With the introduction of the Retail Distribution Review (RDR) less than three months away, the Financial Services Authority is making it clear that there will be no getting around the commission ban.
The FSA has written this week to 24 product providers and large advisory firms, warning them against making or receiving payments which ‘work around’ the RDR commission ban.
From 31st December 2012 onwards, financial advisers will no longer be able to receive commissions from product providers for selling retail investment products.
As a result of these new rules, advisers will instead need to agree ‘adviser charges’ with each client. These can be invoiced directly or deducted from any products that are arranged, but will certainly operate on a more transparent basis than commissions.
We have had concerns for some time that some large advisory firms might attempt to circumvent the commission ban by structuring other remuneration deals with product providers. One example of how this might influence advisers is through the use of vertical integration.
The FSA has written to firms as a result of being alerted to “moves in the market which could undermine the RDR adviser charging provisions”, which would unfairly disadvantage those advisers (such as Informed Choice) that have worked hard to prepare for the introduction of adviser charging.
They described examples of these unfair inducements including providers paying for adviser training, conferences and seminars, providers paying adviser to help with the promotion of their investment products, or providers paying advisers for the development of software or IT systems.
Clearly financial arrangements such as these are unlikely to be in the best interests of investors.
If a product provider is paying an adviser for these things, it introduces a strong element of bias and could result in the adviser recommending unsuitable products.
The commission ban being introduced on 31st December is a positive move for consumers because it introduces greater transparency and breaks the link between product provider and adviser.
Where some advisers are trying to cling onto this murky commercial relationship, clients should question their motives and make sure they understand the implications on the impartiality of any advice they receive.
Photo credit: Flickr/Travis S
