Rules that came into effect as part of RDR require initial adviser charges for a lump sum investment to be paid upfront –
- as a separate amount paid direct to the adviser, OR
- by deduction from the investment amount
Charging adviser fees in instalments is generally allowed in only two circumstances. Broadly speaking these are –
- the charge is for an ongoing service for providing personal recommendations or related services;
- the charge relates to the initial advice for a regular payment product.
However, while it was well publicised when RDR took effect, there is a third ‘exception’ that appears have been little used in practice and largely forgotten about. Given current concerns about the affordability of financial advice, it is perhaps useful to think about this ‘third way’ as we head through 2017.
Separately, where the two limited exceptions mentioned above do not apply, firms are permitted to offer a client credit to pay for an initial adviser charge. This effectively amounts to another exception to the general rule that adviser charges must be paid at the time the service is provided. Effectively, this third exception enables firms to charge for initial advice yet allow the client to pay in instalments over a period of up to 12 months rather than as one up-front payment for the total initial adviser fee.
Firms might wish to consider whether this option would be of benefit to clients. However, there are inevitably a few things to bear in mind.
Client’s best interests
First, the rule (COBS 6.1A.23) that permits payment by instalments stipulates that the option must only be offered where this ‘would be in the best interests’ of the client.
Second, allowing a retail client to pay by instalments, instead of paying in full at the time of the advice, is likely to amount to providing credit, where the retail client is an individual (or a ‘relevant recipient of credit’, for example, a small partnership of which not all the members are bodies corporate).
If the client is a company, then deferring payment for advice or instalment plan is not a ‘credit agreement’, and the consumer credit provisions of the Regulated Activities Order (RAO) will not apply.
The instalment exemption in the RAO only applies where all the following criteria are met –
- where there are no more than 12 instalments within 12 months;
- where the credit agreement involves no charges or interest (which means there can be no administration fee);
- it is a borrower-lender-supplier agreement (i.e. it finances the acquisition of specific goods or services);
- it is for a fixed amount.
Where the option to pay initial charges by instalments is provided and the above criteria are not met, the firm would need to hold permission to enter into a regulated credit agreement as lender.
In addition to holding the relevant permission, the adviser would need to ensure that they met all pre-contract formalities for entering into a regulated credit agreement, as well as all post-contract requirements (for example, issuing annual statements).