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FSA plans four reviews to scrutinise RDR compliance

by Michelle Abrego on Jan 09, 2013 at 11:13

FSA plans four reviews to scrutinise RDR compliance

The Financial Services Authority (FSA) will conduct four thematic reviews in 2013 in an effort to ensure the implementation of the retail distribution review (RDR) is successful.

The reviews are set to begin later this month and will focus on professionalism, charging structures, description of advice, and non-advised sales.

The FSA supervision team will conduct them in three cycles with a different sample of firms each time. At the end of each cycle it will publish guidance to firms on good and poor practice.

Linda Woodall (pictured), FSA head of investment intermediaries, said the regulator would collect information through surveys, firm visits, file reviews and, where necessary, mystery shopper exercises.

‘We will meet with firms to check how they are operating the new rules in practice.’ she said. ‘What kind of business models are firms putting into place? Are they accurately describing their services? Charging structures: is there evidence that these are in place and that firms are communicating them accurately to clients?’

Woodall said the FSA would look at ‘innovations where the spirit of RDR may not have been appropriately applied’, specifically where advisers describe sales as non-advised in order to continue to receive trail commission or because they are not qualified to give advice.

In its November 2011 paper RDR post-implementation review: Measuring progress and impact, the FSA said that in 2013 it would assess whether advisers were meeting the RDR’s professionalism standards, including evidence of continuous professional development.

Woodall said the FSA had no plans to issue further guidance specifically on independent and restricted definitions but that it wanted to make it clear it had an agnostic view on how a firm chose to define itself.

‘What is important is that advisers accurately describe their services. If, for any reason, they are holding on to a label that does not accurately describe their business then that doesn’t seem to me to be in their clients’ best interest,’ she said.

Dante Peters, director of Crawley-based Magus Financial Management, said the reviews could lead to more prescriptive rules from the regulator.

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73 comments so far. Why not have your say?

Simon Webster1

Jan 09, 2013 at 11:38

I am surprised there is still anyone left at FSA who knows what RDR is. All the original architects have left....

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Jonathan Kirby

Jan 09, 2013 at 11:39

‘What is important is that advisers accurately describe their services. If, for any reason, they are holding on to a label that does not accurately describe their business then that doesn’t seem to me to be in their clients’ best interest,’ she said.

It would have helped if the FSA had not confused the market by labelling three totally different types of advice 'Restricted'.

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Bob Donaldson

Jan 09, 2013 at 11:44

RDR Stands for Really Dodgy Record that just keeps going round and round and round again until you get sick of it.

Five fights with companies to do what they are supposed to do and it is only the 9th January. Good star to the year!

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sol trader

Jan 09, 2013 at 11:49

I have a couple of RDR concerns and wonder if there are any compliance genii out there.

1. Are we allowed to take provider assisted initial fees from regular contribution ISAs & Personal Pensions for the full term the investments are set up for?

2. If we take an initial fee from a client that is not facilitated by a product provider, do we have to produce an adviser illustration to show reduction in yield etc on their investment?

I did phone the regulator on item 1. but would like a second (or more) opinion(s).

Many thanks

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Dave T via mobile

Jan 09, 2013 at 11:59

Sol trader - there is no limit on the period you can spread an initial adviser charge for regulars - as long as there is a defined period and you only take the amount to cover the initial charge. Some providers are restricting the period though. Not sure why any adviser woul want to wait more than a couple of years to get their fee though.

On the second point - I don't beleive you do.

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Richard Anderson

Jan 09, 2013 at 12:00

I wonder how many businesses still have 'Independent' in their title or on their signage etc having chosen to go 'Restricted' ? Are the FSA policing this at all?

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RT

Jan 09, 2013 at 12:04

@ Sol Trader. This is my compliance opinion:

1. I don't believe you can do this, since the term of the investment / pension is unknown. You are required to agree a definite and finite initial adviser charge with the client - therefore there must be an end date by which the fee is fully paid. Otherwise a client holding an investment for a longer term would effectively pay more for their initial advice than a client investing for a short term. Ongoing adviser charges will take care of any ongoing services you provide to your client.

2. I believe you only need to show deductions from the plan, so where fees are being paid directly, these do not need to be shown within the illustration.

I hope this helps.

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Hugh Jars

Jan 09, 2013 at 12:18

@Sol Trader,

point 2; re illustrations,

It's got to be yes.......you do have to provide an illustration, where advice is being provided....

the provider's illustration will factor in no commission being taken, but the illustation still has to show RIY effect of charges etc.....

Unless I'm mistaken, the only instance where a personal illustration isn't required would be pure execution only ....(is there or has there aver been such a thing? ....really?)

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Hugh Jars

Jan 09, 2013 at 12:19

re my previous post....

