Navigating referral fees and commissions: Client consent and compliance

Navigating the complexities of referral fees and commissions can be daunting for any firm, with stringent requirements for client consent and notification.

Referral fees and commissions can be a valuable source of income for firms, but they come with stringent requirements for client consent and notification. Historically, the sources of this income may have been limited to sharing of commissions from financial products such as pensions, endowments and mortgages through an introduced IFA or broker arrangement, however the extent of referral fees and commissions has broadened in recent years.

Newer income sources might include software affinity programmes, claims management, tax inquiry insurance, and fee sharing arrangements where specialist services are required but not provided by the engaged firm.

The ICAS Code of Ethics (section 330) and the DPB (Investment Business) Handbook set out specific requirements where referral fees or commissions are encountered. These requirements vary depending on whether the activity of the underlying source of the referral fees is regulated or unregulated. Where detailed regulatory requirements cover the same issues dealt with in the Code of Ethics (for example where a firm is FCA regulated), the regulatory requirements take precedence where these are more onerous.

Regulated activity requires a DPB (Investment Business) licence to make the referral in the first place. This would include many situations where the client will be looking for a financial product. Unregulated activity is everything else from which a referral fee or commission could be paid. However, regardless of the type, client consent should be obtained and clients notified of the amounts received.

For unregulated activity, the ICAS Code of Ethics requires explicit written consent to be obtained from clients where referral fees, commission, payment or other benefit relating to the client is to be retained. It applies whether the referral fees, commission, payment or other benefit is obtained directly or indirectly. This wide scope can often result in situations not being identified where written consent should be obtained. 

Consent can be obtained in several ways:

• Advanced general consent: Including a paragraph in the engagement letter stating that the client will allow commission to be retained within a specified range. The relevant paragraph must state the range of likely amounts that will be received and if a future specific activity generates a referral fee or commission above that range then specific consent would be required to retain that amount. 
• Specific consent: Asking clients for permission to retain each individual commission.
• Post-event consent: Receiving the commission and then obtaining consent, while keeping the money in a clients’ money account until consent is obtained.

Regulated activity has different consent requirements:

• Case-by-case consent: Obtaining consent for each individual commission. It’s not possible to rely on advance general consent for regulated activity.
• Written disclosure: Informing clients in writing about the amount and frequency of the commission.
• Client’s right to retain: Clearly stating that clients have the right to retain the commission and have it remitted to them.

The responsibility for ensuring compliance lies with the firm or member. Clear, specific, and up-to-date documentation must be maintained showing they have fulfilled their responsibilities. This includes obtaining copies of all documentation if a third party is involved in the notification process.

Further advice and support relating to referral fees and commissions for members is available through the ICAS Technical helpdesk.