Financial advisers have warned that the latest proposed rules on discretionary fund management (DFM) referral payments have not closed potential loopholes.
The FCA has launched another consultation paper, CP13/4, seeking to clear up confusion about the treatment of referral payments to advisers from discretionary managers that resulted from its Handbook Notice in December 2012.
The regulator said it had widened the scope of the original ban to say that an adviser firm cannot receive a referral payment if it provides any other service in relation to a “retail investment product”.
However, it will continue to allow someone who just introduces a client to a DFM and then provides no other service to keep being paid referral payments from the DFM.
Advisers have warned that the proposed rules may still allow firms to find a loophole to carry on receiving referral payments.
Gill Cardy, managing director of the IFA Centre, said: “Even now I can see the relaxation that says that ‘pure’ introducers who do not do retail investment advice could still receive payments would provide an opportunity not only for lawyers and accountants, but also for all those clever financial planning firms who have set up separate businesses for authorised advice and ‘other’ stuff, including the pure financial planning, to get payments for the introduction instead of the advice.”
Ms Cardy said that it was likely that people could attempt to abuse these new rules, but that the FCA’s intention to stamp out anything that might create bias was clear, and the regulator was likely to keep increasing the stringency of the rules. “People continuing to find ways round adviser charging will see ever more rules from the FCA making it clearer and clearer that payments are not in the spirit of the rules,” she said.
Ms Cardy predicted that eventually all payments between providers and advisers or introducers will be banned completely.
Aj Somal, chartered financial planner at Aurora Financial Planning, said when it came to DFM referral payments, “you could argue that there should be a full outright ban”.
He said it would not be workable if it was suddenly announced, but said the FCA could put in place a date in the future at which referral payments should cease to give firms the time to adjust their practices, much like the proposed 2016 ‘sunset clause’ for trail commission payments on platforms.
However, Ian Cornwall, director of regulation at the Association of Private Client Investment Managers and Stockbrokers, said he didn’t think it was likely that advisers would switch to just being introducers to retain referral payments.
He said: “I think it will be rare that advisers will become introducers. I think most advisers will not just become introducers because it means they will have no further contact with the client and can get no more money from them.”