Apologies, for using the 'C ' word......

I am expecting to be stripped naked and stoned to death any moment by the RDR police

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Jonnieb666 via mobile

Jan 09, 2013 at 12:25

It seems to me the FSA planned reviews might be slightly flawed as they are o my focusing one one aspect each quarter which means the assessor a only need to be "expert" in one area whereas adviser firms need to be expert in all areas all of the time in addition to everything else we do. As a result a firm might be really good in three areas but receive a poor assessment because they might be below par on the one area which was assessed. In the interests of fairness I would like to know how the regulator plans to address this risk, if at all!

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Jonathan Kirby

Jan 09, 2013 at 12:28

On the point of illustrations, some are showing the provider charges and the adviser charges separately.

If a plan is done with a separate adviser fee only the product charges will be shown so it looks as if it is better value but in fact the costs and effect of costs will be the same.

Another triumph for clarity and again something I pointed out to the powers that be but to no avail.

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sol trader

Jan 09, 2013 at 12:44

Many thanks for the replies one and all - though it strikes me all ends of the spectrum have been aired!!

I just had a very interesting (for me anyway) conversation with a switched on pension provider who seemed to confirm that all companies would interprete the "rules" differently. This is why some companies appear to allow ongoing initial fees (I suspect the adviser should add these up and agree the total with the client.) and some don't.

My view with a pension is that each payment is an individual payment therefore may be subject to initial charge which is not "structured" as per the COBS rule below.

If I am wrong - RDR has brought us back to the "bad" old days where all pensions and ISAs are front loaded with fees and the client walks away with nothing if the do not keep their investment for 30 years.

the COBS rule I am referring to is COBS 6.1A.22

http://fsahandbook.info/FSA/html/handbook/COBS/6/1A

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alec hargreaves

Jan 09, 2013 at 12:49

Well its nice to see that, as usual, the FSA has set its stall out to keep themselves busy and their overpaid jobs safe for the foreseeable future at the expense of all practicing IFA's that are left in this now miserable industry. It would be good if statistics could be produced showing how many jobs have been lost in the 6 months before and after implementation of RDR and how new business in the industry has been reduced as a result of all this nonsense. Maybe our Chancellor should take note of what i expect to be diabolical stats in this time of dire financial straits for the economy. In fact this Government should take the blame for allowing the FSA to continue without any restrictions on how it affects the Financial system without any obvious benefits.

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Interested party

Jan 09, 2013 at 12:50

Developing point 2 I recently asked our external compliance consultant how to demonstrate a true comparison when charging a fee that might be invoiced directly to the client and not conditional on writing a new plan. For example a pension review may carry a fee of £x irrespective of whether a transfer is undertaken.

If, for eg. a transfer is recommended one can easily illustrate the impact of any fee in illustrations, but I was advised to compare that against the existing arrangement's costs. I believe this to be unfair because it cannot incorporate the impact of the fee I am charging for the review of the existing plan; we are comparing apples with oranges.

I suggested to the compliance gurus that it is fair to say to a client "I will charge you £x for this retirement planning report. Your current pension costs £y to run each year and the one I am recommending will cost you £z, and (assuming y < z) it will be cheaper to run saving you £y-z a year.

Implementing this change will cost you a further £b which will take £b/£y-z years to recoup OR if charged to the plan this cost will impact the future value of your fund as per the following illustrated values etc etc....

Basically - the cost of the report is irrelevant because they will pay it in any case. Any additional cost impact from further recommendations is relevant, but not the fixed cost of the report.

The Guru's enigmatic response is along the lines of " it doesn't matter what measure you use, as long as it demonstrates a level playing field".

Apart from "Change Compliance Consultant" I wonder what others think constitutes a level playing field?

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Sam Caunt

Jan 09, 2013 at 12:50

All paid for by 25% less advisers......

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Simon Webster1

Jan 09, 2013 at 13:05

@Sol trader

Some confusion here...me included...

We charge an annual retainer which is an open ended client commitment to pay us - but they may cancel at any time. For that retainer we provide a specified service. The fee covers the service over the period it was charged. This remains "legit".

There is nothing to stop us charging a client say 3% of each pension contribution going in as an implementation fee, as far as I know there is no requirement to time limit it but the client has to have the option to cancel at any time... of course if they cancel after month one you don't get paid for your time...

You may decide that your fee for setting up a plan is say £1,000 and that this is to be paid at £x or y% of each pension contribution. This is effectively a credit arrangement and you may need an adjustment to your CCL to cover the granting of credit arrangement covering more than 4 installments... These fee may be paid direct or funded from a product.

