FCA allows pre-RDR DFM ‘kickbacks’ but bans new payments for top-ups


The Financial Conduct Authority has decided to allow “kickback” referral payments to advisers from discretionary fund managers on pre-RDR business, but banned new payments related to DFM top-ups.

The regulator has published a consultation paper today which proposes to ban post-RDR DFM referral payments to advisers where the adviser has recommended the client should pay more into the DFM-held investments. DFM referral payments for pre-RDR business will be allowed to continue.

The rules will come into effect on 31 December 2014 if agreed.

Under the RDR the FSA banned DFM payments to advisers where clients are referred to a DFM and provided with a personal product recommendation.

In February the FSA sent trade bodies a briefing note setting out four options for legacy DFM referrals:

  • switch off all referral payments following a transitional period;
  • allow payments for pre-RDR referrals but ban them for post-RDR top-ups;
  • allow referral payments to continue on original investments but turn them off following fund switches, echoing the position on trail commission; and
  • allow payments for pre-RDR referrals but reduce the level of payments for post-RDR recommendations to pay more in to DFM-held investments.

The FCA has proposed going ahead with the second option. It had initially wanted to adopt the same position as it took on trail commission, with payments stopped following fund switches, but now says banning DFM payments on post-RDR top-ups is less complex to administer.

The regulator also plans to extend the DFM referral payments ban to advisers who continue to provide other services to clients referred to DFMs, such as providing the client with market research or passing information from the DFM to the client. Referrals payments can continue to be paid to non-advised firms or firms acting purely as introducers, where the introducer has no further contact with the client.

The FCA says: “These proposals should be considered with the new approach of the FCA. Our new approach to supervision, assesses whether a firm is being run in a way that treats customers fairly.

“Where firm-specific assessments are carried out, firms will need to answer the question: does the firm have the interests of its customers and the integrity of the market at the heart of how the business is run? As part of the new approach, we will expect firms to comply with the spirit of our rules as well as the letter, and adapt their business model accordingly.”