ICAEW’s Code of Ethics and the DPB (Investment Business) Handbook set out a range of requirements relating to commissions or referral fees.
These requirements vary depending on whether the commission or fee received is regulated or unregulated. But, in essence, you need to obtain client consent and notify clients of the amounts received.
“It's the firm’s responsibility to ensure it has all the required client consents and has notified clients, and that all the supporting documentation is in place,” explains Dean Neaves, Senior Manager in ICAEW’s Quality Assurance Department.
“But we're increasingly finding some firms are not following the Code of Ethics or the DPB (Investment Business) Handbook in getting these consents and notifications, or they’re failing to ensure they've got the necessary documentation to support this.”
ICAEW’s latest Practice Assurance Monitoring Report shows there were gaps in accounting for unregulated commission and referral fees at 51 of the firms reviewed. Typically, this was where firms had not told their clients in writing how much they received and/or obtained their consent to retain the amounts.
A failure to treat DPB (Investment Business) commissions or benefits correctly also featured in the top five DPB Handbook regulatory breaches recorded during 2022.
Unregulated commissions
“Basically, if a commission is obtained, the firm needs to get consent from the client to retain it, because otherwise it's the client’s money,” explains Dean.
“But there are different ways to obtain consent to retain the commission depending on whether it's regulated or unregulated,” he says.
ICAEW’s technical helpsheet on introductions to financial advisers includes guidance to help firms decide whether money received is a result of a regulated activity (for which a DPB (Investment Business) licence is required) or an unregulated activity.
“So when firms are making referrals to advisers and are going to receive commission (or they think they might), the first thing they need to do is to determine whether that referral is regulated or unregulated,” explains Dean.
For unregulated referral commissions, firms may get the necessary consent in a number of ways. They can:
- obtain specific consent for each individual amount, which involves asking their client if they can retain it for every commission
- receive the commission and then go back and get consent after the event, but in the intervening time, they need to keep that money in a clients’ money account
- get advanced general consent, which would involve including a paragraph in the engagement letter stating that, if commissions are received, the client will allow the firm to retain them.
If firms choose to use the engagement letter for advance consent, then the relevant paragraph must contain a range of likely amounts.
“Lots of firms have a paragraph in the engagement letter,” says Dean. “But they often fall down because they don't indicate what those fees are, and we want to see a specific range of amounts.”
“So, for example, the letter could say: ‘If you sign this, that allows us to retain commissions in a range of between say £50 and £200’. Then, if it's outside that range, the firm will have to get specific consent.”
“And even in situations where you’ve obtained a general consent, you still need to go back and notify the client of the exact amount once you’ve received it,” stresses Dean.
Regulated commissions
With regulated referrals, which require you to have a DPB licence, the requirements are slightly different. “You can’t rely on advance general consent in the engagement letter,” says Phil O'Halloran, Case Manager at ICAEW. “Instead, the DPB (Investment Business) Handbook says you need to obtain consent on a case-by-case basis for each individual commission.”
In accordance with the Handbook you need to:
- disclose in writing the amount and frequency of the commission or introductory fee to the client
- inform the client that they have the right to have the commission or introductory fee paid over to them
- obtain the client’s express written consent to retain the commission or introductory fee.
Whether the referral is regulated or unregulated, the need to keep the proceeds in a clients’ money account until you obtain permission to retain it remains the same.
For regulated commissions, consent is usually obtained via an individual letter or email to the client. “This correspondence should also clearly state that the client has the right to retain the money and have it remitted back to them if they wish,” explains Phil.
One area where firms with a DPB licence fall down is that they may not have distinguished or recorded whether a referral they made was regulated or not.
“This might mean the way they then obtained consent is not correct,” says Dean. “So they need to make sure they record that distinction clearly.”
“This aspect is also important for the annual return,” adds Phil. “You must declare regulated income on the return, but if you're not distinguishing between different types of referrals, you will struggle to submit accurate figures.”
It’s your responsibility
“Whatever the type of commission, the responsibility for making sure the consents and notifications are properly documented lies with the firm,” emphasises Dean.
“When we carry out monitoring visits, we’ll expect to see clear, specific, up-to-date documentation showing the firm is fulfilling its responsibilities,” he notes. “And this documentation must satisfy the criteria we’re looking for.”
In some cases, an adviser the firm has been referring to may offer to take on elements of the notification of commissions, or even get signed consent on behalf of the firm.
“If that does happen, our member firm needs to be satisfied that it is meeting the requirements and that they, the firm, obtain copies of all the documentation involved,” Dean explains.
“There's nothing wrong in principle in delegating disclosure responsibility to a third party,” adds Phil. “But if, for administrative convenience, you rely on a third party, you must be satisfied it’s doing everything that's required because, when we visit, the onus will be on your firm to demonstrate that any commission has been properly disclosed.”
“And if the third party gets it wrong, or if you can't demonstrate that what the third party has done complies with the requirements, then any regulatory action will be taken against your firm, not the third party.”
“These requirements are not anything new,” he adds. “They’ve been around for some time, and all firms in this position should know what they need to do.”
Resources
ICAEW has worked with technology company RQ in the development of a DPB collaboration platform. The platform is not a substitute for compliance, but it can assist with adhering to the ICAEW Designated Professional Body (Investment Business) regulatory regime. It is a free resource for ICAEW members. Find out more about the RQ platform
