proposals could create an Initial and trail commission-free Oeic share class
The creation of a fee-based 'independent' channel will create a pricing issue for unit trust companies and could lead to the emergence of an initial and trail commission-free Oeic share class.
Should depolarisation rules go through, 'independent' advisers would not be barred from taking trail commission as part of a defined payment system. However, if a client does not want to pay trail, it would have to be rebated, a time-consuming and costly process.
Alan Burton, Standard Life Investment's chief executive, said there is currently no flexibility to charge different annual management fees to different unitholders within the same trust.
Taking no trail commission is not an option, even though it is easy to do, because providers cannot charge lower management fees to clients simply because they have not taken trail.
In a unit trust, an investor paying 1.5% annual management fee with no trail going to their adviser would be paying an extra 25 basis points to the provider.
Steve Glynn, joint managing director at Jupiter, said the industry was still awaiting FSA suggestions for creating different 'unit classes' for unit trusts. Until then, he said, there is no simple way around the problem.
The emergence of a new Oeic share class tailored for a fee-based channel is not a certainty, Burton said. Currently, because VAT is payable on fees but not commission, it makes sense for advisers to offset part of their fees through commission. Should that change, Burton said, the impetus for a no commission Oeic share class would truly emerge.
The cost of professional indemnity insurance will climb under the FSA's depolarisation proposals as they could lead to changes in adviser's capital adequacy requirements.
Adviser firms could find their requirements altered if they hold rebated commission to meet future fees. PI would then increase as advisers holding client assets are considered a higher risk.
Under current regulations, advisers are not deemed to be holding client money pending it being rebated or used to pay future fees unless it is by contractual agreement. Until the commission is rebated, it belongs to the adviser.
However, according to Aifa, the introduction of defined payment systems poses a threat to this interpretation. If, under a defined payment system, a legal, contractual right to excess commission over and above what is necessary to cover fees is conferred, advisers could be judged to be holding client money.
Only around 10% of advisers are currently authorised to hold client money, meaning the remaining 90% would fall foul of client money rules.
Fay Goddard, director of policy and technical services at Aifa, said as part of its response to the depolarisation proposals, the trade association is working out a blueprint of how defined payment systems could be set up to avoid the problem.
Advisory firms could be aided in this type of issue by the proposal to relax rules on provider investment in intermediary's business.
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