Complex & misleading charging structures

Reading through the new FSA Policy Statement on the distribution of retail investments and adviser charging over lunch, I spotted some interesting comments about potentially complex and misleading charging structures.

Looking at investment products where allocations of over 100% are offered to investors, the FSA is sticking to its guns and suggesting that no firm should offer to invest more than 100% of an investor’s money.

In response to their original consultation, the Association of British Insurers (ABI) asked for a waiver on this guidance so allocations of over 100% could continue to be made when investment top-ups to products purchased before 31st December 2012 were made.

The FSA believes that allocations of over 100% could ‘result in a client being misled’. They note it can be used as part of a ‘complex charging structure’ to make it appear that an investor is getting ‘something for nothing’.

We agree with this assessment and we are pleased that the guidance will remain in place that firms should not offer to invest more than 100% of an investment.

Products offering this typically have a complex and misleading charging structure, relying on smoke and mirrors to make it seem as if the investor is getting more value than they invested.

It can often be used to hide commission payments to the adviser; not necessarily the level of the commission payment, which must be disclosed in full, but the nature of how any commission is being paid for.

No investor should believe that more than 100% of their money is being invested. Whilst the notional value of an investment can be made to look higher than the amount invested by using these complex charging structures, there is always a price to pay for this illusion.

The abolition of commission and introduction of adviser charging on 31st December creates a genuine opportunity for this sort of complexity to stop.

We hope that every product provider will embrace the FSA guidance and do away with 100%+ allocation rates on investment products, rather than look for a way to justify an exemption from the guidance to the regulator, and to their customers.

Photo credit: Flickr/Pryere