 By Nicola Green and Andrew Garner, Consultants at Bovill
Overview
In Quarterly Consultation Paper No. 34, issued on 5 October 2012, the FSA issued clarification round the adviser charging and remuneration rules and how they apply to referrals by intermediaries to Discretionary Investment Managers (“DIM”). If the proposals are implemented, the RDR rules will be amended to make clear that advisors who make referrals to DIMs must only accept remuneration via adviser charging, except in specific circumstances.
Retail Distribution Review and Adviser Charging
Under the RDR, the FSA will implement a number of new rules, some of which are intended to ensure that advisers are remunerated through adviser charging for all advice and related services. Under adviser charging, advisers will be required to agree fees in advance with their clients. These rules are intended to prevent an adviser receiving commission for a personal recommendation with respect to a Retail Investment Product (“RIP”).
In addition to setting out rules surrounding adviser charging, the FSA have previously stated that adviser firms should not be allowed to receive commission from DIMs for recommending their services. The FSA have also planned to introduce guidance to this effect into the Conduct of Business Sourcebook, to be effective from RDR implementation date on 31 December 2012.
However, the FSA have become aware that parts of the industry are uncertain of the FSA’s expectations in this area. Therefore, they are now proposing to make further amendments to the rules and guidance which will be implemented on 31 December 2012 in order to ensure clarity for all parties.
Proposed Rule Amendments
The proposed changes to the Conduct of Business Rules are intended to restrict the circumstances in which intermediaries are permitted to receive remuneration, commission or other benefits from DIMs in relation to referrals to that DIM.
The proposals will also see restrictions on remuneration and commission received by intermediaries from DIMs for other activities performed by the intermediary for the client in relation to the service provided by the DIM.
These other activities could include (but are not limited to):
• the intermediary acting as agent for the client with regard to their agreement with the DIM;
• passing information between the DIM and client;
• monitoring performance of the client’s investments with the DIM; and
• periodically reassessing the arrangement to ensure that continued use of the DIM’s services remains in the client’s best interests.
The FSA’s intention is that these rules will remove any bias from advisers in their choice of DIM and enable advisers to demonstrate that they are acting in the best interests of the client at all times.
Impact for Intermediaries and DIMs
In their consultation on the proposed rule changes, the FSA outline two potential scenarios:
• Scenario 1
An adviser carries out a thorough assessment of the needs of their client before providing advice. The advice provided includes a personal recommendation for the client to invest in a RIP as well as recommending a particular DIM to the client. In this scenario, as the referral forms part of an advice to the client which includes a personal recommendation for a RIP, the adviser charging requirements must be applied to the referral to the DIM as well as to the RIP recommendation.
• Scenario 2
An adviser has an ongoing relationship with the client and carries out a thorough assessment of their needs before making a recommendation to the client to use a particular DIM. In this scenario, the adviser does not also provide a personal recommendation to that client in respect of a RIP.
In this scenario, the adviser charging restrictions would not apply and the DIM would be permitted to remunerate the adviser for the referral of the client.
However, it should be noted that the FSA have asked for feedback from respondents on whether the adviser charging restrictions should be extended to include this scenario.
Further Considerations
Whilst acknowledging that there will continue to be circumstances where remuneration is permitted for referrals to DIMs, the FSA emphasise the continuing need for firms to consider carefully whether any payments received are permitted under the inducements rules. Firms must also ensure that they are able to demonstrate that they are acting in their client’s best interests in selecting any particular DIM.
Implementation
The proposed rules will come into force on 31 December 2012 and the FSA intend that any arrangements already in place at that date can continue in the same way, for example trail commission can continue. The FSA intend to further consult on how existing arrangements should be treated after 31 December 2012. In the meantime, the FSA propose to allow existing arrangements to continue and for them to be unaffected by subsequent activity related to the investment.
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