Intermediaries: Brokers: Soft commissions
Soft commissions have been defined by the Association of British Insurers (“ABI”) as an arrangement whereby a stockbroker will fund part of the cost of research services provided by a third party direct to a client in the expectation that the client meets target levels of commission business.
However, for VAT purposes, soft commissions are not restricted either to stockbrokers or costs of research services. Any intermediary can fund (either directly or indirectly) some of his client’s costs, in recognition of the amount of business the client will (or has) put his way. This funding is known as “soft commission” or “softing”.
The two most common ways soft commissions can be given are:
- the intermediary may contract with a third party to supply services to their client (usually a fund or investment manager); or
- the client may already be receiving services from a third party and the intermediary might agree to pay for them (or part of them).
The level of soft commission provided is calculated using a ratio (conversely known as a multiplier), usually between 1.2:1 and 1.8:1. For example, (using 1.2:1) for every £1.20 received in commissions, the intermediary is prepared to use £1.00 to pay for, or buy, services for the client.
Soft commissions do not represent consideration for a supply by the intermediary, but may be consideration for a supply of research however FSA publication PS 05/9 put an end to these soft commission arrangements.