The industry has called on the FSA to provide clarity on the treatment of legacy business after the retail distribution review and specific rules about what the regulator deems to be new business.
The FSA is set to publish a guidance consultation on legacy business later this year.
In a policy statement in March 2010, the regulator stated trail commission could continue where products are essentially unchanged after 2013 but have been amended under options available to the customer from the start. It said adviser-charging would apply to product changes that result in a different product or require a new customer contract.
However, the FSA failed to explicitly define the rules on legacy and trail commission.
The regulator wrote to trade bodies in March to clarify that legacy commission, additional commission on pre-2013 business generated by post-RDR actions, will be banned but trail commission brokered before 2013 could continue.
Ernst & Young director of financial services Malcolm Kerr feels the FSA may not fully appreciate the complexity behind its definition of legacy business.
He says: “A good example is an IFA who is rebalancing client portfolios on a regular basis, selling units in one fund and buying in another but keeping the asset allocation constant. What is the specific response to that kind of situation from the FSA?
“The window to make these kinds of system changes is getting increasingly small. The FSA needs to come up with something crystal clear, otherwise I cannot see there is any chance of every provider and intermediary being able to implement this before the end of next year.”
IMA senior adviser of retail distribution Andy Maysey says: “Everyone in the industry has to have systems in place to ensure legacy business carries on and new systems in place to deal with new business.
“The longer this goes on, the more difficult it is to get systems and procedures in place to meet those requirements.”
Until the March 2011 clarification, many in the industry had interpreted the FSA’s earlier statements to mean any changes to existing business would still pay commission. But the worry now is that advice to top up an existing pension or review an existing Isa will be classed as new business.
This would mean providers having to segment policies or investments into two parts, to facilitate the payment of trail commission on the old business and the adviser-charging element for new business.
According to Personal Finance Society chief executive Fay Goddard, for any products held before 2013, there needs to be clear rules on how to treat a payment for changes made to these products after 2013.
She says: “The change or action could include a whole raft of things, whether that is a straightforward increment, a non-contractual increment into an existing pension, a fund switch or a rebalancing. It is important we have absolute clarity and any rules are doable from a systems point of view. Clarity over the degree of action that would make a change to ’new business’ and what rules would apply is essential.”
Aifa policy director Andrew Strange says: “At one extreme, the FSA could say that any existing product pre-RDR that is amended post-RDR is still an existing product and should still continue on the same contractual terms. But the other extreme is that the FSA says, for example, that the act of reviewing an Isa constitutes advice and therefore should be written on the basis of adviser-charging.”
Strange acknowledges that the regulator and providers are in a difficult position over RDR legacy business. If the FSA decides that all business set up before 2013 could be amended at a later date, then a bias is retained in the market on topping up existing contracts.
Equally, Strange says that product providers could decide that having to retrospectively change their systems is simply not feasible.
He says the knock-on effects of this could see consumers unable to increase pension contributions and advisers carrying out all changes to existing products on an adviser-charging basis, which could be seen as churning.
He says: “It is not an easy subject but in some previous policy interventions from the FSA there has been an opportunity to think through the detail first. I hope we will have the opportunity to engage with the regulator on this issue.”