IFAs struggle with FSA regulation that is open to interpretation
The sins of commission have never been more perfectly demonstrated than in the furore over recent reports of corporate advisers giving employers bundles of cash from commission that will be paid for by their staff’s pensions.
Cashback can be a very handy facility, particularly when there are no ATMs around, but treating your employees’ pension pots like a hole in the wall is not something any sane or honest adviser or employer would consider.
How widespread this practice is remains unclear and despite the best efforts of journalists such as myself, the identity of the culprits is yet to surface. Nor is it clear in what capacity those asking Hargreaves Lansdown’s corporate pension consultants how much they were going to pay them for taking their business were acting. Were they trying it on knowing it is illegal, or innocently seeing if Hargreaves was prepared to match other offers?
Either way, no one is going to deny that this is clearly wrong. And it will doubtless strengthen the hand of those backing the FSA’s total ban on corporate pension commission.
I would be surprised if such practices are ever taking place inside large and medium-sized corporate intermediaries, who between them are responsible for the lion’s share of group pensions business. Such behaviour would present a massive reputational risk – although you never know.
But even for these larger firms, the story does raise broader issues about current practices in the wider workplace advisory sector – namely the extent to which an adviser is allowed to use commission paid for the placing of group pensions business for other services it provides.
The FSA factsheet for employers on promoting pensions in the workplace reminds them they are not allowed to profit from doing so. The factsheet, which is the same one that reminds them that receiving commission in the way Hargreaves’ advisers have reported is not allowed, also makes clear that less direct financial benefits are against the rules. One example it highlights is the situation where an employer receives a reduction in the premiums of the insurance for its fleet of company cars in return for getting its members to join a pension scheme.
Without this rule employees could end up paying for discounts on expenses incurred by their employers, such as car insurance, for decades after they have left the company, through high but not stakeholder-busting pension fees.
But what is to say other services offered by corporate IFAs or employee benefit consultants do not breach the rule? The regulations say the receipt of commission or an equivalent financial reward is not permitted. Some suggest on a bad day that could be interpreted as meaning something as innocent as offering to implement a flexible benefits programme out of the money raised from commission for setting up a group pension.
You could argue the majority of people in the flex scheme are also likely to be in the pension scheme. But there will be groups of people who are not in both, and people in the pension scheme are paying for the flex benefits capability enjoyed by those who are not. What’s more, the employer is getting all the staff retention and engagement positives of having a flex benefits scheme, and not even having to pay for the privilege.
When we drill down to this level of detail, it is tempting to bury one’s head in the sand. Or better still, cite the de minimis defence that regulators never intended rules to be applied to quite such a sub-atomic level.
But the problem for IFAs is that the rules are the rules, and they may never know how they will be applied until it’s too late.
John Greenwood is editor of Corporate Adviser
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