Government and FSA seek to restrict UCITS managers' 'inducements' to advisers

Out-Law News | 06 Mar 2013 | 10:58 am | 2 min. read

The managers of Undertakings for Collective Investment in Transferrable Securities (UCITS) should be restricted in their ability to pay financial advisers for recommending clients to invest in their funds, the Government and the City regulator have said.

The Treasury and the Financial Services Authority (FSA) have called on the European Commission to place constraints on the commission arrangements relating to UCITS funds. The Commission outlined plans to reform rules relating to UCITS in the summer last year. Calls for those reforms to include commission constraints were contained in a joint response the Treasury and FSA have filed to the Commission's consultation.

"The UK believes that UCITS VI represents an opportunity to address the fundamental conflicts of interest which lie at the heart of intermediated sales," the Treasury and FSA's response to the Commission's UCITS consultation (14-page / 245KB PDF) said. "The UCITS brand represents a badge of quality and as such, it is necessary to restrict their ability to pay inducements to the advisors who recommend them."

The two organisations also called for the UCITS reforms to require greater transparency from managers on the issue of the "distribution costs" they incur.

"To further empower consumers, increase investor protection and improve competition, distribution costs should be clearly demarcated from those associated with managing the assets," the Treasury and FSA said. "Such steps are necessary to tackle the inherent opacity of management charges and tackle the asymmetries of information between client and intermediary. Management charges have a significant effect on returns for investors. Encouraging competitive charging structures is therefore particularly important in the context of the poor performance of equity markets."

According to Commission figures, UCITS are widely used by European retail investors and they manage almost €6 trillion in assets.

Among the changes the Commission has proposed to the UCITS rules are reforms that would prevent UCITS managers financially benefitting from "excessive risk-taking" with customers' investments. It is also seeking to introduce precise definitions of the tasks and liabilities of all depositaries acting on behalf of a fund and plans to introduce a "common approach" towards penalties for breaches of the UCITS rules, including common standards on administrative fines.

The FSA has previously outlined plans to ban cash rebates from being issued by product providers or fund managers to consumers' platform accounts. There has been a practice for rebates to be used to pay financial advisers for their services in offering retail investment advice to clients, but the FSA has expressed concern that the level of rebates on offer may be influencing advisers into giving clients unsuitable investment advice.

Under new rules imposed by the FSA that came into force at the end of 2012 advisers can only be paid for offering personalised retail investment advice by their clients as part of the regulator's drive to eliminate 'product bias' in the market and to make charging arrangements more transparent.

The FSA has yet to finalise rules relating to rebating through platforms, but recent reports have suggested that the FSA could permit limited cash rebates from being issued whilst barring unit rebating. Unit rebating is where consumers are given credit that they can invest in certain financial products on the market.

The UK's Investment Management Association previously said that the FSA could be open to a legal challenge by banning commission payments and that it may not be able to ban "cash rebates to investors from non-UK UCITS". This, it said, "raises a serious concern about UK competitiveness and might leave the UK open to legal challenge."