DFM warns on legacy VAT issues after FCA fee ban extension

A loophole in referral payments from discretionary fund managers (DFMs) will be closed and clarity on legacy payments provided following the FCA’s latest consultation paper.

However, one DFM has warned that dealing with legacy payments could throw up VAT issues for financial advisers.

Referral payments from DFMs to advisers were banned following the RDR. However, two issues were left unresolved: the treatment of legacy referral payments – the DFM equivalent of fund commission – and whether the ban on referral payments should be extended to cases where the adviser does not make personal recommendations to the client, but provides other services to them, such as passing information to the discretionary manager.

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The regulator had proposed four options for dealing with legacy referral payments:

• Switching them all off after a transitional period;

• Allowing payments to continue for pre-RDR business but banning them on top-ups;

• Allowing payments to continue on original investments but switching them off after fund switches;

• Allowing payments to continue, but reducing their level if a post-RDR top-up recommendation was made.

In the consultation paper ‘CP13/4: Distribution of retail investments: referrals to discretionary investment managers and adviser complaints reporting’, the FCA concluded that the second option is most appropriate and is now consulting on this, with feedback welcomed until 4 October 2013. It further proposes to extend the referral payment ban even where personal recommendations are not made.

The proposed treatment has largely been hailed as a common-sense approach by the industry, with the other methods concluded to be more complex to administer.

The move will likely throw up some technical challenges, however. Key to any relationship between an adviser and a DFM is knowing where the boundaries lie. Moving to an adviser fee arrangement throws into the spotlight who is responsible for what and the appropriate fees for the split.

Lawrence Cook, director of marketing and business development at Thesis Asset Management, said this potentially causes problems for advisers who want to move to adviser charging for legacy business who did not charge VAT when their referral fees were set up but now do.

He added that, even if ‘trail’ referral fees for pre-RDR business remain, this might affect the value of adviser businesses looking to sell.

“I would have thought that any business that has moved its legacy model is going to be much more attractive and much much highly valued by potential purchasers,” he said.

Mr Cook said the consultation paper “removes any potential murkiness”. He added that the update is unlikely to affect the levels of business advisers place with DFMs. Much of the interest around external investment management was linked to a post-RDR business model anyway, in which case adviser charging would have been implemented at the start of 2013.

Chartered financial planner Phil Billingham of Essex-based Phil Billingham Partnership said the clarity is welcome. “I regard any DFM we use as being purely another service therefore you shouldn’t be paid by them in any way that isn’t immediately accountable to the client,” he said.