19th May 2010

IFA letter of the week

It was Caesar who ordered that the boats his army used to travel be burnt, so that when the army woke up in the morning they knew that they either had to win the war or would die.

Well it would seem that the FSA is about to also destroy an independent adviser's only exit from the financial services industry. You will recall that several independent studies have estimated that up to 10,000 independent advisers will leave the industry rather that attempt the new degree level exams imposed on them in order to remain in business and now the FSA seeks to take away the very fee income that underpins their practice buyout!

I have always understood that under the Retail Distribution Review the FSA wanted the option given to clients to request that trail fees are paid back into the product and that this option would be given to the client annually, no doubt as a pre ticked default !

Of course as Practice Buyout is based on trail fees the value of a practice buyout will collapse, although this message has not yet got through to many. But now the FSA have gone one better (worse). If an adviser leaves the industry or the client transfers the FSA is now saying they want trail be paid to the client!

So here is yet another basic right that is to be stolen from independent financial advisers. The doctrine called "Privity of Contract" provides that a contract confer rights or impose obligations only on those who are party (privy) to it and not a third party. The premise is that parties to a contract should be able to sue to enforce their rights or claim damages as such and a third party should not.

What then happens if you enter into a contractual fee agreement with the client and then the FSA (third party and not a party to that contract) breaches this contract and grants the option to reinvest my contracted trail fee back into "their" product, whilst at the same time breaching an otherwise valid and binding contract? What will that do to practice buyouts based on trail fee? So 10,000 IFA's are to be disenfranchised from their ability to trade and now their ability to sell their businesses! How can this be right?

What the FSA is now doing is they are burning the IFA boats. They are not happy to just let you sell up and go - they now want you to just go without the sale and head for a life on State Benefits.

Simon Mansell
Temple Bar IFA Ltd

Panacea Comment