On the quote front the FSA recently stated that when doing a pension switch comparison the cost of advice was irrelevant. They were merely interested in a comparison of the costs of the "competing " products. Logically this has to be correct as if you charge for advice on whether or not to transfer, or whether or not a buy a product or which of a range of products to buy that charge will be payable in any event - so logically it should not be included in any quote as the fee would have been paid whether or not a product was purchased...

Where I remain confused is whether implementation charges need to be shown in illustrations...

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Dave T via mobile

Jan 09, 2013 at 13:16

@ Simon Webster 1. For new cases you can spread an initial charge on regulars for a defined period and a speific amount. or you can take an ongoing charge for which you provide an ongoing service. You absolutely cannot take 3% out of each regular indefinitely as an implementation fee - this is commission.

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Richard Hardy

Jan 09, 2013 at 13:30

Should they also be reviewing those advisers who were deauthorised due to RDR?

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Simon Webster1

Jan 09, 2013 at 13:32

@Dave T

It is new for all us but sorry I am not sure you are right. Quantum or provider facilitation do not determine whether a fee is commission or adviser charge.

Commission cannot be cancelled while an open ended 3% adviser charge can be cancelled at any time and that is the essential difference. With commission if the adviser's agency was cancelled the provider retained the commission and the client was not entitled to a rebate. But while adviser charge is collected by the product provider; if cancelled the client keeps the money - not the provider...

What do others think?

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Interested party

Jan 09, 2013 at 13:36

@Simon Webster1 - that is certainly how I understand it.

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Jason Strain

Jan 09, 2013 at 13:39

@ Simon Webster1

@ Dave T

Completely agree with Dave, the only instalment plan you can arrange is for regular premium contracts. Personally, the maximum instalment period I am allowing is 12 months and 4 payments, as I don't want to pay for a CCL. But then again I could be completely wrong...

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RT

Jan 09, 2013 at 13:49

@Simon Webster - Dave T is 100% correct.

Let's say you choose to charge a client £1000 as an initial charge, you can spread this (by monthly premiums) until it has been fully paid. If the client cancels the investment after 2 mths, as long as you have a 'fee' agreement, you can legally reclaim the outstanding amount owing. THIS is the difference between an adviser charge and commission - with commission you would have no ability to reclaim this 'lost' money.

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Alwaysright

Jan 09, 2013 at 14:04

Oh good. That's it all cleared up then.

A commission is a fee that cannot be cancelled. A fee is a commission that can be cancelled. A total shambles is an FSA initiative that cannot be understood.

Now back to work. I wonder if I'm going to get paid for any of it?

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Interested party

Jan 09, 2013 at 14:08

If your fee agreement states that any new investment made is charged at 3% for implementation the client will be charged 3% for each investment made until they cancel the agreement, whether this is invoiced to the client's contract or directly to them.

This is not stage payments, but a fee for each transaction.

If the provider makes a payment without the explicit consent of the client, it is paying commission.

No?

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Hugh Jars

Jan 09, 2013 at 14:10

Wow !

Early days on this blog thread, and already it's obvious the FSA's Non-Advice / lack of Help /get on with it chaps approach to IFA's in understanding the ins and outs of RDR is obvious to see,

It looks as though the (probably hundreds) of clients of the dozen or so, Posters so far, may well receive a hugely different 'outcome' as a result of different interpretations of Adviser Charging...

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Simon Webster1

Jan 09, 2013 at 14:10

@RT - Sorry now I disagree with both of you. At least on the definition of what makes commission...

Under the old rules advisers always had the option to add a paragraph in their terms of business that said if commission was clawed back they reserved the right to recover the lost remuneration from the client. BUT the clients needed 24 hours to consider this so the client signature always had to pre-date any application by at least 1 day. We used this for several years and then dropped it mainly over the 24 hour issue. On one occasion we did reclaim lost commission and the client paid without any problem...

Under adviser charge if the client signs a fee a agreement and does not pay, all commercial recovery options are open

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Sam Matthews

Jan 09, 2013 at 14:12

@Simon Webster - if you take 3% on every regular for an indefinite period what service is the client paying you for exaclty?

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Simon Webster1

Jan 09, 2013 at 14:12

@interested party

I think you are right but if you say your fee is £1000 and it is paid in more than 4 installments then CCL applies...

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Simon Webster1

Jan 09, 2013 at 14:13

@sam mathews

Implementation plus whatever else if anything it says in your client agreement...

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Sam Matthews

Jan 09, 2013 at 14:16

Commission is a contractual agreement between the provider and the adviser - fees are a contractual agreement between the client and adviser. The FSA have been very clear that you have to provide a service for your fees. If these are facilitated by a product provider then for initial advice on lump sum investments this must be paid at inception, intial advice on regulars can be spread over a defined period for a defined amount, adhocs can be taken to cover a one off service, ongoing charges can be taken as long as a service is provided for those charges.

