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Out-Law News 2 min. read

FSA: Platforms and product providers may not be compliant when facilitating adviser charge payments


The Financial Services Authority (FSA) has raised concerns about the way that some platform and product providers plan to facilitate adviser charging in light of imminent reforms to the regulation of the retail investment market.

The regulator said it has written to every firm it understands will facilitate the payment of adviser charges following the implementation of the Retail Distribution Review (RDR) rules in a bid to confirm whether those firms are doing so with the appropriate consent of investors.

Under the RDR financial advisers are prohibited from receiving commission from platforms or product providers when giving retail investment advice to clients. Instead, the advisers can only receive payment for those services from their clients. However, platforms and product providers can facilitate investors' payment of the adviser charge.

However, under the rules, platforms and product providers must obtain and validate an instruction from customers in relation to any adviser charge for which it provides a facilitation service. The FSA has left it up to individual companies to decide how to do achieve this standard.

The regulator has asked all the firms it understands will facilitate adviser charging under the RDR regime "seeking regulatory assurance" from those companies on the issue.

In its latest RDR newsletter (4-page / 313KB PDF) the FSA said that it was "concerned" that some of the "different approaches" it had seen companies adopt in facilitating the adviser charge would "not meet the ‘obtain and validate’ requirement". It said it would be a breach of its rules "if the instruction came solely from the adviser".

"We are not saying that all existing arrangements will be non-compliant post-RDR – just that firms should not automatically assume that they can continue existing arrangements without checking that they comply with the new incoming rules and guidance," the FSA said in its newsletter.

"We sent letters to all firms that we understand are planning to facilitate adviser charging. The letter requires the firms to declare that: they are comfortable that their proposed approach will comply with the relevant rules; and the firm has designed an appropriate accompanying control environment within which to operate," it said.

The FSA added that discretionary investment managers may, "by operating client money accounts from which investors can ask for their advisers to be paid", also facilitate adviser charging and that they too would need to ensure compliance with the 'obtain and validate' rules.

In its letter, seen by Out-Law.com, the FSA explained what some firms may be doing wrong.

"We have seen that some firms are automatically relying on their existing client-consent arrangements to facilitate adviser charging post RDR," Nick Poyntz-Wright, the FSA's head of life insurance, said in the letter. "However, existing arrangements to facilitate the payment of new adviser charges may not necessarily meet all the relevant RDR requirements and simply re-labelling existing fee/commission arrangements as adviser charges without carefully analysing them against the new RDR rules will not be considered acceptable."

"Beyond the firm developing a policy in relation to facilitation, it is incumbent on the firm to ensure that they have developed robust processes and procedures in place to capture evidence that the intended outcomes of the ‘obtain and validate’ requirement have been achieved," Poyntz-Wright added. "For example, some firms are considering using Management Information generated from compliance monitoring activity or direct customer contact (on a risk based sampling basis) to test whether the policy is operating as intended and that the firm is in compliance with the rules and desired customer outcomes."

"Firms will need to ensure that they have fully understood, designed and deployed an appropriate control environment to mitigate the risk of their proposed approach failing to provide sufficient protection for customers, achieve the desired outcomes and meet all relevant legal and regulatory requirements, including in relation to its relevant SYSC (Senior Management Arrangements, Systems and Controls) obligations," he said.

Under the RDR, the FSA has set out new adviser charging rules which, from the end of this year, will require that advisers only receive payment for their services from clients. The regulator introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. This arrangement creates the risk that advisers may not always provide personalised recommendations that are best suitable for clients, the FSA has said.

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