COBS 6.1A Adviser charging and remuneration

8Guidance on the regulated activity 12of advising in relation to a new or existing investment can be found in PERG 8.24 to PERG 8.29. Although the guidance in PERG 8.29.7 G relates to advising on investments (except P2P agreements) 12under article 53(1) 12of the Regulated Activities Order, exactly the same answers apply to a personal recommendation because the examples given relate to the relationship between a firm and a particular client and advice given to that specific client. A firm wishing to know when it will be giving advice but not making a personal recommendation should refer to PERG 13.3. The guidance in PERG 8.24 to PERG 8.29 does not apply to the regulated activity of advising on P2P agreements. 12

12In this section, COBS 6.1A.4AR, COBS 6.1A.4ABR and COBS 6.1A.4BR are not relevant to a firm making personal recommendations in relation to P2P agreements.

1. (1)

   8A firm may continue to accept a commission, remuneration or benefit of any kind after 30 December 2012 if there is a clear link between the payment and an investment in a retail investment product which was made by the retail client following a personal recommendation made, or a transaction executed, on or before 30 December 2012. This is the case even if the firm makes a personal recommendation to the same retail client after 30 December 2012 to the extent that the continued payment can properly be regarded as linked to the pre 31 December 2012 personal recommendation or transaction, rather than the new personal recommendation. Of course this is dependent upon the terms of the contract contemplating the continued receipt of such payments.

2. (2)

   Examples of circumstances where a commission, remuneration or benefit is clearly linked to the retention of an investment in a retail investment product and can therefore continue to be accepted include (in each case where the terms of the contract contemplate a continued payment of the kind referred to in (1)):

   1. (a)

      no change is made to the retail client's investment in the relevant retail investment product;

   2. (b)

      the retail client's investment in, or regular contribution to, the relevant retail investment product is reduced; the firm may continue to accept the payment associated with the reduced investment amount;

   3. (c)

      the retail client's investment in the relevant retail investment product is transferred from accumulation units to income units or vice versa;

   4. (d)

      the retail client transfers all or part of his investment between funds within a life policy.

3. (3)

   If a firm makes a personal recommendation to a retail client and wishes to:

   1. (a)

      receive remuneration for that personal recommendation in addition to any commission, remuneration or benefit of any kind it receives in the circumstances contemplated by (1); or

   2. (b)

      be paid additional amounts for any actions which are linked to a new amount invested by the retail client in the relevant retail investment product;

it should only be paid those additional amounts for that personal recommendation or for those actions by adviser charges.

1. (4)

   A firm may offset against any adviser charges which are payable by the retail client any commission, remuneration or benefit of any kind it receives in the circumstances contemplated in (1).

1. (1)

   11If a firm makes a recommendation of a discretionary investment manager to a retail client and wishes to:

   1. (a)

      receive remuneration for that recommendation in addition to any commission, remuneration or benefit of any kind it receives in the circumstances contemplated by COBS 6.1A.4AB R; or

   2. (b)

      be paid additional amounts for any actions linked to a new amount invested by the retail client through the same discretionary investment manager;

   it should only be paid those additional amounts for that recommendation or for those actions by adviser charges.

2. (2)

   A firm may offset against any adviser charges which are payable by the retail client any commission, remuneration or benefit of any kind it receives in the circumstances contemplated in COBS 6.1A.4AB R.

A firm may receive an adviser charge that is no longer payable (for example, after the service it is received in payment for has been amended or terminated) provided the firm refunds any such payment to the retail client.

11‘Other services’ in COBS 6.1A.6R (3) includes:

1. (1)

   providing information relating to retail investment products, P2P agreements or operators of electronic systems in relation to lending12 to the retail client, for example, general market research; or

2. (2)

   passing on information from the discretionary investment manager to the retail client.

The requirement to be paid through adviser charges does not prevent a firm from making use of any facility for the payment of adviser charges on behalf of the retail client offered by another firm or other third parties provided that the facility complies with the requirements of COBS 6.1B.9R.

Examples of payments and benefits that should not be accepted under the requirement to be paid through adviser charges include:

1. (1)

   a share of the retail investment product charges or platform service provider's charges, or5 retail investment product provider’s or platform service provider's5 revenues or profits; 12

   5
2. (2)

   a commission set and payable by a retail investment product provider or an operator of an electronic system in relation to lending 12 in any jurisdiction12; and

3. (3)

   12a share of the operator of the electronic system in relation to lending’s charges, revenues or profits.