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Alwaysright

Jan 09, 2013 at 14:25

Clearer and clearer .....................

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RT

Jan 09, 2013 at 14:30

@Simon Webster - Technically what you operated in the past was effectively a 'deferred fee' i.e. it would only come into effect if the commission was clawed back - although you obviously still viewed it as commission. However a fee can still be a fee, even it is paid for via commission, because it's an agreed amount up front between client and adviser - that's what makes it a fee. As Sam Matthew says, clients cannot be asked to refund "commission", which is an agreement between adviser and provider.

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Julian D

Jan 09, 2013 at 14:35

@Simon Webster1

@ Sol Trader

I agree with you on this, as long as there are no cancellation fees and you don't specify an amount of implementation fee in advance, there should be no reason why you can't accept a %age of each premium for the life of the contract. I view regulars as a series of singles too, especially where I am able to demonstrate clients that have stopped, restarted, increased and decreased premiums without penalty.

@ Dave T

@ Jason Starin

As long as you agree the basis in advance with the client this appears to be permitted under COBS COBS 6.1A.22.

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sol trader

Jan 09, 2013 at 14:46

The case I am dealing with is £500pm gross pension conts for 10 years. This equals £60,000 so 1% initial charge = £600. I also want 0.5% annual review fee. Under rules as I understand them I could spread this £600 over 36 months (about £16.66pm) as long as I make the client aware the initial fee is £600. But I don't want to do this, I want to take £5 per month initial charge as long as she pays and, if she stops, I don't get the full initial payment.

I am hoping to take the view that this is not credit on the basis I am not insisting on the full £600 and that each contribution is treated as an individual one because its regularity is not contractual.

I have spoken to two pension providers who believe this is possible and one who does not.

In my view this is potentially more tcf than having to take all the initial charge upfront.

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Julian D

Jan 09, 2013 at 14:56

@ Sol Trader

There seems to be huge amount of confusion about this at the moment, our compliance support company disagrees with you and I; however I've just spoken to a provider who agrees.

As usual the FSA Handbook is as muddy as ever in its terminology and therefore I guess it's just comes down to good old 'interpretation' of the rules and wait and see what comes out the other end.

By the way, if you are quantifying the amount of your initial advice then I don't think you can spread this in the way you are suggesting; however if you simply state your advice fee is a fixed percentage of each contribution, then in my opinion you can continue that indefinitely I also view each regular contribution a series of single contributions, rather than a long-term commitment.

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Simon Webster1

Jan 09, 2013 at 15:10

@SOL TRADER

for what it's worth I think you can definitely do this and, for the reasons you state, it is not a credit agreement.

One advantage of adviser charging is that an adviser & client can agree pretty much any legal basis of remuneration.

Over the next few months one of the big issues will be the adviser may agree a basis of remuneration with a client but certain providers can/ will not facilitate it. The more switched on may well gain some competitive advantage.

There is always the option for the client to pay by standing order but then if pension related there may be tax relief issues.

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Alwaysright

Jan 09, 2013 at 15:24

I don't get this. Are we suggesting that fees can be deducted from GROSS pension premiums ??

Surely not ..............

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Simon Webster1

Jan 09, 2013 at 15:34

always right

On a pracitcal baisis I have assumed all along that fees would come out of the fund after premium remittance and while tax relief is collected

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sol trader

Jan 09, 2013 at 15:39

I think fees can be deducted from anything..as long as you obey the COBS rules... and possibly MIFID rules... and TCF rules..and Suitability and Appropriateness rules (or is it Guidance) and the LAW, of course.

In this particular case, we are talking about gross employer contributions so it is all tax deductible (subject to obeying HMRC rules). I could just charge for it to the client as a business expense but would probably have to comply with consultancy charging rules and I am not entirely sure my PI insurance has got to grips with that yet.

thanks for all your help - we have probably given the regulator a few ideas for their scrutiny and maybe saved them some cost

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Julian D

Jan 09, 2013 at 15:42

@ Alwaysright

It's far more tax efficient for a client to pay fees from gross pension contributions. The cost is then less on a net basis to the client.

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Dave T via mobile

Jan 09, 2013 at 15:54

Yep fees can be deducted from gross conts. So is definitely wise to do so. So if you re taking 3% you need to make sure client has agreed 3% of gross figure. We could probably argue all day about the interpretation of the rules. The bottom line in my view is that if you are providing a service for your 3% you will be ok and if you re not then you won't. Some providers will refuse to allow you to take an indefinite slice of every premium. How advisers interpret the rules is a bit academic as we will need to comply with providers 'rules' if they are facilitating.

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Alwaysright

Jan 09, 2013 at 16:20

I'll bet HMRC are going to have something to say about this. If a client is paying a fee which, at least notionally, is based on the time spent advising the client, then he should pay it out of taxed income.

