FSA refuses to back down over legacy commission
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The FSA says it does not intend to remove or relax the ban on legacy commission, despite widespread industry opposition to the ban.
In its consultation paper on the treatment of legacy assets under the RDR, published today, the FSA says it plans to push ahead with its ban on legacy commission.
It defines legacy commission as additional commission that may become payable on legacy assets where there has been a change or addition to the product or investment post RDR.
The FSA says top-ups to a life policy or the buying of new units in a unit trust would come under the legacy commission ban.
The regulator has been holding discussions with the industry after it told trade bodies in March that trail commission could continue under the RDR, but legacy commission would be banned.
It is pushing ahead with the ban on legacy commission despite concerns from product providers that given the large number of old systems it would not be worth amending them to cater to adviser charging.
Providers argued customers would lose out as a result of the firm no longer accepting top-ups into investments if the ban on legacy commission was not relaxed.
Alternatively providers said they might be able to accept top-ups but keep additional commission they would have paid, as it would be too expensive to reprice the contract. This means the customer would pay twice for the advice, through both adviser charges and commission.
The FSA says: “We do not intend to amend COBS rules to remove or relax the ban on legacy commission.
“Allowing legacy commission to continue could perpetuate bias in the market, with advisers having a vested interest in recommending that customers continue to hold legacy products or to increase payments into them. This would potentially create a systemic bias towards top-ups into existing products.
“We therefore consider that it would not be desirable to relax the ban.”
The FSA has compiled a guidance table which sets out whether various typical situations such as fund switches and increase to monthly Isa contributions would be able to pay legacy commission or not.
The FSA has clarified that legacy commission will remain payable for non-advised sales.
Increases to regular contributions and fund switches fall under the legacy commission ban. Re-registering a client’s assets held on one platform and moving to another payment appears to qualify for paying legacy commission. The FSA says: “This is unlikely to be advice because normally it will not involve buying and selling the investment held on the platform.”
Firms providing discretionary management services which “make changes to a client’s investment without providing advice” will still be able to receive legacy commission. Re-invested dividends without advice would also qualify for legacy commission to be paid.
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Readers' comments (18)
Marty Young | 16 Nov 2011 10:33 am
“Allowing legacy commission to continue could perpetuate bias in the market, with advisers having a vested interest in recommending thatcustomers continue to hold legacy products or to increase payments into them. This would potentially create a systemic bias towards top-ups into existing products."
Potentially lead to bias - Good one FSA. Lets definately provide Consumer Detriment by banning something that MIGHT lead to consumer detriment instead of regulating it properly. The good old FSA strikes again. AND THE HITS JUST KEEP ON ROLLING!!!!!!!!!
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Andrew King | 16 Nov 2011 10:36 am
I am NOT an acoutant or a solicitor and so have no intention of charging clients an hourly rate. as they do
i will not charge for telephone calls or to write a letter as they do
to charge by the hour is ludicrous
It is open to abuse after all if I want to be paid more money I simply work slower
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Mike Jordan | 16 Nov 2011 10:46 am
A client will only add to an existing product if they're pleased with how it has done and so it can't really be said that there's a bias there. However, by banning legacy commission the client is being banned from adding to a product they're perfectly happy with. Madness!!
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Richard major | 16 Nov 2011 11:01 am
I don't really expect anything different from the FSA now to be honest. You would think if every time you made it statement it made you look inept, ill-informed and a bit retarded that you would stop making statements. Not the FSA though they continue to advertise their own idiocy at a pace.
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huw | 16 Nov 2011 11:26 am
Guidance rather than advice is starting to look like the shape of things to come.
Re Andrew King @ 10.36 A great many advisers will charge by the hour because as you correctly point out, the number of hours a job takes is under your control. It is also possible given the astonishing complexity of regulation governing advice to totally justify many many hours of work over what should be simple pieces of work. So IFA clients will receive bills in line with using the services of a solicitor or accountant, and the advisory firms will prosper accordingly IF the clients will pay it. I hope the UK population will be pleased when this tsunami of complexity and cost hits them in 2013 - being double charged will help a lot too.
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Edward T | 16 Nov 2011 11:31 am
Quote page 10 CP11/26 'It could also lead to advisers being paid twice for the same work, once through adviser charges and again through commission' Unquote
If there is an inference that the FSA believe that IFA's would in practice do that, then as an IFA I find their statement offensive.. It also shows that they have little understanding of the processes that they regulate.
In the same document the answer that they can bring to the table is that the provider should make a cash rebate if said provider insists on paying commission rather than making alterations to the product terms.....
(for them this will be the easiest route as presumably new sales documenation will be required, should there be an alteration... would love to see that for an old Traditional With Profits RNI pension contract with GAR's... :-))
The truth is that there are most probably so few contracts that can have additional investments made to them, so why all this upheaval and cost...? ... world's going mad...
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Anonymous | 16 Nov 2011 11:50 am
The FSA have, and will carry on its journey of distruction whatever happens, they have no one to answer to and live in a world of their own. sitting in their ivory tower they have little concept of what happens in the real world. something has to happen to stop them because the industry will suffer and die !
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Steve | 16 Nov 2011 1:44 pm
The whole RDR is clearly full of unworkable and unsustainable elements. Consumers, providers, IFAs will suffer as a consequence of the FSA's unbelievable incompetence. Come on TSC/David Cameron stand up to Sants and his idiotic policy makers and insist that the madness stops here
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Peter Lawrence | 16 Nov 2011 2:08 pm
If recommending moving from one platform to another is not counted as advice (see the table), then why does recommending a particular platform in the first place? So why would the FSA be bothered about using one or lots of platforms? Illogical and inconsistent.
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Neelesh Patni | 16 Nov 2011 2:54 pm
It looks like FSA is promoting 'back door entry' to receiving commissions on legacy products. I wonder what controls they would have in place to check the practice of 'non advised advice' wherein the adviser would virtually advice to pay more in to existing products without calling it an advice. Moreover it would be difficult for the FSA to check it since the products and the clients are 'legacy' and FSA can't even do mystery shopping!!!
Even the providers are likely to promote this by taking off the advised increments from their plate, as it would be cost prohibitive to change their age old systems and processes for this.
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