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A legacy to stand on

David Cartwright, head of Insight at Defaqto, says at last the FSA has provided advisers with some clarity on legacy commission and now firms can put plans in place

The key questions we have to ask after the FSA’s policy statement on treatment of legacy assets are, first, what has changed? And then, do we now know enough to move on and complete advice and charging models for clients and identify where the new policy will affect existing practice?

Much of the guidance and the updated text to the conduct of business source-book relies on a principle-based approach to adoption of rules and the text reflects this.

It appears, from first reading, that firms and platforms are free to decide for themselves how they will ensure commission is not paid for advice.

This gives adviser businesses an element of control through their business model architecture but it does rely on advisers providing clear and transparent information to providers and platforms as to whether advice has accompanied a transfer or change of existing investments.

This means there is a need for close dialogue and good communication between adviser firms and providers/ platforms.

It is also confirmed that “fund switches within a life policy” against which trail commission is paid can continue and this provides for not just single-premium insurance bonds (that is, non-qualifying single-premium whole of life contracts) but also contract-based (insured) pensions as per the “life policy” definition as referred to in the FSA policy statement and defined in the FSA handbook glossary.

Under this definition, a long-term insurance contract also includes a pension policy. This means trail commission can continue for fund switches relating to insurance bonds and pensions but not for unwrapped collectives or non-packaged products.

It is positive to note that where automated portfolio rebalancing has been put in place before December 31, 2012, then it is deemed that no new advice has been given and thus does not fall under adviser-charging rules, even for collectives.

This means where a switch leads to legacy asset trail commission ending, then, quite possibly, a commensurate sum will need to be charged either directly to the client and/or from other assets or products, depending on the terms of engagement with that client.

It is a good idea to look at when legacy commission can now be paid after the RDR and where it cannot be paid.

It can continue in the following circumstances:

  • Where top-ups are paid in to products then legacy can continue on the pre-RDR investment amount.
  • Where advice is given on an existing product and where this leads to no change to that plan.
  • Where changes to pre-RDR products occur automatically, such as automatic increases or auto-rebalancing in line with pre-RDR advice (note the continuing theme).
  • Fund switches within a life product (for life product read any form of long-term insurance savings plan, for example, personal pensions, etc).

It cannot continue to be paid after the RDR where:

  • New investment amounts are applied.
  • Client advice is given which leads to a product change.

Closer examination now informs us what will and will not fall under adviser-charging rules and also provides clarity on where there is either prescription or more principle-based guidance exists.

We know what has changed and practitioners probably have sufficient detail to determine how their client segments are managed in the future and how any new adviser-pricing model will have to be applied to existing clients to meet the new guide-lines and support a transparent advice model. Possibly easier said than done but equally this now allows for a plan to be put in place for adviser-charging.

One last small complication in all this is the fact that many providers and insurers have not yet revealed or released their RDR-compliant funds and products which will have to accommodate adviser-charging and probably contain sufficient inbuilt flexibility for a variety of adviser-charging shapes and levels.

Although legacy commission will not be allowable on investments after December 31, 2012, comparisons and analysis will need to be undertaken by advisers to compare the merits of topping up existing plans against the impact of starting a new plan, all of which will affect an adviser-charging model and the quest to execute advice with best-value client outcomes.

No doubt, the small matter of the European Court of Justice judgment on the gender directive and the work involved to comply with Solvency II may be playing a part in slowing down factory- gate product development and launches early in 2012.

“It is going to be critical for advisers to have access to good quality research systems to compare new products with existing ones”

You would have to observe from the final guidance document that it is going to be critical for advisers to have access to good quality research systems to compare new products with existing ones and to be in a position to select an adviser-charging model which can be fulfilled through a variety of platforms and products to help with good value execution for clients and to be in a position to apply their adviser-charging model transparently to existing products and funds.

In summary, adviser- charging, for all its complexities does at least establish a basis for advisers to engage with clients to agree a fair and transparent level of fees and charges and the adviser and the client can, to a large extent, select from a combination of directly paid fees and adviser- charging deductions from platforms and products.

For many, it is realistic to anticipate that most adviser- charging will operate through the mechanism of agreed deduction from products and platforms in the advised arena. New product launches from providers will, I am sure, be observed with interest to see if they are sufficiently flexible to accommodate the needs of the adviser community.

At least we now all have a clearer picture of those sources of trail commission that can continue to be paid from legacy assets and plans.

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