Out-Law News 5 min. read

Latest MiFID II amendments create uncertainty over independent adviser remuneration


Financial product providers will be permitted to issue independent financial advisers (IFAs) with "minor" non-monetary benefits in circumstances where the advisers are providing investment advice to their clients under plans developed by the EU's Council of Ministers.

Late last month the European Parliament adopted a text containing proposed amendments to the MiFID II package of financial services laws that are currently being drafted that would demand that product providers are excluded from paying fees, commission or any non-monetary benefits to IFAs that provide investment advice to clients.

However, the Council of Ministers' has proposed (226-page / 723KB PDF) a slight loosening from those rules to permit some non-monetary benefits to be provided to advisers from providers. In general, the draft MiFID II Directive requires IFAs to only be paid by their clients when providing investment advice.

Under the Council of Ministers' draft plans "minor" non-monetary benefits could be provided by product providers to IFAs that provide investment advice to clients as long as the arrangements are "clearly disclosed" and are "capable of enhancing the quality of service provided to a client and are of a scale and nature such that they could not be judged to impair compliance with the investment firm’s duty to act in the best interest of the client."

A non-binding recital contained within the Council of Ministers' text provides an example of what a 'minor non-monetary benefit' may constitute. The recital said that a product provider giving IFAs "training on the features of the products” they are offering could be said to be providing an IFA will a minor non-monetary benefit. Further examples were not detailed.

Both the Council of Ministers and the European Parliament would have to agree on the terms of the MiFID II package before new EU laws in this area can be established.

However, in the UK the Financial Services Authority (FSA) is already pressing ahead with plans to clamp down on what it sees as 'bias' in the retail investment market stemming from existing payment and charging models.

Under its Retail Distribution Review (RDR) the FSA has set out new adviser charging rules which, from the end of this year, will require that IFAs provide investment advice on a broad evaluation of the products available across the market and only receive payment for those services direct from clients.

The regulator introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. This arrangement means that advisers may not always provide personalised recommendations that are best suitable for clients, the FSA has said.

To expand on the principles of its adviser charging rules, the FSA has said that it will ban product providers from paying cash rebates to advised clients. In a consultation paper published earlier this year, which detailed the regulator's intention to apply the ban to cash rebates paid through platform services, it made clear why it wanted to ban the arrangements.

"Our view is that cash rebates hinder transparency and potentially provide a mechanism for commission to continue being paid," the FSA said in the paper.

Cash rebates in a platforms context are currently paid to consumers' platform accounts. They are issued by product providers whose products have been selected for investment by consumers or advisers on their clients' behalf. Often a portion of the rebates are used to offset what advisers charge clients for their advice.

However, whilst the FSA has outlined its intention to ban such arrangements it has proposed to allow product providers to issue unit rebates to clients' platform accounts instead. The units would represent a value that clients could reinvest in particular products they are offering.

Financial services law expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com, said that the latest changes to the MiFID II draft would raise questions over whether unit rebating would be allowed under the new EU regime.

"It now seems clear that at EU level, independent advice has been singled out in respect of fees, commission and non-monetary benefits," Salmon said. "This likely will further the unit rebating debate that has been taking place for some time in the UK. On one view, a unit rebate may be seen as conferring an indirect benefit on advisers, wherever reflective of payments made by clients to advisers."

The FSA has already written to a "sample" number of life insurance providers and financial adviser companies seeking assurances that they are not negotiating payments that flout imminent new rules on adviser charging.

It 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.

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.

In its letter the head of the FSA's life insurance conduct business unit, Nick Poyntz-Wright, said that even if firms' distribution 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.

Insurance law expert Bruno Geiringer of Pinsent Masons commenting on the FSA's plans said that "It will be interesting to see how the FSA will react to this slightly relaxed approach in Europe towards benefits from product providers to adviser firms and how it fits with the RDR and deals with the extension of the RDR approach taken by the FSA with regard to restricted advisers. And so we wait to see what the FSA will say in response to these European developments."

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