Nic Cicutti: A legacy of confusion
A few weeks ago, I reflected on the sometimes glacial speed with which the FSA appears to be dealing with some of the thornier aspects of its RDR reforms
To be fair - and I have been known occasionally to be open-minded in some matters - a few of the delays in issues under discussion, like platform rebates and VAT on adviser’s fees, are either not in the gift of the regulator or reflect a cack-handed attempt to listen to industry opinion before reaching a final conclusion.
But one cannot also help wondering how, with an outline of the reforms the FSA wanted to see in place originally unveiled more than four years ago, it was not possible to be identify some of these thornier questions a long time ago and offer clearer guidance about them before now.
One of the areas that should have been cleared up a while ago is that of legacy commission. Back in March last year, the regulator said trail commission could continue where products are essentially unchanged after 2013, even those amended under options available to the customer from the start. However, adviser-charging would apply to product changes that result in a different product or require a new customer contract.
Not surprisingly, many IFAs have been up in arms about this, arguing that advice to top up an existing pension or review an existing Isa will be classed as new business and therefore ineligible for further commission payments. Equally, concerns have been raised about confusion over what constitutes a legacy product.
The FSA is also planning a distinction between insured and non-insured products, allowing insured products like bonds and pensions to keep paying legacy commission, while Isas and other collective investments do not.
The danger of that strategy, it seems to me, is that by doing so, you abandon a level playing field for advisers and providers alike, with insurers being able to compete more effectively for business than some fund management groups, particularly in a climate where some IFAs are worried about how they can survive in the recession.
In addition, until the March 2011 letter, it also seems the industry simply assumed the FSA’s earlier statements meant any changes to existing business would still pay commission. Yet the FSA now says IFAs cannot receive further commission on pre-2013 business that was generated by post-RDR changes to clients’ contracts.
It is difficult to understand such reasoning: after all. There is a difference between the rebalancing of a portfolio, a fund switch or a basic increase in contributions to an existing policy. These are done to an existing policy, albeit that it may also constitute new advice. If so, should IFAs be barred from receiving legacy commission on new aspects of that advice as it relates to an old policy?
I would argue that is the case, even though the industry argues that in so doing it is likely to lead to additional costs as it is forced to separate elements of an existing product on which it can pay legacy commission and those on which it cannot.
The problem, of course, is that of trail commission itself and what should have been decided a long time ago about that thorny issue. Over trail, the FSA capitulated to the industry and said existing commission could continue to be received by advisers, regardless of the lack of service or otherwise they are providing their clients in respect of an old policy.
In doing so, it then laid itself open to reaching a similar decision on the subject of legacy commission for pre-existing policies. That is why consumers could soon be faced with a ludicrous situation where, in the absence of clarity on the subject, they could remain parked for years in unsuitable or poor-performing products because IFAs fear a large slice of their income will be taken from them if they recommend a switch. If they want to make new investments, some IFAs will simply keep them topped up in their old products to avoid losing that income.
What the FSA should have done is create a Year Zero, where all advisers would have had to justify their trail earnings to clients after 2012 and, if they were unable to do so, face the prospect of those payments no longer being received.
In addition, factory gate pricing should have meant that providers were no longer able to keep payments not paid to the IFA, allowing the client to benefit by means of improved policy servicing or lower charges. At the same time, any legacy commission should have been stopped after a given point.
If the FSA had been quicker off the mark, it could have made its proposals at least two years ago and the cut-off date of January 1, 2013 would not have appeared unrealistic.
As things stand, however, they are starting to do so. Which is why, reluctantly, I am increasingly drawn to Skandia’s suggestion that there should be a “sunset clause” on legacy commission, whereby it could continue to be paid for five years then stopped - except I think three years is a much fairer option.
The sooner we create a level playing field between all preand post-RDR products, the better for advisers and, most important, their clients.
Nic Cicutti can be contacted at firstname.lastname@example.org