We have got away with commission being paid out of gross pension contributions because it was defined as a cost of investing and not as a fee for adviser time. This also allowed for the open ended nature of the ongoing initial charges.

A fee for time spent (with or without a fixed term) as discussed at length above should be ADDED to the net premium and then deducted by the provider and remitted to the adviser before calculating the tax relief to be claimed from HMRC.

So, a £500 premium with a 3% initial "fee" would mean the client paying £515 by direct debit, £15 being remitted to the adviser and £125 claimed back in tax relief.

In the case of a gross employer contribution, the payment from the employer would need to be split: £625 to the pension and £15 deducted from the bottom line of the employees pay cheque.

I realise this sounds totally impractical but I'm afraid it is just another example of the unforseen consequences of the RDR shambles. I am absolutely certain that HMRC are not going to tolerate paying 20% of adviser fees.

I hope I'm wrong but ....................

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Simon Webster1

Jan 09, 2013 at 16:30

The quantum is agreed as 3% of the premium it is paid for out of the gross fund. Product and advice charges (formerly commission) came out of the product pre RDR why should it be any different after?

VAT was revealed to be a huge red herring and I am afraid this will be too.

RDR is a crock, most agree, but it is here and we now have to find ways to make it work.

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Christopher Petrie

Jan 09, 2013 at 16:33

alwaysright,

I think you are indeed wrong (not always wrong I'm sure!)

Think about SIPPs (the true kind, not life office pretendy things). IFA fees have been charged to the account for years and years, including one-off invoices etc etc.

The new rules just widen this to all pensions.

And on the 3% per premium situation, FWIW. I'm sure there's no problem with it being applied indefinitely on all premiums so long as it's not also attached to a "target" overall price. If you charge 3% on all premiums, then you charge 3% on all premiums. But if the client cancels that after a year then you'd need to check your Client Agreement as you may have no means of getting any further payments....

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RT

Jan 09, 2013 at 16:50

I'm sorry, but in my humble opinion, regarding the 3% ongoing fee issue, COBS is clear that clients must be given the TOTAL cost of the adviser charge - this is impossible to do if it's based on an indefinite number of payments.

COBS 6.1A.24

A firm must agree with and disclose to a retail client the total adviser charge payable to it or any of its associates by a retail client.

As these payments are for a single piece of initial advice, they cannot be treated as a series of advice events.

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Hugh Jars

Jan 09, 2013 at 16:52

@ Always right. - Christopher Petrie is right, if the 'fee ' or adviser charge, can continue to be facilitated by the pension provider, then hurrah, let clients (who are the real beneficiaries) continue to get an advantage... It's not an RDR consequence, - it's been available for years....

Don't poke the HMRC bear .... let it lie

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Julian D

Jan 09, 2013 at 16:57

@ RT

You are correct in what you say regarding COBS 6.1A.24; however when you go further into this and look at the definition of an adviser charge you will see it says:-

'Any form of charge payable by or on bealf of a retail client to a firm in relation to the provision of a personal recommendation by the firm in respect of a retail investment product which is agreed between that firm and the retail client in accordance with the rules on adviser charging and remuneration.'

Therefore my interpretation is that as long as you agree the charge with your client and quantify it in terms of amount, i.e., 3% of each contribution which amounts to £3 per month for a £100 contribution, you have then complied with these requirements.

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Interested party

Jan 09, 2013 at 16:58

@ RT, the illustration will show the ongoing charge until retirement and impact of that charge on growth.

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sol trader

Jan 09, 2013 at 17:01

To RT

On the initial charge front I sort of agree. Though if you say to a client the charge is £600 but I will reduce that if you don't actually pay in the full £60,000 then I cant' see how anyone can complain.

However, the new rules definitely allow ongoing advice charges to be based on fund value which fluctuates. I believe in this instance you can say to the client if your fund value with me is £60,000 I will receive £300 and if it is £100,000, I will receive £500 and so on...

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Simon Webster1

Jan 09, 2013 at 17:11

I have yet to look at a post RDR quote... I should spend more time working than on here. I think I understand the rules on what and how we charge but I am not so clued up on disclosure...

If a "quote" is supposed to show product charges while advice is now a stand alone charge in its own right, does the advice charge need to go in the quote, as long as the separate advice charges are disclosed in suitability report and or fee agreement?

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RT

Jan 09, 2013 at 17:17

@Julian D - yes, but if your client asks how much you would charge to provide advice on setting up a pension and you said you'd charge 3% for each premium, you're not being clear enough - this is an open-ended amount - you have not expressed TOTAL charges.

@ Sol trader - in relation to ongoing charges, you are correct, but what we are discussing here is not an 'ongoing charge' in this context - it's an initial charge that is spread over a period of time. In order to take an 'ongoing charge' you must provide an ongoing service in return.

