Disclosure

Disclosure – key points – Depolarisation Seminar 23 February
• We ran through 6 questions on disclosure and the Menu with most of the audience split on the answer or failing to offer an opinion, so a lot of confusion out there on what is required.
1. If an IFA offering mortgages, investment and general insurance do you need to use the CIDD by 1 June?
2. Can a fee only IFA receive commission for protection only products?
3. Do you need to provide a copy of the Menu when selling Group Personal Pension products?
4. Is 5% initial commission on a bond more than 3% plus 0.5% trail?
5. If you are a fee based appointed representative of a network do fees have to go through the network?
6. If a fee only IFA retains trail commission against future fees is this deemed to be client money?

• Confusion around IDD on 14 January as FSA do not require firms to use until 1 June but parts of it have to be disclosed before then. The IDD is the simplest way to overcome this, however the IDD refers to the Menu so IFAs not yet depolarised have to tick a different box.

• General insurance brokers aggrieved at not being able to call themselves whole of market. FSA believe this is impossible for brokers given the vast range of products, services and providers.

• Mortgage brokers upset at having to put insurance first (when insurance is incidental to their business), as the sequence is determined by FSA.

• There are 6 versions of the Menu! Depending on the structure of fees, commission and top up. Very confusing for brokers let alone having to explain to the consumer.

o Fees only
o Commission (or equivalent) only
o Fee or commission (or equivalent)
o Fee or commission (or equivalent); or commission (or equivalent) and top-up fee
o Commission (or equivalent); or commission (or equivalent) and top-up fee
o Fee; or commission (or equivalent) and top-up fee

• Having to disclose how fees are charged leads to another layer of complication for the broker.

• VAT is a significant issue for IFAs. Clarification sought by Prof Sandler in February 2003 confirms fees to procure products, is not subject to VAT but any other fees would be. This leads IFAs having to avoid describing themselves as purely offering holistic financial planning towards charging fees to arrange the sale of products to avoid VAT. Networks must account separately for each appointed representative for VAT creating a significant regulatory burden.

• Market rates used by FSA appear to be distorted downwards by inclusion of products not normally sold through the advised route like guaranteed growth bonds where very low commission are paid. Putting in low commission stakeholder pension products with personal pensions also creates a false impression.

• The prescribed format of the Menu leaves little space for further information requiring intermediaries to supplement with a terms-of-business letter and other firm specific information.

Questions

1. If an IFA offering mortgages, investment and general insurance do you need to use the CIDD by 1 June?
2. Can a fee only IFA receive commission for protection only products?
3. Do you need to provide a copy of the Menu when selling Group Personal Pension products?
4. Is 5% initial commission on a bond more than 3% plus 0.5% trail?
5. If you are a fee based appointed representative of a network do fees have to go through the network?
6. If a fee only IFA retains trail commission against future fees is this deemed to be client money?

Answers

1. No. Each adviser can have their own IDD but it makes sense to put all in one document for the firm.
2. Yes. Protection products are not part of the menu.
3. No. Unless you advise outside of the GPP which are seen as similar to occupational pension schemes where disclosure is given to the employer at outset not each employee.
4. 3% plus 0.5% trail is higher rounded up to 6% for the Menu
5. Each appointed representative must keep records on fees charged for Vat purposes. It is up to the Network how this is dealt with but records needs to be kept either way.
6. FOS has said in a case that it should be treated as client money. FSA have contradicted this view. AIFA drafted guidance but currently sitting with FSA lawyers. There would need to be written agreements with the client and it seems FSA don’t want to class this as client money though the question has yet to be resolved.

Anthony Smith
28/05/05
 

Published: May 2005
By: Anthony Smith

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