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01 October 2012

FSA: Inducements rules and the Retail Distribution Review (RDR) adviser charging rules


In a letter to 24 product provider and advisory firms, the FSA warned that it would take "robust action" against groups that seek to work around fee rules under the Retail Distribution Review.

The regulator said it was concerned that some firms may be looking for ways to circumvent the adviser charging rules by soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome, i.e. to secure distribution and have the same ability to unduly influence advice. Clearly such arrangements are not in the spirit of the RDR, said the letter.

It was also concerned that non-commission payments and benefits (typically included within “distribution agreements” between provider and distributor firms) may be indicative of firms seeking alternative ways of preserving features of the market that the RDR intends to eradicate. The regulator had previously said on a number of occasions that during the transition to the RDR implementation date it would supervise for signs of firms seeking to do this.

The FSA said it had three main areas of concern:

  1. It considers that an agreement may impair compliance with the duty for a firm to act in the best interests of the client if payments made by a provider to a distributor represent a key source of revenue for the distributor; in such circumstances these payments may cause a distributor to put its commercial interests ahead of the best interests of its customers.
  2. From 31 December 2012, the scope of COBS 2.3.1R(2)(c) has been widened to include insurance and so payments/benefits will also need to satisfy the additional requirement that they “enhance the quality of service provided to the client”. In some of the agreements the regulator has seen it does not see how the payments/benefits are designed to enhance the quality of service to the client; in such circumstances the payments would be prohibited under FSA rules.
  3. Inadequate disclosure of permitted inducements. The disclosure wording firms propose to use to meet the disclosure requirements of COBS 2.3.1R and COBS 2.3.2R must contain sufficient information to enable the client to understand the existence, nature and amount of the payment so that an informed decision can be made.

The regulator went on to mention two general concerns:

  1. The FSA has seen some distribution agreements with lengthy terms (such as five years) under which sizeable upfront benefits (such as contributions towards distributors’ IT systems) are being made to the distributor in advance of 31 December 2012. However, where all or most of the benefits are going to be used by the distributor after 31 December 2012, the regulator considers that a portion of the upfront benefits may, depending on the circumstances, need to be treated as if it was made after 31 December 2012 and so be caught by the adviser charging rules.
  2. The FSA intends there to be a level playing field between advisers and wants to ensure there is no unfair subsidy by providers of individual distributors’ costs. The scale of the payments it has seen under some distribution agreements are such that the regulator is concerned that these payments may in effect be subsidising a distributor’s general costs, which in turn may subsidise the adviser charges levied by the distributor. In the FSA's 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. Such an outcome was clearly not the policy intent of the RDR and the desired outcome under the prospective adviser charging rules.

Full letter



© FSA - Financial Services Authority


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