The regulator has clarified those protection selling advisers who will be affected by its latest Retail Distribution Review (RDR) proposals, but admitted a flaw which could see mortgage sellers also having to reveal their commission payments.
It confirmed that “only pure protection sales and advice ‘associated’ with investment advice” is intended to be subject to its proposals to force disclosure of adviser remuneration.
However, if an adviser firm decided to apply the transparency to all protection sales business-wide, as opposed to on a client-per-client basis, mortgage brokers working for that firm could also become compelled to declare their commission payments when selling protection alongside a mortgage.
It said: “We recognise that some firms may prefer to adopt an approach of always complying with the proposed remuneration transparency rules when they provide pure protection services, because it will be more straightforward than identifying particular transactions based on whether or not an adviser charge is likely to be agreed or has been agreed in the previous 12 months.
“The drawback of this approach is that it will capture transactions that are not in any way linked to investment advice.
“For example, for a firm that has both investment advisers and mortgage brokers who do not give investment advice, the mortgage brokers would be obliged to disclose commission on any pure protection sale because the rule applies to the firm not the adviser.
“It may also be a more costly option for firms, as they will be required to explain how they are remunerated for all their pure protection transactions, rather than just those associated with investment advice.”
Under a case-by-case basis, the FSA explained that: “‘associated’ means circumstances where the firm is likely to agree an adviser charge for investment advice with the customer or if it has done so in the previous 12 months.”
This would exclude, for example, circumstances where firms are arranging a mortgage and also arranging a term assurance sale for the customer, where the firm has not agreed an adviser charge for investment advice within the previous 12 months.
In these circumstances, it is reasonable for the firm to conclude that it is not likely to agree an adviser charge, since the purpose of the customer’s interaction with the firm is the purchase of a mortgage and associated pure protection contract.
It also includes circumstances where the purpose of the customer’s approach to the firm is to seek investment advice, and the firm and the customer then begin discussing adviser charges.
The regulator, explaining its reasons for this approach said: “We recognise that the draft rules may include some transactions where there is a limited risk of the consumer linking the pure protection service with the adviser charge, because it is nearing the end of the 12 month period since an adviser charge was agreed.
“However, we believe this is less burdensome for firms than having a rule that is more open to different interpretations of when commission should be disclosed and more proportionate than a rule that is not time limited.
“We would welcome feedback on alternative ways of capturing pure protection services ‘associated’ with investments that meet our objectives,” it concluded.
