FSA seeks evidence that 'distribution agreements' comply with adviser charging rules

The Financial Services Authority (FSA) said that the providers may be paying distributing firms' inducements in a way that works around new rules preventing financial advisers from receiving payment for their services from anyone other than their clients. Those rules are set to come into force from the end of this year under the FSA's Retail Distribution Review (RDR).

The regulator raised concerns about the way that some providers were paying for advisers to attend conferences, training or seminars, or in the way that they were helping pay distributors to promote their products or set up new IT systems.

"One of the central aims of the RDR is to address the potential for adviser remuneration to distort consumer outcomes," Nick Poyntz-Wright, head of the FSA's life insurance conduct business unit, said in the letter (4-page / 130KB PDF) published by MoneyMarketing. "Our adviser charging rules ensure that advisory firms are only remunerated by adviser charges for the advice and related services they provide in connection with retail investment products, these charges being agreed with, and paid for, by their clients."

"We are concerned that some firms may be looking for ways to circumvent the adviser charging rules by soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome, i.e. to secure distribution and have the same ability to unduly influence advice. Clearly such arrangements are not in the spirit of the RDR. We are concerned that non-commission payments and benefits (typically included within 'distribution agreements' between provider and distributor firms) may be indicative of firms seeking alternative ways of preserving features of the market that the RDR intends to eradicate," he added.

The FSA has asked the companies to provide it with certain information about any distribution agreements they have in place and said that it may require the firms to take action based on the "conclusions" it arrives at "following completion of [its] review." The regulator said that even if firms' arrangements comply with its rules on 'inducements', they may still be in breach of its adviser charging rules. It added that it has "two general concerns" about agreements some firms are entering into.

"We have seen some distribution agreements with lengthy terms (such as five years) under which sizeable upfront benefits (such as contributions towards distributors’ IT systems) are being made to the distributor in advance of 31 December 2012," Poyntz-Wright said in the letter. "However, where all or most of the benefits are going to be used by the distributor after 31

December 2012, we consider that a portion of the upfront benefits may, depending on the circumstances, need to be treated as if it was made after 31 December 2012 and so be caught by the adviser charging rules."

"We intend there to be a level playing field between advisers and want to ensure there is no unfair subsidy by providers of individual distributors’ costs," he added. "The scale of the payments we have seen under some distribution agreements are such that we are concerned that these payments may in effect be subsidising a distributor’s general costs, which in turn may subsidise the adviser charges levied by the distributor."

"In our view, this creates a distortion in the market by potentially giving some distributors an unfair competitive advantage over other firms which do not receive such payments or nonmonetary benefits. Such an outcome was clearly not the policy intent of the RDR and the desired outcome under the prospective adviser charging rules," Poyntz-Wright said.

The agreements some firms are forming may "impair" their ability to "act in the best interests of the client", as they are required to, the FSA's letter said. In circumstances where "payments made by a provider to a distributor represent a key source of revenue for the distributor" a firm may "put its commercial interests ahead of the best interests of its customers," it said.

Any payments or benefits negotiated between companies must serve to "enhance the quality of service provided to the client." If they don't, those arrangements would be "prohibited", the FSA said.

In addition, Poyntz-Wright cautioned that companies may not be adequately disclosing "permitted inducements".

"The disclosure wording firms propose to use to meet the disclosure requirements ... must contain sufficient information to enable the client to understand the existence, nature and amount of the payment so that an informed decision [by clients over potential investments] can be made," he said.

The FSA said that providers that pay for advisers to attend training, conferences and seminars may be in breach of the rules. Similarly, distributors cannot be paid any more than it costs to operate new "IT hardware and software" they install to better offer a provider's products, it added.

The regulator also said that companies that pay to help distributors promote their retail investment products can only, generally, pay an amount that covers the costs involved in that promotion. Even then those cost-covering payments will only be justified, under the new rules coming into force at the end of the year, if it can be shown that there has been an "enhancement of the quality of its service to clients" by distributors, it said.