FSA warns firms over ‘cross-subsidising’ advice cost
Regulator tells firms that advice charges should be “reasonably representative” of the services offered.
The Financial Services Authority has issued a warning to firms that offer both retail investment products and advice, stating that it is concerned some will continue to cross-subsidise their activities to keep advice costs artificially low after the Retail Distribution Review.
In its latest RDR newsletter the regulator said it was concerned that firms are not including a provision to cover all of the costs of operating an advice service and thus their fees are not “reasonably representative”.
The FSA reiterates that cross-subsidising the cost of advice in this way is prohibited under the new rules coming into force in January 2013.
The FSA said: “Our concern is that firms may be taking a narrow view of what should be included within the advice cost excluding, for example things like IT costs, marketing budgets, property charges and costs relating to business development.”
Linda Woodall, head of investment intermediaries department, also emphasised that the FSA is concerned that some firms are not testing their post-RDR propositions or are leaving this process “until it’s too late”.
The newsletter said: “Every business needs to test their client propositions. We will continue to focus on this.”
Furthermore the regulator also once again highlighted concern over firms that may be soliciting recurring payments that are akin to commission to secure income ahead of the new rules coming into force.
The newsletter said: “Unfortunately we have found a number of firms that seem to be looking for ways to circumvent the adviser charging rules.
“This includes soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome – to secure distribution. Clearly such arrangements are not in the spirit of what we’re all working so hard to achieve.”
The FSA is concerned that non-commission payments and benefits may be indicative of firms seeking alternative ways to preserve features of the market that the RDR is intended to address.
The newsletter said: “We have always said that we would take any necessary action to deter firms from frustrating the intended market outcomes.
“We are considering ways to reinforce our requirement that firms can only be remunerated by adviser charges in relation to their new advisory business.”