Reports of backhanders to employers paid from upfront commission have highlighted the broader issue of what that remuneration can and cannot be used to pay for, says John Greenwood
Mystery still surrounds the identity of the corporate intermediary at the centre of the row over cash kickbacks to employers paid out of up front commission.
But the furore, kicked off last month when Hargreaves Lansdown accused rivals of paying cash bribes to employers after taking maximum commission on new group schemes, has put the issue of what commission is actually used for at centre stage.
Hargreaves reports that one of its group pensions consultants found itself in the peculiar situation of finding themselves being asked by an employer how much cash they intended to give them for placing the business, as this is what others in the beauty parade had been offering.
How widespread the practice actually is remains unclear, and whether the case encountered by Hargreaves is a one-off, one of a handful of cases amongst smaller firms or a symptom of a deeper problem in the industry, reputable firms are unanimous in their opinion of the harm that it will do to the sector.
Tom McPhail, head of pensions policy at Hargreaves, says: “This smacks of the sort of thing that was going on in the early 1990s. Workers are not going to realise they have being paying higher charges, or that the employer has been giving at the front door and taking it back through the back door.”
Certainly no adviser is going to admit to such a breach of FSA rules, and in saying what it did to the other advisers pitching to business, the employer in question has laid itself open to accusations that it has breached FSMA by receiving a direct financial benefit for promoting its scheme, an act that automatically loses it the protection of the financial promotions exemption.
“I have never heard of it being done and I have never been asked by an employer for such a backhander,” says Damian Stancombe, head of corporate DC at Punter Southall. “If this was going on I would think it more likely to be amongst smaller firms dealing directly with an IFA they know through the golf club. I can’t see a reputable firm of any size taking the risk.”
Simon Fletcher, co-founder of Johnson Fleming agrees. “This goes completely against TCF, and while I have never known it to be happening, looking back I can recall situations where we have lost business to a scheme where the charge looks a bit high,” he says.
This goes completely against TCF, and while I have never known it to be happening, looking back I can recall situations where we have lost business to a scheme where the charge looks a bit high
But however widespread the practice is, some advisers say it raises questions over the way intermediaries pay for different parts of their service offering out of the commission pot.
Stancombe points out that the Retail Distribution Review will not necessarily bring an end to such a practice, as employers could get a backhander from an artificially inflated contribution charge under Consultancy Charging. But he also highlights the fact that current industry practices of apportioning money derived from commission for putting in place group pensions to pay for other services could also be interpreted as bending the rules.
“You could argue that paying for putting in place a flex scheme out of the commission from putting in a group pension is unfair,” says Stancombe. “You could have only half the workforce paying for the flex package, and other members of staff enjoying that for nothing. Is that fair?”
An FSA guide for employers on promoting pensions states that they must not receive a direct financial benefit from promoting the scheme. It cites the example that you must not be paid commission, or receive some equivalent financial reward, such as a reduction in your motor fleet insurance premiums for signing up members to a scheme.
Whether or not the reduction in the charge for putting in place a flex scheme would be considered such a direct financial benefit is a moot point.
Robin Hames, head of technical, marketing and research at Bluefin says his firm has come up against a similar argument on the practice of retaining initial commissions to provide ongoing services. “We do retain commission for its potential application against quarterly services, which is agreed by the client. Taking cash from employees and giving it to employers is one thing, and is extremely questionable to say the least. But to say this argument extends to commission offset is going too far. These are two different animals.
“In this debate in the run-up to the RDR there is an element that your viewpoint reflects your company’s standpoint on paying commission.”
How closely the charge for a service reflects the exact piece of work that has been done is clearly an issue that the FSA and the pensions industry will have to come to terms with.
Nobody wants to see employees lose out because innovative uses of commission to improve benefits have been outlawed. But at the other end of the spectrum, backhanders from commission are clearly well beyond