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Confusion reigns over FSA’s legacy commission stance

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.”


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. as usual the FSA haven’t thought it through………….

  2. I suspect that pretty much every FSA policymaker has problems deciding which shoe to put on which foot every morning, so what else could we expect from such an intellectually (and morally) bankrupt organisation…. or should that read ‘disorganisation’

  3. The FSA has been well aware of this issue for a very long time. Its complete failure to provide clear guidance and leadership demonstrates both breathtaking niavety and gross incompetence…

  4. I think I must have missed something because I cannot understand why this is an issue.

    Surely after 2013 (or whenever..) the adviser and client agree a charge, commission is paid as agreed in the contract and the adviser either refunds or invoices the client the balance.

    No need for system expensive system changes and adviser charging rules are met.

  5. I give up. Im out. Good luck to the rest of you

  6. The problem I have with understanding RDR is trying to figure out where IFAs will fit in. Product providers have costs of (1) production, (2) marketing, (3) distribution and (4) maintenance. IFAs often contribute ideas to (1) free of charge. IFAs contribute to 2, 3 and have some input into 4 – and in doing this work FOR product providers, they are paid by product providers. Providers got rid of sales forces, and with it compliance costs and employment tax costs, and found it quicker, cheaper and more flexible to use IFAs as well as office based direct sales. RDR is about cutting IFAs away from product providers’ costs in 2, 3 and 4. Product providers will no longer pay IFAs for carrying out these jobs for them in 2, 3 and 4. It is difficult to imagine any circumstances were an IFA business can survive this loss of revenue. Clients certainly cannot be expected to compensate for this revenue loss. And I’m sure product providers have already discounted the idea that IFAs will work for them for nothing…

  7. Many of the RDR critics were keen to take their concerns to MPs but failed to focus on the real issues and in consequence the TSC produced a poor report. There is a case to postpone the RDR (or part of it) because of the lack of clarity and the failure to understand the implications of the final rules on VAT and legacy products. There was and always has been too much focus on qualifications and now suddenly the anti RDR brigade says this lack of clarity supports their argument.
    The TSC screwed up and would have had a much more persuasive argument for delay had they stripped out the emotion and focussed on the (lack of) detail. The farce regarding platforms is further evidence of the FSA’s confusion on the issues involved and should cause the TSC real concern which of course they were unaware of when they made their report.

  8. I’m with Sammy on this one.After 20 years of trying the various regualtory bodies (LAUTRO, FIMBRA, PIA, FSA) have finally got their way and this marks the end of the small IFA. The banks will dominate financial services which is just what the FSA has always wanted.

    Time to put the laptop on aEBAY, turn off the lights, lock up the office and go and work for B&Q.

  9. I agree with Tom, don’t see the problem.
    As I do now, post 2013 your client has a review of their portfolio, (Pension or Investment) and there is either a fee for the time and any subsequent advice, as per your Client Agreement/ Terms of Business or the time is covered by a contracttual % of FUM again as covered under the CA/TOB.
    New business agree a fee, of course the fee can always be paid for from the investment under CAR with the provider.
    What is your problem, look at your business model, explain it to your cleints, (hey might take time you have to meet and talk to them)
    If they don’t like the conditions then as per many articles recently, they have segmented themselves.

  10. Anyone who doesn’t see the problem of legacy issues, as succinctly expounded by the article, doesn’t fully understand the immense IT complexity involved. Just cast you mind back to the relatively simple problem of the “Y2K bug” – well this is infinitely more involved.
    Sure, you might not have wanted to designed the existing systems but they are in place and need to be managed.
    There are legal contracts which will be affected – why does the FSA think it is permissable to simply rupture them? We are supposed to live in a law based society but the FSA obviously doesn’t think it applies to them.

  11. Ken Durkin,

    Try and imagine a world where you earn your living from clients and not providers and then try and imagine who will actually lose.
    This whole non issue is just another example of providers desperately trying to hold onto their control of the market through remuneration by commission.

  12. Have to stay anonymous to avoid current employer going off on one – sorry!

    Phil has hit the nail on the head – for sure there are some IT challenges here but the bottom line is that for years product providers have over invested in the front end for the purposes of acquisition of new business with heavily loaded charges to support the commission model at the expense of existing customers/clients – the shift in who now takes what from the value chain can only benefit the client which is a good thing.
    Instead of advisers being part of the manufacturers’ distribution chain and getting paid commission, the adviser prices the product (i.e. the advice) and the manufacturer becomes part of the adviser’s supply chain – seems the right way round at last to me.
    Two routes to market, either via a consolidation platform (which is why the likes of AEGON/Zurich are now chasing the platform space as laggards in many ways) or via a stand alone retail product in the form of a tax wrapper – given that all of these will be vanilla this explains the gnashing of teeth (largely from North of the border) regarding the cost of switching off commission on small “top-ups etc.
    Tom also makes a really sensible observation which is doomed to fail largely because it is sensible!

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