Metamorphisis of commission

With just six months until the RDR the industry is still finding major wrinkles in the rules. John Lappin assesses firms’ readiness for 2013

Is the consultancy charging regime proving to be one of the weaker links in the retail distribution review chain?

The concept has certainly taken a bit of a battering in the last few weeks, with concerns focused on a decision by HMRC to rewrite its charging guidelines for both adviser and consultancy charging.

Syndaxi Chartered Financial Planners managing director Robert Reid has led those spelling out what he sees as the problems for both consultancy and adviser charging, following conversations with HMRC, though he thinks it is the consultancy charge that faces the most challenges.

Reid warns that in the eyes of the HMRC, consultancy charging is simply a label for adviser charging in group schemes and that the Revenue sees no difference when it comes to unauthorised payment charges.

He says that means charges for other services cannot be taken from an individual’s account or from employers’ contributions, because they are meant for a personal pension.

Reid argues that under current rules, consultancy charging cannot be used to pay for scheme implementation – certainly where no advice is provided nor, in his view, to pay for advice to non-joiners out of joiners’ pots.

On this interpretation, many corporate advisers will need to adjust their strategy at least as it relates to post 2013 business.

Opinion is divided about just how significant an obstacle this may prove to be and indeed what it may mean for the fate of the charging structure itself.

One view is that consultancy charging will prove to be a transitional arrangement, perhaps as a step on the way to full fee charging.

The opposing view is that a compromise will be arrived at between the industry and the authorities. With such views abounding however, no one is quite sure what sort of structures will emerge. Some providers do expect to publish consultancy charging structures by the end of the summer.

Reid sees a big challenge across the market ranging from EBCs to smaller corporate advisers. “HMRC doesn’t want people to be able to take money out, taking a ridiculously high fee and then splitting it with the guy who is doing the work. So you end up with a pseudo ceiling, perhaps a maximum that you can withdraw, say, 3 per cent,” he says.

He also says that in his view it is unlikely the Revenue will compromise. He says: “They can’t compromise without opening a barn door and they are panic stricken about people taking too much money out already with QROPS.”

However others do not see the issue in quite such black and white terms.

Aegon head of regulatory strategy Steve Cameron says: “We identified the importance of adviser charging being classed as an allowable scheme member administration payment. The ABI liaised with HMRC on this, and got confirmation about that provided adviser charging was only being used to pay for pension advice. All we need is the equivalent confirmation for consultancy charging. It would be quite bizarre if HMRC thought adviser charging was fine, but consultancy charging wasn’t. Consultancy charging is about helping employers set up pension schemes, choose what pension to go with and help get the members enrolled. I would be surprised if HMRC were to come out with something that went against that principle.”

HMRC can’t compromise without opening a barn door and they are panic stricken about people taking too much money out already with QROPS

Deloitte lead RDR partner Andrew Power says: “HMRC have said it could be a chargeable item. I know the industry will work with HMRC to deal with that. My guess is the industry will sit down with HMRC, explain it to them, and some compromise will emerge like it did with adviser charging where it looked like the whole adviser charging was subject to VAT and then it was agreed where product recommendation was part of that, then it wasn’t.”

More generally, Cameron has been urging corporate advisers to consider their client banks of employers and identify the services they will need in future and how these employers will want to pay for them with the obvious 2013 cut off for commission an important consideration.

However, he also highlights another issue for pre-2013 commission based schemes, one he feels that has not received widespread publicity. He says that if advisers are to continue to provide individual advice on, for example, individual transfers or increasing contributions outside the scheme limits under the commission system, provision on that needs to be in the scheme agreement. Otherwise it will be considered as a separate charge by the FSA and will require a separate adviser charge post 2013.

He says: “We are encouraging advisers to see if they have that agreement and if not ask if they might put something together and to cover individuals. If a scheme is on a commission basis, including advice on individual transfers they should make sure that is documented. Many advisers are not aware of this.”

For schemes written post-2013, he says that unless an employer is prepared to pay for everything by fee, advisers will have to think about how to fairly allocate the consultancy charge between members. He says it is at that level that consultancy charging becomes more complicated than adviser charging.

He notes that the Society of Pension Consultants published guidance on this last year that raised the need for many of these issues to be considered, although not all were resolved.

Cameron says there is merit in trying to separate initial scheme overheads and explore whether the employer will pay for those costs separately.

“Then you are not loading overheads on to the first batch of members. It might be more palatable and could also give you a charge per member that is stable over time,” he says.

He points out that you may want to avoid a very high consultancy charge coming out of the first two months contributions because it could encourage opt outs.

”You need to be thinking about what you are doing not just this year but what services will be needed in future years and try to plan all that through. There is some way to go before the market settles on how to make consultancy charging work yet. Different advisers are taking different approaches. There is awareness but there is still a bit of market evolution before we settle on it after 2012.”

Power believes most corporate advisers, especially the big business writers have defined a process for charging – how it is going to work, how you get agreement and how you might take it from the contributions.

He says one outstanding area may be what the FSA means by offering flexibility around consultancy charging, whether that can be simply be either gross or net or has to include a full range of charging structures be it upfront, half yearly, quarterly or monthly. He says the industry is still working on what it will offer.

