Adviser > Your business > RDR > Adviser remuneration
Adviser remuneration
The term ‘Customer Agreed Remuneration’ has been replaced by ‘Adviser Charging’ (AC).
Scottish Life’s View
When we did our first web response to the RDR in mid-2007, we welcomed the FSA challenging whether current remuneration practices (i.e. up-front AMC-based commission) was really working in the favour of consumers. This came at a time when many thought the RDR was proposing the end of commission and an attack on IFAs. We maintain that it’s not, and it isn’t, and we’re glad to see that, increasingly, others are embracing this line of thinking. Adviser Charging (and likewise our own Financial Advisers Fee (or FAF) model) is simply a form of commission negotiated between the customer and adviser rather than between the provider and adviser. As such, it gives the adviser greater scope to negotiate remuneration which is in line with the value of the service offered (rather than reflecting the increasingly depressed capital constraints of the provider!).
We are delighted that the FSA has started talking practicalities rather than just principles on the remuneration front. Indeed, it is good to see them recognising the practical implications for advice firms in terms of the need to change their business model – something we have put some time into also with our Business Toolkit.
In actual fact, there is a real possibility that the FSA has gone too far in its proposals, particularly in relation to regular premiums. A ‘nil allocation’ period will not encourage pension provision amongst low-earners, so we believe that some form of factoring is required. As such we welcome the fact that the FSA acknowledges that factoring can benefit regular premium pension savings. We still believe that a form of factoring over a period of up to 5 years, with an industry prescribed discount rate and adviser clawback on early exit, can achieve much. It ties all three parties – provider, customer and adviser – into the success of the sale beyond day 1. It would simply operate like an industry-standard loan to the adviser and its design would reduce churn and provider bias.
We are, however, disappointed that we don’t yet have a defined path for GPPs to be included in Adviser Charging. Group pension products clearly suffer from the same problems as individual pension products, namely provider bias and churn. The FSA must address the GPP market in the coming months if the RDR is to truly make headway with the issues it has identified, and we firmly believe they will do so.
From our perspective, we simply cannot see the problem with Adviser Charging being extended to GPPs, so long as the employer is given a role reflected in regulation and has the ability to negotiate the advice charge to a maximum of the employer’s contribution. So long as the employee’s contributions aren’t being reduced by an advice charge then it significantly reduces the risk of the product being ‘toxic’ which is hugely significant in the forthcoming world of auto-enrolment. Also, if an adviser does offer advice to individuals, then the situation is no different from a retail product and the adviser should be able to agree and charge for advice on the employee’s contribution too.
We wholeheartedly support the FSA taking a stand on soft commissions, such as “free” training, which could have the potential to undermine everything the RDR is aiming for.
The rationale was that CAR implied negotiation with customers which was unlikely to be a common occurrence in practice.
This FSA paper re-iterates its belief that providers must be removed from determining how much advisers are paid. Thankfully, the Remuneration discussion has been moved on significantly and clear principles for how AC would work have been established:
- The adviser would set their own charging structure and make the client aware up-front as to what services could/would be provided and at what cost.
- Product providers cannot influence this or incorporate the adviser’s charge within their own product charges – the charge must be paid by the customer.
- Providers could facilitate payments to the adviser from the customers’ investments, but from 2013 cannot do so from their own funds i.e. no forms of factoring will be allowed, such as AMC-based initial commission.
Effectively, this would require advice firms to make decisions about the way they charged for their time and how they would collect those payments.
The FSA will consult on these rules during 2009 with the aim of implementing by the end of 2012.
The paper darkly talks of making sure that AC is “not undermined by product providers finding alternative ways of exerting influence that encourages advisers not to act in the best interests of their clients”. This is almost certainly attacking ‘soft commissions’ where providers offer services or make payments to the adviser with the expectation of being given future business.
Providers will be monitored in three other ways:
- Standard rules and guidance may be issued on ‘Operating Limits’ i.e. maximum AC payments that providers can facilitate.
- The collection and reporting of data to the FSA on AC payments they have facilitated.
- Separating the AC and the product charges clearly and showing their impact separately. One suggestion is using Reductions in Yields.
Finally, a proposal to extend AC to GPPs is to be considered by FSA in more detail. The FSA has acknowledged the different characteristics of the market and will be exploring this avenue in the coming months. They have acknowledged the problems that might arise if AC were not extended to GPPs in that they may be sold where individual policies would have been sold in the past, simply to avoid the new remuneration requirements.
next: Professionalism and Capitalisation
For professional advisers only
