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Discretionary fund manager adviser charging rules due "shortly", says FSA

The City watchdog is shortly to publish new rules on payment for financial advisors where they outsource investment decisions to third parties, according to reports. 29 Aug 2012

A report on the New Model Advisor website says that the Financial Services Authority (FSA) will "shortly" outline the way in which financial advisers obtain payment for their services in circumstances where they outsource clients' investment responsibilities to discretionary fund managers, according to a report in the trade media.

The FSA has outlined rules which are due to come into force at the end of the year that prohibit advisers from receiving commission from discretionary fund managers.

The regulator has been keen to eliminate "product bias" in the investment market. It has previously outlined concerns about advisers' "inherent conflict of interest" in suggesting that clients invest in particular financial products from which they would receive "financial gains". This situation, the FSA has said, has "created a clear risk of clients receiving advice that was not in their best interests."

In guidance (26-page / 296KB PDF) issued in April the FSA outlined how advisers' agreements with discretionary fund managers could be organised, but rules on how charges could be legitimately levied have yet to be published. The FSA, though, is set to explain such structures soon, according to the report.

"On a high level, we expect discretionary managers to stop payments to advisers if that adviser continues to offer advice to a client in any form not just on the assets held by the discretionary manager," said Linda Woodall, FSA's head of investment intermediaries, according to the report. "We will be clarifying these rules shortly."

In its guidance published in April, the FSA said: "Where a firm outsources investment selections to a discretionary manager, both the introducing firm and the discretionary management firm have obligations to ensure that a personal recommendation or a decision to trade is suitable for the client."

"The obligations on each party will depend upon the nature and extent of the respective service provided. Both parties should be clear on their respective service, and ensure they meet the corresponding suitability obligations. If either or both parties are not clear, there is a risk that clients may receive unsuitable advice and/or have their portfolios managed inappropriately," it 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 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 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 regulator outlined plans to ban product providers from issuing cash rebates to consumers' investment accounts earlier this year. 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."