Out-Law News 3 min. read

Better late than never: guidance from the FSA to platforms and product providers on facilitating adviser charges


John Salmon’s Financial Services blog - 14/12/2012

The Financial Services Authority (FSA) has finally given guidance about what platforms and product providers have to do in order to facilitate adviser charges and still comply with soon to take effect retail distribution review (RDR) rules. It has said that relying on previous arrangements will not be enough.

Last week in a second round of 'Dear CEO' letters the FSA turned its attention to platform and product provider adviser charging facilitation arrangements.

The FSA warned that firms should not automatically rely on their existing client consent arrangements or simply take the approach of sticking adviser charge labels over the top of existing fee/commission processes.

The facilitation rules which take effect at the end of the month require platforms and product providers to ensure that instructions for payment of adviser charges are obtained from retail clients. This means that platforms and product providers cannot simply rely on assurances given by advisers that consent to make payment has been obtained.

The instruction must also be separately validated.

The FSA's new guidance states that platforms and product providers must ensure that they have "fully understood, designed and deployed an appropriate control environment for adviser charging facilitation."

In the FSA's view, platforms and product providers would, in an appropriate control environment, be able to:

  • demonstrate that payment instructions have not come solely from the adviser;
  • produce a policy setting out their approach to facilitation, to which they can then point when investigated or otherwise challenged; and
  • demonstrate that their systems and processes are in line with their facilitation policy.

Bruno Geiringer, our RDR specialist, has suggested that "The market has waited a long time for regulatory guidance on validation."

He notes that the guidance that the FSA has now given "accords with our advice that there needs to be a good audit trail to justify deducting sums from a client's investment, like a signed facilitation agreement."

Bruno points out that a signed facilitation agreement must:

  • explain the terms on which the facilitation service is being provided;
  • show that the client is instructing the provider, and not the adviser, to pay the adviser charge; and
  • show exactly what is being paid, when and how, to avoid confusion or argument later.

It would also be best for platforms and product providers to send "play-back" letters to clients to confirm that instructions to pay fees out of the product have come from the client – perhaps as a means of demonstrating that consents have not only been 'obtained' but also 'validated'.

The FSA is expecting more platforms and product providers to check and monitor their facilitation arrangements in order to ensure integrity, and as Bruno points out this "is not just good practice but essential as platforms and product providers will be making returns to the FSA about the charges paid."

Purely automated adviser charge consent arrangements?

Although the FSA has not explicitly said that the 'obtain and validate requirements' would rule out plans to utilise straight-through-processing for facilitation arrangements, it has not gone so far as to make it clear that validation could be achieved through straight-through-only processes either.

But it seems pretty difficult to see how a platform or product provider could comply with both of the 'obtaining' and 'validating' elements of the rule through a purely automated process.

One solution may be to consider implementing an electronic signature regime similar to that announced by iPipeline today or otherwise move towards a more direct to client processing model.

Putting to one side the practical difficulties in taking either of these approaches, there may also be challenges from a legal perspective. Although a regime for recognising the legal value of electronic signatures has been in place for more than 12 years now across the EU, the law in this area remains piecemeal at best and there is no certainty that an electronic signature based validation process will guarantee compliance with the FSA's validation requirement. The concept of an electronic signature is a broad one, but not all electronic signatures are created equal (at least from a legal perspective).

A platform or product provider would likely want confirmation from the FSA that any electronic signature regime that it is seeking to implement could be considered a sufficiently reliable substitute for one that is dependent on 'wet' pen and paper signatures.     Ultimately though, it is the retail client's best interests that are at the heart of the new rules and if the FSA were to explicitly allow platforms and product providers to straight-through-process facilitation consent documentation it would be favouring an approach which is consistent with its core objectives, given the cost benefits of encouraging a greater adoption of straight-through-processing. Perhaps this will be the subject of 'Dear CEO letter III'?

As plans continue at both national and EU levels in relation to authenticating identities, e-signatures and e–identification, it may be time for the FSA to look more closely at what is currently being proposed and endorse solutions which encourage transparency in adviser charging on the one hand, while also accounting for the benefits which flow (ultimately to the retail client) of dispensing with the need for an audit trail to extend to paper based facilitation instructions on the other. 

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