Advisers re-evaluate business models for ban

Kickbacks from DFMs to advisers could now be subject to a blanket ban by the FSA, it has emerged this month, following complaints about the potential manipulation of current rules.

Now advisers are being forced to re-evaluate their business models as they face losing a significant source of revenue, industry participants have said. Chris Mayo, investment director at discretionary fund manager Wells Capital, has seen evidence of some IFAs restructuring their business models as a result of the potential rule change. “Potential loss of earnings will be an issue for the adviser community as a result of this issue. One of our introducing advisers, which used to receive payments pre-RDR, has now increased their adviser remuneration for new clients to offset the lost revenue,” he says.

The FSA first announced its intention to review the legality of ‘kickbacks’ in March 2010. The FSA added a caveat, however, which allowed advisers to still accept fees as long as the client they referred to the DFM was not a client of theirs.

However, a backlash against this caveat emerged this year as industry participants complained the revised rules are too vague and leave room for unfair manipulation. Now the FSA has announced a further consultation looking at a blanket ban, and also looking at cracking down on ‘legacy payments’ whereby advisers can continue to claim fees for referrals made before the implementation of the RDR on December 31 2012.

Ben Willis, investment manager at Whitechurch Securities, also says the potential ban of referral payments or ‘kickbacks’ will increase cost pressures for DFMs as they are forced to draw up fresh agreements with clients.

“For those advisers who have been outsourcing to DFMs for several years, pre-RDR friendly charging structures could be in place for longer standing clients. Any ban would mean that new client agreements would have to be drawn up between client and adviser clearly highlighting remuneration á la RDR. This could prove a costly and time consuming exercise,” he warns.

Other industry participants say DFMs should have seen the blanket ban coming. Martin Bamford, managing director of chartered financial planners Informed Choice, says the ban on kickbacks, due to their confliction with the spirit of the RDR, was to be expected.

“Receiving what was effectively commission payments from a DFM was never going to hold up under the scrutiny of the RDR, so this ban on legacy payments and kickbacks from DFM to advisers was to be expected,” he says.

He adds that he could see how the current caveat to the rules could encourage a small number of unscrupulous industry participants to take advantage of this loophole. “It is similar to the legacy commission loophole which sees trail commission continue if no advice is provided; I expect some advisers will suggest to clients they contact providers directly to make fund switches to ensure that existing trail commission continues to be paid,” he adds.

Another key concern for industry participants is that the current caveat on the FSA’s ban of kickbacks could encourage some advisers to push clients towards DFMs for the wrong reasons.

“To a degree, the temptation will be there to continue to channel clients into the DFM route even it remains no longer suitable. Though I would like to think that this kind of scenario would be infrequent and that the adviser would embrace the spirit of the RDR,” says Mr Willis.

Conversely, some IFAs argue that the potential ban on kickbacks changes bears little significance for them and they have seen little evidence of industry participants abusing current loopholes.

“In our peer group I do not get the impression that anyone is particularly concerned by this. It seems entirely consistent with the outcomes that the FSA wants to achieve and their stated intentions for many years,” says Gavin Jones, chartered financial planner at the Old Mill Group.

As the results of the FSA’s next consultation draw closer, advisers will need to prepare for the increasingly likely prospect of a full ban on referral payments including legacy payments.

Katie Holliday is a freelance journalist

Adviser view

Gill Cardy, managing director at IFA Centre:

“It has been clear that pretty much everyone agreed that the payments should be treated exactly like other adviser payments under the RDR rules on adviser charging and legacy payments.

“The FSA will, I am sure, act if they see activities which act against the spirit of the RDR.”

“Potential loss of earnings will be an issue for the adviser community as a result of this issue”