Initial advice charges for lump sum investments

We explain how our rules allow some flexibility to firms to allow clients to pay in instalments for advice on a lump sum investment.

FAMR recommendation

Our information on the adviser charging rules  sets out how advisers can charge clients, and how they must explain these charges.

Some respondents to FAMR felt that the rules put in place because of the Retail Distribution Review (RDR) had removed some flexibility in the way advisers can charge retail clients for advice on lump sum investments. 

The FAMR report said that instalment-based payments could make financial advice more affordable and accessible for some consumers, provided that the terms of the instalment payments were clear and fair. The report noted that firms do not appear to be using the flexibility already permitted by the rules to offer more convenient payment options to consumers. It recommended that we draw firms’ attention to the flexibility available.

Payment in instalments of an initial advice charge for advice on a lump sum investment or single premium policy 

FAMR recommendation 15 (on payment of initial advice charges in relation to single payment products) states: 

'The FCA should take steps to help ensure that firms and advisers are aware of the existing flexibility in the rules on adviser charging.'

The rules require initial adviser charges for a lump sum investment to be paid upfront:

• either as a separate amount paid direct to the adviser, or
• by deduction from the investment amount

The rules provide certain limited circumstances in which an adviser charge may be structured to be payable over a period of time. Very broadly, these are where:

• the charge is for an ongoing service for providing personal recommendations or related services (COBS 6.1A.22R(1)) -
• the charge relates to the initial advice for a regular payment product (COBS 6.1A.22R(2)) 

Separately, where these limited exceptions do not apply, firms are permitted to offer a client credit to pay for an adviser charge, provided this ‘would be in the best interests’ of the retail client (COBS 6.1A.23R). Guidance says the firm should consider whether the personal recommendation or other related services is likely to be of value to the retail client taking into account the total charges the client is likely to be required to pay (COBS 6.1A.16G).

Consumer credit

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. (This assumes that 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 RAO will not apply).

The RAO instalment exemption has been amended so that it applies where there are no more than 12 instalments within 12 months. However, it only applies where the credit agreement involves no charges or interest (which means there can be no administration fee). Read a summary of the exemption.

So, for example, deductions over 24 or 36 months from contributions to a regular payment product, where those deductions pay for the initial advice, would not meet the conditions for the instalment exemption. The adviser 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).

Further guidance

The rules include guidance for adviser firms to remind them that, in meeting their responsibilities under the client’s best interests rule and our Principles, firms should consider whether the advice is likely to be of value to the client when the total charges the client is likely to be required to pay are taken into account. These total charges include:

• interest, and
• other charges related to providing credit in the form of an arrangement to pay for that advice in instalments

Clients can be offered different ways of paying the initial adviser charge for a lump sum investment without the adviser needing to consider implications for the total cost of the adviser charge if there is no interest or other charge payable by the client for an arrangement that permits them to pay the adviser charge in instalments. 

It is still up to individual advisers whether they wish to offer this option - it will need to meet the requirement (in COBS 6.1A.23R) that it is in the best interests of the client in question.