Power believes that in adviser firms that are split between retail and corporate work, more consideration has been given to the retail side on issues such as client segmentation. Advisers are also much more likely to consider moving clients on to an adviser charged basis for retail and are much less likely to feel pressure to do so for corporate clients where they may not want to ’disturb’ the commission system.

Power feels, however, that the big issue is whether small advisers can convert to consultancy charging and whether employers will feel they can place that charge on employees. How all this will be communicated also remains problematic.
“The unknown question is what are advisers going to be able to charge in the small and medium market, or will employers just go into Nest,” he says.

Others suggest that employees may bear the brunt of charges. Financial Technology & Research Centre managing director Ian McKenna says: “As with so many things on the RDR, no one can be absolutely clear how things are going to work until we get there. As I read it at the moment an employer might agree to a consultancy charge deducted from the individual member that could be fairly significant. If consultancy charging ends up being something deducted from the investment then how different is that from the current situation? I have had people suggest to me that the impact on the individual members may be greater than commission is today.”

It would be quite bizarre if HMRC thought adviser charging was fine, but consultancy charging wasn’t

Some corporate advisers suggest that the answer to many of these issues is to concentrate on employers who will pay fees.

Ferrier Pryde, an adviser at Advanced Retirement Planning, says he is already consulting with his clients about stripping out the commission and it has gone down well with some of his bigger corporate clients.

“I have opened up a discussion saying why don’t we strip out all the commission now and have less complications post RDR, and you pay a fixed fee or half a per cent. The two biggest schemes that have in excess of 300 members have been fine with that.”

He says in one case moving to a non-contributory basis has gone down well with the union, and the reaction of employees has convinced the finance director that it is worth it. He says that it partly depends on the type of conversation you have, though there have been negotiations over service.

He says in one case as part of moving to a fee basis he has agreed to a minimum fee that increases by inflation subject to a cap. For this he has been asked to increase the site visits to four from two a year plus a site visit from the investment manager.

He adds: “My companies are very service-level orientated so they have no problem paying the money but they want a clearer signed contract with six months notice either way, and they can always monitor you because if you haven’t done what is agreed, they may want the return of our fees.”

He suggests he may well be better placed to have these conversations because he comes from an actuarial background.

Lift-Financial head of corporate pensions Noel Birchall likewise says his firm’s focus is on the firms who will pay.

He says: “The industry is focusing on people who aren’t in schemes, leaving those that are in schemes almost forgotten about. That is our target market. When we’re asked “what is your target client?” it’s not size, it is organisations which are interesting in providing for their employees. That is much more fertile ground with decent schemes and decent take up rates and they will value services in terms of advising their staff whether formally or informally.”

He suspects however that there may be few schemes set up on a new basis in the first few years post 2013.

“There are companies that will pay fees and those that aren’t prepared to pay fees and with the latter the schemes will be in place when RDR comes around. Providers are developing financial adviser fee models, but I am not sure they will get massive take up because there won’t be new schemes.”

“I can’t see advisers switching commission-based schemes. You can drive fabulous charges, a decent scheme could be 0.5 per cent or 0.6 per cent, and you get level commission and provide the services for that. The members are getting a great deal. That scheme won’t move to an adviser charging basis. That will look a lot worse. I question how many schemes will be written on an adviser charged basis in the next three years.”

But he says there will be pressure however on the commission system that extends beyond 2013.

“The big question is what will providers do? If they switch commission off it changes the game, and they are more likely to switch high initial rather than level. Common sense suggests that they certainly will make a change, certainly schemes where initial commission is paying for new entrants. They may turn that off, but where does that leave the adviser?”

The Ideas Lab director Roderic Rennison, who works with advisers on business transition, believes the impact of the consultancy charging regime may be greater than the market expects.

The unknown question is what are advisers going to be able to charge in the small and medium market, or will employers just go into Nest

He says he believes the impact of both adviser charging and consultancy charging hasn’t been thought through, not least the strain it may place upon providers to facilitate the charges. That is something advisers should factor into their thinking.

He also believes that many firms may end up being reactive.

“Like their brethren on the retail side, firms have been busy getting advisers up to the required level. There remain questions about the robustness of propositions, processes, the admin or the grunt part of the process. It has not come up high on the list of activities. Most firms have not got an established formal process. It is about the words that they put round the presentation to clients. How are they going to position it with the HR or finance director or managing director in an SME? All of those things conspire to make things problematic. Rather than planning for it, they may be hit with things after the event,” he says.

He says the best prepared EB firms may be those that grasp the nettle and go beyond consultancy charging.

“I think this may only be a transition phase. How is this fair and equitable to members? How do you provide an equitable solution to people who do enter the scheme? Shouldn’t the employer at least pay for the general activities and then people who join a scheme should pay for the level of work attached them becoming members or remaining members, rather than loading it?

“The best solution may be to say ’this is the cost of running your arrangement and this is the value we provide’. They may go beyond this issue of obtaining the money on the facilitation of the contract but actually just charging fees. The successful ones will be the ones who convert clients from commission on to fees and will have a much more stable long term relationship that is beneficial to the members and the employer.”

With barely six months until implementation there remain as many questions as answers. For those firms enjoying commission’s swansong, the impetus to find solutions for 2013 will grow and grow.