From 31 December 2012, the rules introduced to implement the UK’s Retail Distribution Review (RDR) prevented advisers, amongst other things, from receiving certain payments from discretionary investment managers. This ban was triggered where the payments from the discretionary managers were made in connection with a service that related to the advice provided by the adviser. Included in this category of ‘related services’ were situations where the adviser provided advice to a retail client and also referred that retail client to the discretionary manager. Payments could, therefore, continue in circumstances where the adviser did not advise the client but simply referred it to the discretionary manager (provided such payments also complied with the FCA’s separate rules on inducements).

At the time the rules were introduced, the FCA noted that it would revisit this arrangement to see if the ban should be widened and also to consider how to address legacy arrangements (e.g. payments being made for referrals that occurred pre-31 December 2012).

The FCA consulted on both these items in July 2013 in CP13/4 – ‘Distribution of retail investments: referrals to discretionary investment managers and adviser complaints reporting’. In the consultation, the FCA proposed to widen the ban as follows:

  • widening what amounts to a ‘related service’ so that it is not just the link between the advice and the referral which triggers the ban;
  • to do this by linking the referral to other services that advisory firms generally provide to their clients – e.g. providing general market research on retail investment products, acting as a post box between the client and the discretionary manager.

In relation to payments for legacy arrangements, the FCA proposed to permit such payments in a similar manner as permitted for trail commission received by advisers. In essence, this would mean that where the referral occurred pre-31 December 2012 (with the investment mandate entered into shortly thereafter) and the referral payments were permitted at that time (both under the adviser/discretionary manager contract and under the FCA Rules), existing referral payments could continue to be received by advisers. However, any referrals of new clients to an existing discretionary manager or any increase in what an existing client is investing with an existing discretionary manager would not be able to be paid for by referral payments.

The FCA noted in its consultation that the new rules will permit discretionary managers to carry out fund switches within a pre-RDR investment without switching off the ability to make a referral payment.

In January 2014, the FCA issued its policy statement to the consultation (PS 14/1 - ‘Distribution of retail investments: referrals to discretionary investment managers and adviser complaints reporting’). It has made no changes to the essence of what it consulted upon and no changes to the proposed rules.

The FCA has confirmed that the rules only apply to advisory firms, so firms that only offer non-advised services or pure introductions (provided they are pure introductions) remain outside the scope of the ban for now (provided they also comply with the existing rules on inducements).

Of particular interest, is that the FCA has reconfirmed that pre-31 December 2012 referral payments can continue under the proposed legacy arrangements indefinitely (if the right conditions are met) and has reconfirmed that trail commission can continue indefinitely. The FCA had previously been considering whether the lack of a long-stop date for permitted trail commission might not give good customer outcomes, but it seems that there is not to be a long-stop date set just yet.

The new rules are due to come into force on 31 December 2014.