A 2008 file photo of the head office of Dutch financial insurance company Aegon is seen in The Hague. In 2011, Aegon offered to advise firm Caerus on a £2-million deal for “sales and marketing activity” over five years.STR/Reuters
Fund managers, insurers and pension companies in the U.K. have been warned that the practice of signing multimillion pound deals with advisers to secure favourable distribution of their products will no longer be tolerated, following new rules that ban all forms of commission.
Payments already in place between advisers and retail investment product providers are now under scrutiny by the Financial Services Authority (FSA), which says that it will release further details of its thinking before the end of the year.
The catalyst for the investigation is a fundmanetal reform of the way that investors in the U.K. pay for financial advice. From Jan. 1, 2013, the Retail Distribution Review (RDR) will outlaw the existing system of commission payments and will permit advisers to only accept payment from clients.
But the FSA is now concerned that some advisers are looking for ways to circumvent the new charging rules and are soliciting payments from product providers for "sales and marketing."
A spokesperson for the FSA said that these payments are "not in the spirit" of the forthcoming ban on commission and could be presenting advisers with an incentive to sell particular products to clients – something the ban on commission is supposed to stamp out.
Significant marketing deals between life offices and distribution companies have already been arranged, according to an executive briefing note from Ernst & Young, and are likely to be targeted.
At a conference for financial advisers last week, FSA technical specialist Rory Percival said that "extreme caution" should be exercised when distribution deals were arranged. The industry, he said, should "watch this space" for further action.
Last year, Dutch insurer Aegon offered to advise firm Caerus on a £2-million deal for "sales and marketing activity" over five years. No contract has been arranged and Aegon said that none of its arrangements went against the FSA's regulations.
An Aegon spokesperson said: "In common with many product providers, and in line with developing market practice, Aegon has commercial arrangements with key adviser group partners. ... All our arrangements with our key partners are in the spirit, and by the letter, of the regulations."
Andrew Power, lead RDR partner at Deloitte, said that deals in which any money changed hands between provider and distributor went against the spirit of the ban on commission.
"The whole principle behind RDR is to take away any type of bias and inducement," he said. "The FSA is worried that in order for companies to make back the marketing spend they will offer the investor worse deals."
Last week, the FSA confirmed that it would not allow payments from providers to online fund supermarkets, and raised the possibility that this ban might be extended to life companies and self-invested personal pension providers.
The financial advice industry has warned that the changes to commission payments are likely to cause problems for many firms, which may struggle to replace lost revenue from product providers with direct fees from clients.
Critics of RDR also argue that the need to charge clients fees will create an "advice gap," leaving the majority of middle income investors unable to afford advice.