Referral fees and client consent

Why this comes first

Most of the questions about an introducer arrangement are about the client relationship. The question that actually catches firms out is narrower and duller: if your firm receives money in connection with an introduction, what do you have to tell the client, and what do you have to get from them in writing?

The answer is more demanding than most firms assume, and it is one of the areas ICAEW’s own monitoring finds firms falling short. Any arrangement worth joining should hand you the answer rather than leave you to find it.

The starting point: it is the client’s money until they say otherwise

ICAEW’s position is blunt. If your firm receives a commission or referral fee connected with a client, you need that client’s consent to keep it, because without consent it is their money and you must account for it to them.

Until consent is obtained, the money is held in a clients’ money account. That applies whether the introduction was regulated or unregulated.

ICAEW’s Practice Assurance Monitoring Report found gaps in accounting for unregulated commission and referral fees at 51 of the firms reviewed — typically firms that had not told the client in writing how much they received, or had not obtained consent to retain it.

First decide whether the introduction is regulated

The requirements differ depending on whether the fee arises from a regulated or an unregulated activity, so the first step is to establish which one you are dealing with. ICAEW publishes a technical helpsheet on introductions to financial advisers for exactly this purpose, and it is worth reading before the first introduction rather than after it.

Firms holding a DPB (Investment Business) licence have been found not to have distinguished or recorded whether a given referral was regulated, which makes the rest of the compliance trail impossible to evidence.

Unregulated introductions: three routes to consent

• Specific consent for each amount. Ask the client, each time, whether the firm may retain it.
• Consent after the event. Receive it, hold it in a clients’ money account, and obtain consent before treating it as the firm’s.
• Advance general consent in the engagement letter. A paragraph confirming that where commissions are received the client agrees the firm may retain them.

The third route is the one most firms use and the one most often done wrongly. ICAEW is explicit that the paragraph has to state a range of likely amounts — their own illustration is wording allowing the firm to retain commissions of between, say, £50 and £200. A paragraph with no figures in it does not do the job, and anything outside the stated range needs specific consent.

Even with general consent in place, the firm still has to notify the client of the exact amount once it has been received.

Regulated introductions: general consent does not work

Where the introduction is a regulated activity requiring a DPB licence, advance general consent in the engagement letter cannot be relied on. Consent has to be obtained case by case, and the DPB (Investment Business) Handbook requires the firm to:

• disclose in writing the amount and frequency of the commission or introductory fee;
• inform the client of their right to have that amount paid over to them; and
• obtain the client’s express written consent to retain it.

In practice that is an individual letter or email per case, and it has to say plainly that the client can ask for the money instead. Failure to treat DPB commissions and benefits correctly appeared in the top five DPB Handbook breaches recorded during 2022.

What this means in an Altro partnership

Altro is an introducer arrangement: your firm makes an introduction, Equity & General gives the regulated advice and carries the regulatory responsibility, and your firm receives an agreed share of the resulting income.

That share is money received in connection with a client, so the duties above apply to your firm and cannot be transferred to us. What we can do, and do, is make them straightforward to meet:

• The commercial terms are agreed and put in writing before any introduction is made, so your firm knows the range of amounts in advance rather than after the fact.
• Every introduction and every payment is recorded in the partner portal, so the written notification to the client is a record rather than a reconstruction.
• We provide model wording for the engagement letter and for per-case consent, for your firm to put to its own professional adviser before use.

What we do not do is tell you which route applies to your firm. That depends on your professional body, your licence position and whether the particular introduction is regulated, and it is a question for your firm and its institute.

Three things worth doing this month

• Read your current engagement letter’s commission paragraph and check whether it states a range of amounts. If it does not, it is not doing what ICAEW expects of it.
• Check whether your firm can say, for any referral made in the last two years, whether it was regulated or unregulated, and where the written consent is filed.
• Decide who in the firm owns this. In most practices the answer turns out to be nobody, which is how 51 firms ended up in a monitoring report.

Sources: ICAEW, “Referral fees and commissions: client consent is your responsibility” (regulatory news, February 2024), quoting ICAEW’s Quality Assurance Department; ICAEW Practice Assurance Monitoring Report; DPB (Investment Business) Handbook. This guide summarises published ICAEW material for accountants considering an introducer arrangement. It is not a substitute for your own reading of the Code of Ethics, the Handbook and the relevant helpsheet, or for advice from your professional body.