The UK Financial Services Authority (FSA) is warning firms not to try and find a way around the ban on embedded commissions that is to take effect next year.
The FSA has written to the CEOs of 24 firms, outlining its concerns that firms may be looking to ‘work around’ the new rules by soliciting or providing payments or benefits, and perpetuating the risk that consumers are receiving biased advice.
It says that one of the principal goals of its reforms is to give consumers confidence that the advice they receive is in their best interests and that advisors are not simply recommending products that pay the highest commission. “But our supervisory work has alerted us to moves in the market which could undermine [these reforms] and also unfairly disadvantage those advisors who are working hard to treat their customers fairly and prepare for the upcoming changes,” it says.
The regulator says that it is concerned that firms are working out deals that could effectively subsidize the cost of advice, and cause firms to recommend certain providers and products over others, thereby biasing advice.
In particular, it is concerned about product manufacturers subsidizing dealer training, conferences or seminars (involving expensive entertainment that are unrelated to the training); paying excessive co-op marketing expenses; and, funding dealers’ software development. It’s also worried that some firms might be rushing to implement distribution agreements with lengthy terms with sizeable upfront benefits before the new rules take effect.
“The scale of the payments we have seen under some distribution agreements are such that we are concerned that these payments may in effect be subsidizing a distributor’s general costs, which in turn may subsidize the adviser charges levied by the distributor. In our view, this creates a distortion in the market by potentially giving some distributors an unfair competitive advantage over other firms which do not receive such payments or non-monetary benefits,” it says.
As a result, it is seeking information about the terms of these distribution agreements by October 15. “We will be challenging firms who are pursuing these deals and arrangements and we will take robust action where we see evidence that they are circumventing the rules,” it warns.