View more on these topics

FSA admits legacy ban will push up RDR cost

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.”


News and expert analysis straight to your inbox

Sign up


There are 4 comments at the moment, we would love to hear your opinion too.

  1. I am sure many clients will refer to Jo Miller (Denzel Washington) memorable quote in Philadelphia
    Now, explain it to me like I’m a four-year-old.

    Right Mr Client Since 1992 you initial paid £100 in to this plan which has certain benefits your life cover is incorporated into the plan and you receive tax relief at you highest rate .In addition you have WOP which also attracts tax relief. This contribution has increased each year by 5% to meet you target pension agreed at outset. In addition we have placed in single contributions to the plan depending on the success of your company’s profits.
    You may recall that at outset I agreed with you to take commission and offset fees otherwise chargeable over the years I have also received renewal commission. This as you are aware has been credited to your time ledger on Prestwood and any time I spent on this arrangement I have offset against the commission.
    While we still receive the renewal commission, as you can see from the time sheet. From the end of this year (December 2012) I have to agree with you a suitable fee for the additional contribution of £100.00 plus the renewal. For any increase you make now till retirement
    Mr Client
    Jim you have looked after my affairs for the last twenty years I am quite happy for you to continue to take the commission both initial and renewal. You have always been transparent with me why do we need to change the agreement. Frankly I realise that your advice is not free and that you have not only to run a business but pay yourself an income.
    Client Oh I see this is yet another rule from the FSA
    Me Yes
    Client Like everything else in Britain these days. We are not paid enough to think and have to leave this to the cleaver people who are paid six figure salaries to consider and implement these wonderful ideas up.
    In the mean time a small business owners we have to continue to pay the cheques regardless of cost to keep our masters in the life style they feel is their right

  2. 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.”

    So, now poor consumer outcomes are acceptable with legacy products are they? I bet the consumers association “Which” doesn’t know about this!

    Monitoring and supervising these poor consumer outcomes is not the same as preventing them, if there is the remote possibility of such events, the statutory obligations of the FSA “To protect the interests of consumers” is dominant and must be adhered to, if the FSA itself is aware of the problem and does not prevent it, they are as guilty of mis selling as any adviser.

    How did we get to a stage were the regulator can make such a bland statement and get away with it.

    Who are these morons?

  3. “we believe that these risks are ones we can monitor and supervise.”

    So how many more staff for the FSA, it will soon be 1 to 1 compliance.

  4. The FSA’s last estimate of the cost of its RDR was £1.7 Bn. Add to that another £460m and the total becomes £2.16 Bn. which is very nearly 3.5 x the FSA’s original estimate of a relatively mere £600m. The original figure was obviously a completely mendacious fabrication, with not the slightest grounding in reality. But the train is already out of the station, so to hell with what anyone else may think, it’s pedal to the metal every inch of the way from this point on.

    In any other walk of life, the progenitors of such a colossal increase in costs would be ordered to go back to Old Kent Road and rethink from scratch the entire proposition.

    But nobody can order the FSA to do anything, because the FSA is accountable to nobody. When the TSC tries to call the FSA to account, all we see is Hector Sants effectively cocking a snook at Andrew Tyrie, with Sheila Nicoll sat beside him smirking smugly in the knowledge that, to all intents and purposes, the FSA is untouchable.

    And yet the FSA has had the temerity to write to my MP claiming that it takes its obligations of accountability extremely seriously. The writer declined however to provide a single example of how, so make of that what you will.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm