In a discussion paper published on Thursday, the FCA said that, while both its adviser charging and inducements rules currently apply to all adviser firms, both restricted and independent, it believes “it is appropriate to copy across the likely more restrictive inducements regime to firms providing restricted advice.
“We consider that it would cause confusion and permit firms to undermine the RDR adviser charging rules if we allowed restricted firms greater flexibility than independent firms over the payments or benefits they can accept from providers and other third parties”.
MiFID II applies the same ban to discretionary investment managers, as it does to advisers, the FCA said. Under the new European rules, discretionary firms “will also be banned from accepting and retaining any third party inducements, other than minor nonmonetary benefits”.
As a result it says, DFMs may be significantly impacted, because “discretionary investment managers are currently only subject to the more general inducements rules, so they can receive payments from providers and other third parties if these do not impair compliance with the firm’s duty to act in the best interests of the client and are designed to enhance the quality of the service to the client.”
“This ban on payments will therefore also apply to business conducted for professional clients, in contrast to our existing RDR commission ban, which only applies to retail clients,” it adds.
In a separate chapter, the FCA says MiFID II bans discretionary investment managers from accepting and retaining third party commissions, fees and monetary and non-monetary benefits.
Thus, “effectively applying requirements similar to aspects of the RDR adviser charging rules to DIM activities.
“However, unlike our RDR rules applicable to investment advisers, MiFID II allows discretionary investment managers to receive payments from third parties if these are passed on to clients in full (in effect allowing rebating).”
The FCA said: “Allowing rebating for DIM firms may create the potential for consumer confusion and regulatory arbitrage. Firms may seek out commission-paying share classes and then rebate the commission to their clients, seemingly reducing fees and creating confusion among clients about the true cost of both the product invested in and the DIM services.
It added: “We expect that many DIMs will be applying RDR standards to their existing business for various reasons, and will prefer regulatory consistency, with differing standards risking creating additional costs and complexities for firms, which a simpler and more consistent regulatory approach would prevent.”
