FSA cannot tell IFAs not to cross-subsidise, Aifa member
Regulator says its “very happy” for IFAs to do pro-bono work despite issuing warning against cross-subsidising advice and product fees.
All businesses cross-subsidise in order to make a profit, Neil Liversidge, managing director of Castleford-based West Riding Personal Financial and Association of IFA council member, told FTAdviser in response to the regulator’s warning that IFAs should not cross-subsidise advice charges with product costs.
Last week the Financial Services Authority 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 warned that cross-subsidising the cost of advice in this way is prohibited under the new rules coming into force in January 2013.
However, Mr Liversidge does not think the FSA understands how to run a successful business, believing that “every business cross-subsidises to some extent”.
He said: “None of these people have ever started a business from scratch and run it at a profit and this is why they’ve got this obsession with no cross subsidy, but every business cross subsidises to some extent.”
The FSA has confirmed to FTAdviser that it is “very happy” for advises to do pro-bono work but Mr Liversidge believes this contravenes its cross-subsidy rules.
He said: “Pro-bono work is work that is subsidised by the profit that you make on other business. If the FSA allows this, that tells me that the FSA does not understand business. Take what they have said to its logical conclusion and that would be that the FSA does not allow IFAs to do pro-bono business. Shouldn’t I be able to decide what I charge for what I do? That is business.”
A spokesperson for the FSA said: “We are very happy for advisers to do pro-bono work. What we were referring to [in the RDR newsletter] is where firms are selling products and giving advice and making up the advice cost losses with higher product charges so the cost of advice would be artificially low.”