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sol trader

Jan 09, 2013 at 17:30

SW1 - I have produced a number of quotes, mainly on my own various policies and the thing that has struck me is how the Reduction in Yield seems to have risen somewhat - even though I am still taking 3% plus 0.5% (or trying to)

A few quotes have looked a lot better but, on closer inspection, they did not include my initial charge as this was deemed to be paid direct to me by the client and not facilitated by the product provider...I think

I was very gratified to have Robert Peston read out my question on this on Asset TV to 3 large UK insurers a few months back (sad, I know) - ie will RDR and adviser charging result in product providers filling their boots. The answer given was that "markets will drive costs down" - I suspect in the early days at least, the opposite could happen

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Julian D

Jan 09, 2013 at 17:39

@ RT

There's nothing in the regualtions that says you have to express total advice fees (be careful not to mix total CHARGES with total FEES). The total CHARGES are expressed on the client KFD in line with requirements.

As long as you are clear on the amounts being paid as fees as I explained earlier, that is sufficient. After all RDR (yuk!) is supposed to be about being clear and upfront with your client and not confusing them.

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Julian D

Jan 09, 2013 at 17:42

@ Sol trader

It sounds like you're used to commission quotes where the RIY was not always necessarily correct due to the combination of enhanced allocation, loyalty bonuses, early transfer penalties etc.

If you were previously taking 3% & 0.5% on a clean commission contract then a post RDR contract should have the same RIY.

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Christopher Petrie

Jan 09, 2013 at 17:49

@ Simon W,

Aviva sent me my first RDR quote yesterday....their quote showed a column of "factory gate" charges and RIY, plus an additional column showing Adviser Charges and the extra RIY created.

It was quite helpful for an adviser. Not sure too many clients will be that interested IMHO.....

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yeah right

Jan 09, 2013 at 17:54

I see RDR was a clear and resounding success in clarifying how we all agree how to explain and actually charge clients then LOL ! ..... there must be a better way to earn a crust :-)

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Martin Smith IFA Ltd

Jan 09, 2013 at 21:26

EXECUTION ONLY SALES - I understand. As rare as hens teeth if we are all honest. Only for those clients who know exactly what the product name / fund / share class is and can't be bothered to fill in forms themselves. Adviser gets paid commission. No suitability report. No Factfind. Just a signed declaration from the client to cover your backside.

NON ADVISED SALES - "here are the facts of a product that you didn't know about. It might be suitable, it might not. If you read this booklet and want to buy it then on your head be it. And you'll have to sign a form to say I have not advised you in any way at all." Adviser gets paid commission. No suitability report. No Factfind. Just a signed declaration from the client to cover your backside.

Not a lot of difference really. Have I got this right ???

If I have, what Financial Adviser would be mug enough to run this risk ? Those who used to be qualified I assume.

If any adviser is active in Execution only or Non advised investment business. I'd like to know how you position it and what happens in reality.

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David Hatton

Jan 09, 2013 at 21:58

And I assume we're the level 4 advisers left in a role!

Looks like we might as well have all bailed out of the inept ones clear rules.

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Gillian Cardy

Jan 10, 2013 at 08:03

The rules are clear that you can formulate any charging structure you please for each client, then the related Guidance says you could formulate a standard charge if you want to.

I agree that COBS 6.1A.24 says disclose the total charge ... so sol trader can do this ... he (?) can say that if you start now and pay every contribution until you plan to retire at 60 you will have paid me a total of £x. He (?) can also say that if you stop paying contributions there will be no "comeback" i.e. additional invoice for any balance owing.

I agree that because of this this is not a credit agreement (which it would be if you agreed that the initial charge was £600 which you were allowing clients to pay by means of 10 years' instalments of £5 per month.

But having read all through this thread I'm extremely persuaded by the argument also in the rules of client best interests ... if sol trader is prepared to work on that basis how could this charging structure not be in client best interests (er ... well, if the client was 21 and going to invest for 53 years - maybe, but then again but this sounds like a repeat of the value of the old Standard Life 95% allocation to me which worked precisely because so few people actually make all those contributions and we know that not destroying the fund in the early years is best for the client ... )

In passing, I would spend less time worrying about the providers and their internal arguments and external competitor-bashing on compliance with the rules ... they will always argue - and they will always come up with different answers ... but you / your firms are responsible and accountable for your own compliance - do what you know / believe to be right and if the provider (or your compliance consultant) conflicts with that then don't use them!!

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sol trader

Jan 10, 2013 at 09:27

to Gillian -

£500pm for 53 years = £318,000 x 1% = £3,180. Curiously, I estimate this has a present value of about £107.95 (assuming 2% annual inflation and 5% lost investment opportunity.). Very cheap!

