Out-Law News 3 min. read

FSA plans crackdown on firms' efforts to 'circumvent' adviser charging rules


Some financial services firms are trying to find loopholes in new rules that ban them from paying investment advisers to recommend their financial products to clients, the City watchdog has said.

The Financial Services Authority (FSA) said that the product providers were paying advisers through non-commission means and other benefits in an apparent attempt to "circumvent" new rules on adviser charging set to come into force from January next year.

It said the practices were outside the spirit of the rules stemming from the regulator's Retail Distribution Review (RDR) into the retail investment market and that it was "considering ways" of how to enforce against them.

"One of the central aims of the RDR is to address the potential for adviser remuneration to distort consumer outcomes," the FSA said in its June RDR newsletter. (3-page / 266KB PDF) "Our adviser charging rules aim to ensure that firms are only remunerated by adviser charges in relation to the advice and related services they provide, these charges being agreed and paid by their clients."

"Unfortunately we have found a number of firms that seem to be looking for ways to circumvent the adviser charging rules. This includes soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome – to secure distribution. Clearly such arrangements are not in the spirit of what we’re all working so hard to achieve," it added.

"We are concerned that non-commission payments and benefits may be indicative of firms seeking alternative ways to preserve features of the market that the RDR intended to address. We have always said that we would take any necessary action to deter firms from frustrating the intended market outcomes. We are considering ways to reinforce our expectation that firms can only be remunerated by adviser charges in relation to their new advisory business," the newsletter said.

The FSA has announced a raft of changes to its rules aimed primarily at increasing transparency for consumers in the retail investment market.

Currently complicated arrangements can be formed between financial advisers, product providers, fund managers and investment platform providers over the management of consumer investments and how charges are levied and paid for. In 2010 the FSA published plans to make the processes involved clearer with the aim of eliminating 'product bias' in the market.

Among the problems identified by the FSA has been the issue of 'product bias' where platform providers receive commission for promoting certain financial products to consumers, or advisers on behalf of their clients. However, problems around 'product bias' have also been identified in the relationship between product providers and advisers. The problem exists where some advisers are paid commission by product providers to promote to their clients, or invest in them on their behalf, certain financial products that the provider offers.

Under the FSA's rules though advisers must set their own charges for the services they provide and those charges must solely be based on the level of service they provide rather than the provider or product they recommend and are payable solely by consumers.

The FSA has largely left it up to advisers themselves to draw up their own charging structures, but it has said that consumers must be informed about the charges they could face "up front" and that, in general, any ongoing charges should only be levied where clients have agreed to an ongoing service from an adviser.

Product providers are explicitly banned from offering commission to advisers and are subject to further rules drawn up by the FSA if they offer to deduct adviser charges from their products.

The FSA recently outlined plans to ban product providers from issuing cash rebates to consumers' investment accounts. Firms have used the rebates to offset the costs faced by consumers in paying the adviser charge. Under the FSA's plans consumers would still be able to receive rebates by way of additional units which the customer may decide to reinvest into the same or different funds.

Further rules were published last year by the FSA in relation to the relationship that platforms have in the investment market. Those rules, which the regulator wants to delay implementation of until the end of 2013, force investment advisers to "take reasonable steps" to ensure that their choice of platform does not bias their selection of products for consumers.

Platforms are also required to present their products in an "unbiased manner" and they must also "meet the same standards as product providers when they facilitate adviser charging." Platforms are also required to "disclose any fees or commission offered to them by third parties in advance of providing a service to customers."

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.