The FSA has admitted there will be additional costs for insurers to comply with the ban on legacy commission, despite previously saying the legacy ban was factored into earlier cost estimates.
The regulator has published a policy statement on the treatment of legacy assets today, following a consultation paper it issued in November.
In November the FSA confirmed that legacy commission, defined as additional commission payable on on pre-RDR business where changes are made to the product after December 31, would be banned. Today’s paper confirms where trail commission can continue to be paid.
In the consultation paper, the FSA argued the cost of the legacy ban had been priced into earlier RDR cost estimates from March 2010. But insurers rejected this argument, saying clarity only started to emerge about legacy commission in March 2011, in a letter sent to trade bodies by the regulator.
They argue the FSA’s position on legacy commission was then confirmed in November.
In today’s paper the FSA says: “The Association of British Insurers, the Association of Financial Mutuals, the Investment and Life Assurance Group, and also some individual insurers, did not agree that the new guidance and policy position set out in the CP would not lead to incremental costs for firms compared to the costs set out in the original RDR cost-benefit analysis.
“Based on information received from the industry, we estimate the additional compliance costs – if all insurers changed all their legacy systems to allow top-ups/increases without commission being paid- to be £460m.”
But the FSA says it is aware from industry discussions that insurers will only amend legacy systems for larger or more profitable books of business, and where top-ups are likely.
In March 2010 the FSA estimated the RDR as a whole would generate one-off costs of between £605m to £750m and ongoing costs of between £170m and £205m.
One-off costs to providers to implement adviser charging were estimated to be between £330m and £385m and ongoing costs of between £70m and £85m.
The legacy commission ban is problematic for providers and consumers as providers’ systems automatically generate commission on top-ups to existing investments.
Providers could choose to no longer accept top-ups, or continue to accept them but not change their pricing systems, meaning clients would effectively pay twice through the product and through adviser charging.
The FSA says: “We recognise there are risks of poor consumer outcomes for customers with legacy products, though we believe that these risks are ones we can monitor and supervise.”