Consumers to pay financial advisers' IT, marketing and property costs directly, says FSA

The Financial Services Authority (FSA) said that financial advisers that offer advice to clients in a retail setting about which financial products to invest in as well as providing financial products for investment themselves must describe IT, marketing and other costs as "adviser charges" and not financial product costs.

The regulator outlined its view in a recent newsletter (3-page / 266KB PDF) discussing the Retail Distribution Review (RDR). The FSA has announced a raft of changes to its rules affecting the retail investment market following an RDR it previously conducted aimed primarily at increasing transparency for consumers. The rules are set to come into force from the end of this year.

"The RDR requires larger firms, who provide products as well as advise on products, to set advice charges so they are ‘reasonably representative’ of the services offered," the FSA's newsletter said. "This prohibits firms cross subsidising advice charges, with profit made from other parts of the business. These firms must ensure that their adviser charge is reasonably representative of the services associated with making the personal recommendation (and related services)."

"Our concern is that firms may be taking a narrow view of what should be included within the advice cost excluding, for example, things like IT costs, marketing budgets, property charges and costs relating to business development. This will continue to be an area of focus for the remainder of the year," it said.

Following its RDR the FSA outlined increased requirements that the costs associated with the retail investment market be transparent to consumers.

It identified issues of 'product bias' in the market, which it suggested were caused by a result of existing charging structures that enabled, for example, financial advisers to receive commission from product providers to recommend their offerings to investors. Additionally, providers of platforms, which enable consumers or financial advisers' on their behalf to select and manage investments online, have also been accused of 'product bias'. The FSA has expressed its unhappiness at the way product providers have paid platforms to display their product offerings more prominently than others.

The regulator has issued new rules, some of which come into force at the end of the year, to address these issues. The rules require that financial advisors only receive payments from their clients. 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 arrangements that have in place with the provider of the product they recommend.

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.

However, the dynamic of the retail investment market is further complicated due to the varying and complex business models operated by some firms. Many large firms offer a range of services, which can see them act as financial advisers, product providers as well as platform providers. The FSA's statements in its August RDR newsletter appear to outline its intention to prevent some firms from hiding costs associated with delivering investment advice from consumers within other parts of their business.

The FSA has previously defined an adviser charge as "any form of charge payable by or on behalf of a retail client to a firm in relation to the provision of a personal recommendation by the firm in respect of a retail investment product (or any related service provided by the firm) which is agreed between that firm and the retail client in accordance with the rules on adviser charging and remuneration."

Plans to restrict platforms in the way they can obtain payment for their services were also announced earlier this year by the regulator. The FSA said platforms must only be paid by consumers and has prohibited them from charging the providers of financial products for selling those products. In June it said that platforms are likely to become more consumer focused rather than adviser focused in the advised market and that its proposals help remove the incorrect impression consumers hold that non-advised platforms are free to use.

The FSA has proposed delaying the implementation of some rules affecting platform providers until the end of 2013 following concerns raised within the industry.