An adviser charge is likely to be reasonably representative of the services associated with making the personal recommendation if:

1. (1)

   the expected long term costs associated with making a personal recommendation and distributing the retail investment product do not include the costs associated with manufacturing and administering the retail investment product;

2. (2)

   the allocation of costs and profit to adviser charges and product charges is such that any cross-subsidisation is not significant in the long term; and

3. (3)

   were the personal recommendation and any related services to be provided by an unconnected firm, the level of adviser charges would be appropriate in the context of the service being provided by the firm.

A firm can use a standard charging structure.

In determining its charging structure and adviser charges a firm should have regard to its duties under the client's best interests rule. Practices which may indicate that a firm is not in compliance with this duty include:

1. (1)

   varying its adviser charges inappropriately according to provider or, for substitutable and competing retail investment products, the type of retail investment product; or

2. (2)

   allowing the availability or limitations of services offered by third parties to facilitate the payment of adviser charges to influence inappropriately its charging structure or adviser charges12; or

3. (3)

   12varying its adviser charges inappropriately according to operator of an electronic system in relation to lending.

A firm is likely to be viewed as operating a charging structure that conceals the amount or purpose of its adviser charges if, for example:

1. (1)

   it makes arrangements for amounts in excess of its adviser charges to be deducted from a retail client's investments from the outset, in order to be able to provide a cash refund to the retail client later; or

2. (2)

   it provides other services to a retail client (for example, advising on a home finance transaction or advising on an equity release transaction), and its adviser charges do not represent a reasonable proportion of the costs associated with the personal recommendation for the retail investment product or P2P agreement 12and its related services.

In order to meet its responsibilities under the client's best interests rule and Principle 6 (Customers’ interests)

, a firm should consider whether the personal recommendation or any other related service7 is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.

A firm may wish to consider disclosing as its charging structure a list of the advisory services it offers with the associated indicative charges which will be used for calculating the adviser charge for each service.

In order to meet the requirement in the rule on information disclosure before providing services (COBS 2.2.1 R), a firm should ensure that the disclosure of its charging structure is in clear and plain language and, as far as is practicable, uses cash terms. If a firm's charging structure is in non-cash terms, examples in cash terms should be used to illustrate how the charging structure will be applied in practice.

A firm is unlikely to meet its obligations under the fair, clear and not misleading rule and the client's best interests rule unless it ensures that:

1. (1)

   the charging structure it discloses reflects, as closely as is practicable, the total adviser charge to be paid; for example, the firm should avoid using a wide range; and

2. (2)

   if using hourly rates in its charging structure, it states whether the rates are indicative or actual hourly rates, provides the basis (if any) upon which the rates may vary and provides an approximate indication of the number of hours that the provision of each service is likely to require.

A firm may meet the disclosure requirements in this section by using a services and costs disclosure document or a combined initial disclosure document (COBS 6.3 and COBS 6 Annex 1G or COBS 6 Annex 2).

6To comply with the rule on providing a retail client with the right to cancel an ongoing service for the provision of personal recommendations or related services without penalty (COBS 6.1A.22R (1)(b)) a firm should:

1. (1)

   ensure that any notice period of the retail client's right of cancellation is reasonable;

2. (2)

   not make any charge in respect of cancellation of the ongoing service except for an amount which is in proportion to the extent of the service already provided by the firm up to the date of cancellation of the ongoing service; and

3. (3)

   not make cancellation conditional on, for example, requiring the retail client to sell any retail investment products or to assign any P2P agreements 12to which the ongoing service relates.

3If the price of the retail investment product may vary as a result of fluctuations in the financial markets and the adviser charge is expressed as a percentage of that price, a firm need not disclose to the retail client the total adviser charge payable to the firm or any of its associates by the retail client until after execution of the transaction, provided it then does so promptly.

A firm may include the information required by the rule on disclosure of total adviser charges (COBS 6.1A.24 R) in a suitability report.

To comply with the rule on disclosure of total adviser charges (COBS 6.1A.24 R) and the fair, clear and not misleading rule, a firm's disclosure of the total adviser charge should:

1. (1)

   provide information to the retail client as to which particular service an adviser charge applied to;

2. (2)

   include information as to when payment of the adviser charge is due;

3. (3)

   inform the retail client if the total adviser charge varies materially from the charge indicated for that service in the firm's charging structure;

4. (4)

   if an ongoing adviser charge is expressed as a percentage of funds under management, clearly reflect in the disclosure that the adviser charge may increase as the fund grows; and3

5. (5)

   if an ongoing adviser charge applies for an ongoing service, clearly confirm the details of the ongoing service, its associated charges, and how the retail client can cancel this service and cease payment of the associated charges.