I agree with your comments of course but they sound like self regulation!

yes - male - but trying to keep my comments androgynous

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Julian D

Jan 10, 2013 at 09:48

@ Sol Trader

@ Gillian

I've been thinking very carefully about this overnight and there seems to be a very serious conflict between RDR and TCF on this issue.

To give you an example if I have two clients, one of whom wishes to review their cash flow each year and therefore elects to pay single pension contributions once a year and another who is happy with their cash flow and wants to make regular contributions each month.

The first client agrees a contribution of £12,000 at each review meeting (I haven't changed the figure each year for simplicity), from which my initial advice charge is taken.

The second client contributes £1,000 per month and has an initial charge for a specified period, let's say 12 months to avoid any potential consumer credit and RDR problems.

Over the life of the contract the first client is going to be far more disadvantaged as he will pay advise fes on everything he puts in, whereas the second client gets away with paying less.

Both clients benefit from annual reviews, cash flow analysis and ongoing investment recommendations.

This cannot be a good example of TCF.

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Luella Keeley

Jan 10, 2013 at 09:52

I went over this issue about fees being a percentage of each monthly investment paid and our compliance officer was adamant that this can only be done with a Credit Agreement in place As above, it would require writing up a Credit Agreement showing fees of £3180 payable in instalments.

You could still say that there would be no comeback if the contributions stopped but what a faff! Also, if the client increased the contribution you would need to redo the credit agreement as the figures would have to be spelled out again. You also have to keep a regular note of the fact that the 'credit agreement' is uptodate and the client is not in default etc as you would with holding any credit agreement which impacts on a clients credit worthiness.

I asked why this hadnt been more widely discussed and the compliance guy's answer was that all the compliance people know about this problem and are deliberately turning a blind eye to it as it is such a can of worms. The FSA just didn't understand the implications when they defined the rules.

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Julian D

Jan 10, 2013 at 10:00

@ Luella

Try drawing their attention to the TCF argument I've posted and see what they say...

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sol trader

Jan 10, 2013 at 10:15

to JD - I imagine what many will do is charge client 2 an ongoing advice fee of say 0.6% or 0.75% of fund value. When the fund hits £300,000 client 2 will most likely be disadvantaged! However, as many product providers have pointed out, higher ongoing fees do make the illustrations look nasty...

I still would argue against LK's compliance person. The only fee that is due is the initial charge on the last regular investment. The £3,180 is an "as if" illustration to give the client an idea of what they might pay. On the basis we are forced to show "effect of deductions" in investment illustrations, I would add the same process to my fee collections and tell the client this could have a present cost of £107!

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Luella Keeley

Jan 10, 2013 at 10:26

Julian - thank you for your encouragement. I completely agree with you and your point is very well made. I have I tried putting forward a similar view myself. This would be ethical and TCF as you say.

However, the problem seems to be that there is no scope under the rules as they have been drafted to-date to do this without a Credit Agreement.

We could all ignore the Agreement on the basis that there cannot possibly be a disadvantage to the client (quite the reverse) but I have been through Pensions Review and knowing that you are in the right morally does not protect you from the minutae of the regulations.

I've stopped refusing to carry out ludicrous administration in the name of righteousness and I try to adhere to the letter of the law however daft.

Of course, we still all need to make our views known to the regulator and others at every opportunity but we must make sure we can't be criticised in the meantime - it's just not worth the bother as it just downgrades our reputation in the eyes of those who don't really understand the issues but may be important to us, such as clients.

An adviser told me recently that when his son was reluctant to go to school for a test, he had explained that there are Excitement Days, Ordinary Days and Acceptance Days, all of which contribute to the grand story of one's life.

When you come across this type of issue I think you have to take a deep breath and realise that it's going to be an Acceptance Day - and work out how you deal with complying as simply and calmly as you can.

With a bit of luck, tomorrow might be an Excitement Day!

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Sascha K

Jan 10, 2013 at 10:35

@JD: Why are you only charging Client B initial fees for the first year's contributions? Surely the problem here is simply that you are not charging the same. To make it equal you should either charge Client B indefinitely, or charge no initial fee for any of Client A's contributions after the first.

Your initial fee presumably covers the cost of determining that a £1,000pm pension contribution is suitable for them. If you do an annual review for Client B then you are implicitly advising them that £1,000pm is still suitable for them. And if you covered this part of the advice with an initial fee originally, I don't see why this changes after a year.

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Luella Keeley

Jan 10, 2013 at 12:22

Sascha K - thank you! You have just made me realise that I can do a 12-month credit agreement for a monthly premium and then reconfirm at each annual review that I advise doing it again. That will make life easier than guessing an end date at some point miles in the future.

