Forget RDR 2.0. There is plenty of life left in 1.0 yet. As if we needed reminding of that, a Dear Compliance Officer letter landed with platforms and providers last week. The gist of it was that the FSA has been looking at how adviser charging is shaping up, and it is not all that chuffed.
The issue is that the FSA is not completely convinced that clients will be clear what adviser charges will be taken from their accounts, either at outset or on conversion to AC from commission when an ‘advised event’ occurs.
This is a problem. Having spent all that time and energy eighty-sixing commission, the regulator is very keen that AC should not be just a different form of it. Hence the insistence on the cash rebate ban and hence the DCO letter.
What the letter says is that providers who facilitate AC must “obtain and validate client instructions” for the deduction and paying away of AC. That is a little sentence but makes a big difference.
Why? Well, the big benefit of the RDR from the adviser point of view was that it will, at a stroke, rebalance the power relationship between adviser and provider. Instead of commission being a sword of Damocles held over advisers’ heads, they will simply tell the provider what to do and expect it. The stooshie (a Scots word meaning ‘stooshie’) over decency limits earlier in the year highlighted very nicely the difference between adviser and provider views of what adviser charging is all about.
It pains me to say it, but it turns out the providers have it this time. They not only can get in the way, they have to. The conduct of business sourcebook contains the instruction that providers must take reasonable steps to ensure instructions to pay adviser charges “have been obtained and validated as being from the retail client”.
How this is done is open to some interpretation. Skandia, for example, takes a firm line and insists on clients signing its own paperwork, as does Fidelity FundsNetwork. Standard Life takes the view that it does not need to see the signature as long as the adviser validates they have it available for auditing. Nucleus asks for a signature but is more flexible on how it is presented. And so on.
But whichever route a provider takes, the fact is that where AC is being taken, a provider who facilitates it has to be in the mix. This is going to lead to problems. Providers, driven by their business prevention departments, will get in the way. There will be ‘whose client is it anyway’ outside-the-pub face-offs. Some providers with strong sales cultures will try to make it easier to do for advisers. Corners will be cut, something will go wrong and we will be reading about it in these pages, just as the new regulator decides the industry cannot be trusted and mandates a wet signature for each AC payment.
In light of this, advisers who are confident in their own proposition and ballsy enough to ask clients to pay fees directly might be forgiven for thinking ‘a plague on all your houses’ and just stepping away from AC through products altogether. It looks like true independence – in a cultural if not regulatory sense – needs to reject the soft landing of AC. Only then can an adviser and client be completely sure that the payment for advice relationship is uncluttered and pure.
There are VAT issues to worry about, there are issues about the tax treatment of AC taken from a pension wrapper, but I do wonder if the true sign of a sustainable business might not be the amount of recurring trail income. Maybe it will be the percentage of turnover generated without the facilitation of a provider. In the meantime though, advisers should speak to their platforms and providers and be very, very sure how this is going to work. This is not an area in which to hit and hope.
Mark Polson is principal of The Lang Cat