Leading advisers and discretionary managers have warned that the FSA may need to completely ban kick-backs from discretionary managers to advisers to prevent firms from dodging the rules.
Days before the December deadline for the implementation of the RDR, the FSA published its final guidance on how referral payments should be dealt with post-RDR, which said advisers may receive payments from DFMs if they don’t directly advise their clients but just refer them to a DFM.
Lee Robertson, CEO of Investment Quorum, said the rules “leave too much wiggle-room” for firms to get around the ban.
“There is no point having half a rule – the FSA should just go the whole hog and ban referral payments,” he said.
Mr Robertson’s comments were echoed by Gillian Cardy, managing director of adviser trade body IFA Centre, who questioned whether merely referring people to a wealth manager and getting paid was in the spirit of RDR.
After the FSA’s consultation found that 15 of the 18 respondents supported a blanket ban on kick-backs, the regulator said it would launch another consultation to review whether it should implement a full ban. The notice said respondents supported the proposal because “they thought this would prevent firms getting around the ban on referral payments and would provide clarity for the consumer on the adviser’s remuneration.”
The next consultation will also deal with the status of “legacy” payments for referrals made pre-RDR. The FSA has decided to consult on draft rules that would treat existing referral payments “in a similar way to trail commission, so advisers could not receive additional referral payments if they advised a client to [add] money to their investments held with the DFM.”
The FSA’s Handbook Notice 125, which takes into account responses from its October consultation paper CP 12/27, also clarified which services an adviser could carry out that would be counted as a “related service” and would result in a ban. The notice defined “related service” as “any service provided to a retail client by an adviser firm in relation to the investments managed by a DFM”.
The FSA also took aim at three respondents to its consultation paper who claimed the paper’s clarifications would entail extra costs for their business.
“We do not accept there should be significant additional cost,” the regulator said. “The policy intention was set out in March 2010, so firms have had plenty of time to prepare for switching off referral payments.”
Ian Cornwall, director of regulation for the Association of Private Client Investment Managers and Stockbrokers (Apcims), said the notice didn’t contain many surprises but that it was likely to need more clarification on certain points when the proposals were put into practice.
He added: “At least we know where we are now, but there is more to come down the track which, considering we have been discussing the RDR for six years, is a little bit disappointing.”