There has been a good deal of confusion over the payment of trail commission after the RDR. The FSA’s latest guidance (PS12/3) does finally provide a degree of much needed clarity.
Trail commission will continue until a product matures or is terminated. Any advice in relation to a product on which an adviser receives trail, after the RDR, will be on a chargeable basis. It won’t affect trail unless it is advised the product should be terminated. After the RDR, if an adviser recommends an increase to an investment, the trail commission can continue on the pre-RDR investment but not the increase.
Remuneration relating to the new advice should be on an agreed-charging basis. This applies equally to a single new payment or a regular investment. If the advice is for a reduction in payments or for them to stay the same, trail continues on the remaining investment.
The area left unclear previously by the FSA, was where advice related to switch of funds. The FSA have now said that advice on the switch of funds within a life policy does not end trail commission. It is important to note that in the handbook this is included as an example of where switching doesn’t affect trail. The key criteria remains – has the product terminated?
The FSA has explained that it is clear with life polices, because switching was a feature of the product that was envisaged when explained to the customer.
herefore, the product is clearly “intact” when any switching of investment occurs. The handbook deliberately chooses the word “retention” of the product when discussing the continuation of trail. These are the characteristics that need to be considered when determining whether trail continue in a product class.
The FSA also clarified matters relating to re-registering trail to a new adviser. To be able to receive trail, the new adviser must provide some ongoing service. The new adviser will need to agree charges relating to the services provided. The re-registered trail should be disclosed to the client and can form part of the payment for ongoing services. If the original transaction was non-advised (unlikely from an advice firm) the requirement for an ongoing service does not apply.
So there is greater clarity about what the rules require and a welcome steer on switching. But it highlights the degree of complexity on trail. It remains to be seen how product providers are able to cope with the varying permutations that the rules envisage. While it may be the case that the rules allow trail to continue in certain circumstances, we will have to wait to find out whether this can be managed in practice, alongside adviser charging.
Chris Hannant is policy director at Aifa