Dealing with commissions is an area which has proved problematic for practitioners for quite some time. It came in at number 5 in the most common findings in ICAEW’s Practice Assurance Monitoring Report 2023, and is an area Mercia regularly finds issues with on compliance reviews.
In this blog we take a look at the fundamentals that firms need to get right.
What is a commission?
In this context, a commission is any kind of fee, payment or benefit in connection with the referral of a client. The definition is therefore quite wide and not simply limited to those labelled as commissions or referral fees.
Types of commission
Firms need to keep records which clearly show how each commission has arisen. It is particular important to differentiate between commissions arising from exempt regulated activities (i.e. those arising out of DPB related activities) and commissions arising from unregulated activities as different rules apply.
For the purpose of this blog, we’ll simply focus on commissions arising from unregulated activities.
The starting point
Due to the fiduciary relationship created where a professional accountant acts as agent for a client or gives them professional advice, the firm must obtain specific written consent to retain any commission received.
There are three possible ways of obtaining this consent:
1. Obtaining specific written consent after receiving the commission
Within a reasonable period of time following receipt of the commission, the firm would need to provide details including the amount of the commission received (and frequency if applicable), what the commission was received for, how the commission was calculated, and both the payer and payee of the commission. The firm would need to ask the client for explicit written consent for the commission received to be retained.
Having sought to obtain consent in line with the above, if the client has not responded, it is possible to presume consent to retain the commission. However, this is only permissible where reasonable efforts to obtain consent have been made – sending one letter or email is unlikely to suffice.
2. Obtaining specific written consent prior to receiving the commission
This option is often used where a firm has been informed of a commission due, but has not yet received it. Similar to the above, the firm would need to provide details including the amount of the commission due to be received (and frequency if applicable), what the commission is to be received for, how the commission is calculated, and both the payer and payee of the commission. The firm would need to ask the client for explicit written consent for the commission received to be retained.
3. Advanced general written consent
The third, and perhaps the most versatile option is advanced general written consent. This involves including a clause in the engagement letter that specifies the firm will retain commission payments received in relation to referrals of the client to third parties. The clause states that by signing the engagement letter, the client is providing consent to the firm to retain the commission.
Such clauses have tended to be misused in the past, and the professional bodies are clear that examples that provide a fair indication of the amount of expected commission must be included. If no such examples are included, or if actual commissions received are significantly in excess of the amounts indicated, the firm will need to write to the client and obtain specific written consent to retain the commission as per the other options above.
Treat as clients’ money
Firms should also remember that where consent has not been obtained to retain a commission in advance of receiving it, the commission must be treated as clients’ money and banked in a client account until such time as consent has been obtained.
Most firms opt for advanced general written consent in order to retain commissions received. Care should be taken though to ensure that these include sufficiently detailed and relevant examples to ensure they stand up to scrutiny from professional bodies.
How Mercia can help
Mercia offers a wide range of training, including on practice management and compliance with ethical requirements. Our experts are also on hand to answer your specific queries through our technical query service.