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Julian D

Jan 10, 2013 at 13:32

@ Sasha K

You misunderstand. I am charging both of the mythical clients the same, I do operate a fixed percentage of every contribution, regular or single.

I was merely pointing to others who question the validity of this post RDR that to charge a regular premium paying client an amount only over a fixed period, such as 12 months is not TCF, when a single repmium paying client is different..

You may get this better if you read all of my comments in order.

@ Luella

i think you might be on to something there, I'm going to think about that some more...

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Gillian Cardy

Jan 10, 2013 at 17:48

Quote from the CCA regulations :

The agreement is exempt if the credit is provided without interest and

without any other charges and is an agreement under which the total number of payments to be made by the debtor does not exceed four, and those payments are required to be made within a period not exceeding 12 months

beginning with the date of the agreement.

For those who are not suitably regulated as far as the Consumer Credit Act is concerned then agree a fee and make sure it is settled in four or fewer instalments and within one year (so 12 months' instalments over one year would still be a CCA regulated agreement).

If your initial fee is £1,200 to be settled by monthly deductions of £100 for 12 months then this is a credit agreement.

If you initial fee is £1,200 to be settled by 4 quarterly payments of £300 then this is an exempt credit agreement.

If your initial fee is 1% of the sum invested, whether that is £100k in one lump sum now or £1,000 per month for the next indeterminate number of months then I do not see that you are offering credit terms to your client.

If your ongoing fee is 1/12th of 0.75% of the value of the portfolio payable for each month that you advise the client and stopping when they stop being a client or don't want the service any more then I am still unclear - what "credit" is being given to the client?

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sol trader

Jan 11, 2013 at 09:19

Thanks Gillian - we still have the problem of - can we take initial charges in drips from regular contributions plus annual advice fee on the same retail investment product?

I have been reading the RDR guidance on RMAR - which seems to say that an initial charge may be taken in regular contributions (SUP Chapter 16 Annex18b) if the charge relates to a retail investment product for which an instruction from the retail client for regular payments is in place and the firm has disclosed that no ongoing personal recommendations or service will be provided (COBS 6.1A22R(2).

If we take this to mean we must tell the client he/she will pay up to, say, £3,000 over the life of a product to cover initial charges (less if they stop contributions early.) and that this particular charge does not involve any ongoing personal recommendations or service which are, if you want them, covered by another ongoing charge - then, all well and good.

If, however, the regulator means you cannot take initial charges in drip from anyone to whom you supply ongoing, paying, service - then, I believe there is serious potential for consumer detriment.

For my client above, I mooted initial charges of 1% for the pension and 1.5% for s&s ISAs with reg contributions of £500 & £480 and likely investment period is 10 years. She might agree to £600 and £864 initial fees upfront or she might prefer to pay this initial fee split over each payment (which would actually be cheaper for her assuming inflation, and better if she stopped contributions early.) If the regulator are saying she does not have this choice, this is not TCF in my view.

Another RDR point has struck me. Didn't the judge in the Arch Cru case refer, something like ...the level of due diligence you would expect from a competent adviser.... post rdr this may not be the case as the level of work you expect from your adviser must be linked to the amount your are paying him/her. If I say it takes me an hour to thoroughly check a fund and I base my 0.5% annual trail fee on a minimum of £125 per hour and you have 30 funds and a fund value of £25,000 - you are not going to get them all checked!??

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Interested party

Jan 11, 2013 at 09:56

@ sol - last point, from a TCF perspective this assumes you carry out full DD for each fund each time you recommend it to a client. I personally feel it more "F" if advisers are honest and recognise that the cost implications of the bulk of the DD they do on a fund would be divisible across all the clients invested in it. Obviously this is problematical because you can't predict which clients are going to be invested in advance.

So - perhaps it is fairer to charge each client for the same work. I am being ironic. I do not want to be like my solicitor who charges for a document as if they drafted it from scratch each time but are essentially cut and paste merchants.

I'm not presenting much of a solution here am I?

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Simon Webster1

Jan 14, 2013 at 15:21

IP, Sol Trader

My understanding of TCF is charging clients an agreed amount for a specified service. But TCF and all other aspects of FS regulation are silent on advice fee quantum. It is not fair to a customer to charge a fee so low that it either restricts the adviser's ability to pay future compensation or the future financial viability of your business.

I am very concerned that one or two here appear quite keen to trivialize their costs to clients. IMHO anyone who is charging or calculating charges based on adviser time costs of less than £150 per hour (and admin £40) will probably not be in business in 2 years time...

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Julian Stevens

Jan 18, 2013 at 10:12

Whenever I see that picture of Linda Woodhall, I cannot help but think of her as The Gorgon of Canary Wharf. Behold her directly at your peril.

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