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10 January 2006

The Financial Services Authority said today that firms offering advice on mortgages can now benefit from a temporary concession already allowed for investment advice. The effect of this is that money which advisers receive by way of commission relating to fee-based advice will fall outside the scope of the FSA's client money rules. This arrangement mirrors one that is already in force for financial advisers on their investment business and will run until a long-term solution is found.

Mike Lord, Head of Investments Small Firms Division at the FSA, said:

"We made this change to achieve the same client money treatment for mortgage business as already applies to investments. In the run-up to depolarisation last year we decided it would be disproportionately burdensome for investment firms to apply the full force of the client money rules on commission money and the same principle applies for mortgage business. This is in line with our aim of keeping the effect of our regulation on firms, particularly small firms, to the minimum that is necessary to meet our consumer protection remit."

Notes to Editors

1. Firms running a fee based business often receive commission from the product provider which they may offset against the fees they charge to their customers. The firm may either refund the balance of the commission money to the customer or withhold it to offset against fees arising from future business with that client. In such cases, while the firm owes the money to the client, the FSA will not apply to the adviser firm the higher capital requirements that apply for holding of client money.
2. In the past, firms have worded their fee agreements to treat such money as owned by the firm and then refunded it to the customer. While this money would, in fact, belong to the client until such time as it became due and payable to the firm, in this situation the FSA has treated those funds as being outside the client money regime. It is unlikely this treatment will be consistent with firms affected by European Union legislation such as the Markets in Financial Instruments Directive (MiFID). The MiFID proposes not to allow a firm to be indebted to its clients unless it is subject to client money rules. The FSA considered that to apply the full rigour of the client money rules to such situations now would be disproportionately onerous for investment firms. The FSA decided, for investment business, to continue to allow firms operating fee agreements, where commission is rebated to the client, to set up their fee agreements in such a way as not to activate the client money rules. This applies while the FSA seeks a longer term solution before implementation of the MiFID.
3. Although the requirement for firms to hold more capital where they handle client money will not be applied in this situation, commission paid towards fee-only based advice is the client’s money not the firm's. Once firms receive commission of this kind, they must pay it over to the client quickly, unless the client has agreed the firm can hold the funds as an advance against future services. The client may subsequently ask for a refund of the funds before the firm has provided such services, for example if they end their agreement with the firm, and in this case the firm is required to make the refund.
4. The Association of Mortgage Intermediaries has issued a Press Release on this subject. It can be accessed on the AMI website (http://www.a-m-i.org.uk/pdfs/AMIbacks_100106.pdf).