not be caught by Adviser Charging.
- An adviser firm recommends that a client invests through a particular discretionary investment manager – Adviser firms are not allowed to receive commission from discretionary investment managers for recommending their services. In fact, managing the relationship between their client and a discretionary investment manager is now included as an example of a service related to a personal recommendation from an adviser.
Legacy Commission
We might at this stage question what happens in relation to increments or additional benefits for sales made BEFORE the Adviser Charging rules come into effect. Would this be classed as old business (on which we could receive legacy commission) or new business? The regulator’s stance on this issue is that if the customer had the option to extend or change the product when it was originally purchased, and the increments or additional benefits come about as a result of those options, the product has not in effect changed. In this case commission can continue to be paid.
Soft Commission
To ensure that the new rules on adviser charging are not circumvented through the use of “soft commission”, the regulator has also adjusted its rules on inducements. Soft commission is commission given in a non-cash form and frequently raises problems because it is not transparent. This is a problem in an investment context because investors' money may be used to pay soft commission in ways that are not apparent to them. The problem with soft commission is not necessarily the commission itself; it is the lack of transparency. Soft commission might be given in a form that actually provides investors with a better service (e.g. research, financial data etc.). However, the bundling of services implied by soft commissions can distort prices and impose extra costs on customers.
Use of Credit to pay for Adviser Services
Firms must not offer credit to pay for adviser charges unless in the best interest of the client. In fact, firms will have to consider the value of the advice to the client taking into account the TOTAL charges the client would be required to pay. This means that if the total cost of the advice outweighs the advice they would receive, the regulator would not expect the firm to provide any advice at all.
Factoring Adviser Charges
Concerns had been raised that banning factoring would impact on the ability customers had to access low value regular savings contracts. Adviser firms have the option to allow customers to pay over time for advice on regular contribution products.
Alison Young - 15th April 2010