FEES 6 Annex 4 Guidance on the calculation of tariff bases

2-1.14

G

The tariff base for category 2.3 and class 3 5 is calculated by taking gross income falling into category 2.3 and class 35 and then deducting commission, fees and similar amounts rebated to customers or passed on to other firms (for example, where there is a commission chain). Items such as general business expenses (for example employees' salaries and overheads) should not be deducted. The calculation may4 be further adjusted so as to include only4 income that is4 attributable to business in respect of which the FSCS may pay compensation4, unless the firm chooses to include all its annual4 income.2

1.14

G

Gross income for the activity of managing investments is the sum of the following:

(1)

the amount of the annual charge on all assets in portfolios which the firm manages on a discretionary basis received or receivable in the latest accounting period (this is calculated as a percentage of funds invested, typically 1% p.a.); plus

(2)

the front-end or exit charge levied on sales or redemptions of assets in portfolios which the firm manages on a discretionary basis (typically 4-5% of sales/redemptions) in that same accounting period; plus

(3)

the amount of performance management fees from the management of assets in portfolios which the firm manages on a discretionary basis received or receivable in that same accounting period; plus

(4)

any other income directly attributable to the management of assets in portfolios which the firm manages on a discretionary basis in that same accounting period, including commission and interest received.

1.24

G

Annual eligible income2 should exclude

income received or receivable from assets managed on a non-discretionary basis, being assets that the firm has a contractual duty to keep under continuous review but in respect of which prior specific consent of the client must be obtained for proposed transactions, as this activity is covered in category 2.15 (the life distribution and5 investment intermediation category5).22

1.34

G

A firm should make appropriate arrangements to ensure that income is not double counted in relation to the activities it undertakes (for example, where it operates and manages a personal pension scheme or collective investment scheme).

Calculation of annual eligible income for firms in category 2.3 and class 35 and who carry out activities within FCA4 fee block A92

2.14

G

The calculation of income in respect of activities falling into category 2.3 or class 3,5 and FCA fee block A9 should be based on the tariff base provisions for that fee block (in Part 3 of FEES 4 Annex 1A R).6 It may4 be adjusted so as to include only4 income that is attributable to business in respect of which the FSCS may pay compensation4, unless the firm chooses to include all its annual4 income.2

22.24

G

Although the calculation should be based on the one for fee block A9, the calculation is not the same. FCA fee block A9 is based on gross income. Category 2.3 and class 3 are5 is based on net income retained.

2Calculation of annual eligible income for a firm in categories 1.1 or 2.15

23.14

G

The amount of annual eligible income should include the amount of any trail or renewable commission due to the firm. Trail commission is received as a small percentage of the value of a policy on an ongoing basis. Renewable commission is received from a very small percentage of the value of a policy from ongoing premiums often received once the initial commission period is over.

2Difficulties in calculating annual eligible income

24.14

G

The purpose of Note 2 in the section of notes at the end of FEES 6 Annex 3AR4 (Financial Services Compensation Scheme - classes) is to deal with the practical difficulties of allocating income correctly between different classes3 and in deciding whether income falls outside FEES 6 Annex 3AR4 altogether. Note 2 requires a firm to carry out the necessary apportionment on a reasonable and consistent basis.

24.24

G

The following provides some guidance as to how firms may approach the allocation of annual eligible income.

24.34

G

Where a firm cannot separate its income on the basis of activities, such as a fund manager which acts on a discretionary and non-discretionary basis for the same client and who only sends out a single invoice, the firm may apportion the income in another way. For instance, a firm may calculate that the business it undertook for a client was split 90% on a discretionary basis and 10% on a non-discretionary basis calculated by reference to funds under management. The firm may split the income accordingly.

24.44

G

A firm may allocate trail or renewable commission on the basis of the type of firm it receives it from. For instance, if it comes from a life provider the firm may consider it as life and pensions mediation income. If it comes from a fund manager the firm may treat it as investment mediation income.

24.54

G

If a firm receives annual eligible income from a platform based business it may report annual eligible income in line with the proportionate split of business that the firm otherwise undertakes. For instance, if a firm receives 70% of its other commission from life and pensions mediation business and 30% from investment mediation business, then it may divide what it receives in relation to the platform business on the same basis.

44.5A

G

Firms should have regard to the ability of the FSCS to pay compensation to members of pension schemes and to participants in collective investment schemes (see COMP 12A (Special cases)) when calculating their annual eligible income.

24.64

G

Unless a firm chooses to include all relevant annual income, annual eligible income excludes business that is not compensatable under the compensation scheme. This can create difficulties because, for example, a person may move between being and not being an eligible claimant over time. The purpose of Note 3 in the section of notes at the end of FEES 6 Annex 3AR4 is to deal with that difficulty by fixing a date for deciding this.

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4

4

4

4

4

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