Out-Law News 2 min. read
09 Nov 2012, 9:17 am
Financial services sector head John Salmon brings you insight and analysis on what really matters in the world of financial services.
There has been a lot of uncertainty over what will be considered an inducement or be permitted as customer agreed remuneration for advisers, platforms and other distributors of financial products in the post RDR world.
Let's take a look back at what has happened.
In July the FSA began clarifying what it considered fell within payments to be provided exclusively by the client. It stated that any attempts by product providers that amount to "soliciting or providing payments that do not look like traditional commission" would be targeted. No clarity however was given as to what would fall within and, more perhaps importantly outside, this newly introduced concept of 'traditional commission.'
By September, the FSA became more willing to talk about what it viewed as impermissible payments and benefits in more specific terms, suggesting that outside the scope of 'traditional commission' would be anything which could be considered "cross-subsidisation of adviser charges." The FSA stated that impermissible payments could include "things like IT costs, marketing budgets, property charges and costs relating to business development."
At the beginning of October the FSA went further, this time sending a 'dear CEO letter' directly to "the largest providers of retail investment products and the largest distributors".
In the letter the FSA highlighted its concern with "sizeable upfront benefits (such as contributions towards distributors' IT systems)" and gave examples of what it considered to be distributor inducements.
It listed (1) "a provider organising, subsidising or paying for distributor training, conference or seminars (involving costly social and entertainment events unrelated to the training)", (2) payments or non-monetary benefits for "assisting in the promotion of the provider's retail investments" and (3) payments or non-monetary benefits for "the development of software necessary to operate software supplied by the provider."
In relation to the IT issue, the FSA stated that they "have seen payments from providers to distributors for the costs incurred by distributors to update and enhance IT hardware and software as part of an overall development of an integrated provider / distributor IT solution."
In its letter, the FSA sought to draw a distinction between IT "costs necessary to operate software supplied by a provider" and IT costs which "go beyond" those requirements.
But the question remains, in practical terms, where is the line in the sand drawn?
The FSA's approach led to a lot of industry talk with many suggesting that they had gone too far both from a 'client benefit perspective' and from an 'EU law perspective' [http://www.out-law.com/en/articles/2012/october/fsa-says-eu-plans-to-allow-cash-rebates-do-not-conflict-with-rdr-rules/].
The European Parliament and the Council of Ministers, currently in trialogue negotiations together with the European Commission, have now accepted proposals which allow the FSA to move forward with its planned bans and clarified the EU law uncertainty. Or have they?
In respect of independent advisers, both bodies have supported proposals for a Europe wide ban on commission, fees and non-monetary benefits paid by anyone other than the client.
The Council though has decided that this ban should not include 'minor benefits'. No definition has been given for the term 'minor benefits' and the only indication of what it might include is the example of a product provider giving independent advisers "training on the features of the products.”
So we are left with notions of 'traditional commission', "costs necessary to operate software supplied by a provider", anything that looks like "cross-subsidisation of adviser charges" and 'minor benefits.'
The challenge now is to make sense of what all of this in terms of adviser charges, cash and unit rebate arrangements and distribution remuneration arrangements.