FSA concerned over advisers 'circumventing' commission ban

FSA concerned over advisers 'circumventing' commission ban


Concerns have been raised by the Financial Services Authority (FSA) about the effectiveness of its commission ban relating to distribution deals. The regulatory body has stated that one of the primary aims of the retail distribution review (RDR) is to “address the potential for adviser remuneration to distort consumer outcomes”.

As a consequence, the FSA has been looking closely at the advise meted out by firms, and, in its latest RDR newsletter highlighted that it has found “...a number of firms that seem to be looking for ways to circumvent the adviser charging rules. This includes soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome – to secure distribution”.

The FSA continued: “We have always said that we would take any necessary action to deter firms from frustrating the intended market outcomes. We are considering ways to reinforce our expectation that firms can only be remunerated by adviser charges in relation to their new advisory business.”

The body has subsequently conducted a review and is warning firms against:

-    Failing to consider customer’s wider financial circumstances resulting in financial detriment;

-    Recommending switching to new products without due consideration of the associated costs;

-    Inadequate or inappropriate documentation of suitability;

-    Failing to fully consider the clients’ risk appetite or capacity for loss;

-    Failing to obtain full Know Your Customer information; and

-    Failing to fully consider tax efficient alternate solutions.

If the FSA finds evidence of these sorts of actions it will take action as required.

Advisory firms have been further warned by the regulator in respect of retaining the title of ‘independent’ if they are, in fact, restricted with regard to the advice they offer.

The FSA clarified that an independent advice firm: “Advises on all relevant retail investment products which could meet the investment needs and objectives of a retail client,” and “provides independent advice within a certain market and makes it clear that this is the case”. In contrast, a restricted advice firm: “Must tell the client that it provides ‘restricted advice’, must explain the nature of the restriction” and “must not use ‘independent’ to describe its advice”.

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