U.K. banks are withdrawing commission payments to independent financial advisers that are typically included in structured products sales agreements before new rules forbidding the practice.
Barclays Plc (BARC) offered four securities tied to the performance of the FTSE 100 index last week that will be distributed via advisers and investors were given the choice to pay for the advice via a separate fee or have commission included in the price of buying the products, according to an offer document.
The so-called autocall notes come six months before the Financial Services Authority’s Retail Distribution Review is due to be implemented, affecting how advisers make and disclose charges. A degree of uncertainty remains about how fees will be paid, even though the FSA’s drive for greater transparency on pricing is not in dispute, said Jamie Smith, chairman of the U.K. Structured Products Association.
“I am not surprised product providers are offering both explicit and implicit pricing options because it is still not clear which way the market will go on pricing once RDR comes in,” said London-based Smith.
Clare Murphy-McGreevey, a spokeswoman for the FSA in London said following a consultation with the market earlier this year, investors can pay adviser charges directly or can agree that an adviser charge can be deducted from the investment.
Financial advisers, which Smith estimates account for more than half of structured product sales to individual investors in the U.K., have historically taken commission from banks when recommending their products with the cost to the bank in issuing the notes passed on to the investor. Once RDR is implemented, advisers will no longer be able to take commission from banks and will need to be upfront about their fees.
Barclays’s six-year notes were offered with potential annual returns ranging from 7.7 percent to 9.5 percent, depending on how the notes are distributed. The option without adviser commission has the highest offered returns.
Investec Plc (INVP), the owner of a bank and money manager in South Africa and the U.K., issued a group of four autocall securities in May, two with in-built commission and two without, according to the company’s website. The latter featured higher coupons.
“RDR should be beneficial for structured products because it will increase scrutiny on charging, and in many cases will require distributors and regulators to maintain much more knowledge of these investments,” said Smith. “Ultimately, that has to be good for the investor too.”
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