The FSA has hit back at calls by politicians to ban trail commission but say IFAs must prove they are giving ongoing advice.
It says its research shows that many consumers prefer a commission-based method of remuneration to payment by fees. However, it will tighten up its rules on trail to ensure that it is not being paid out regardless of service.
The regulator says consumers display a reluctance to pay for advice by way of a separate fee and they like the fact that no commission is paid if no product is bought.
Under its remit of treating customers fairly, the FSA will launch a probe into good and bad practice of commission and trail commission and the relationships between product providers and distributors.
But the FSA does acknowledge there are practical problems in asking IFAs to account for very small amounts of trail and it is proposing that firms will be able to agree with clients an acceptable amount of trail to be kept each year.
Earlier in the year, the Treasury select committee hit out at trail commission received by IFAs, claiming that many were getting money for investments made on behalf of clients when they were not doing any work year on year for the money.
The reaction from the FSA has disappointed consumer watchdog Which? which claims the regulator has ducked the issue.
The FSA says: “We would not consider a direct ban or limit on commission to be a proportionate response to the risk of commission bias.”
Which? principal policy adviser Mick McAteer says: “The FSA has further ducked out of making the market work by ruling out a direct ban on commission as it would not be proportionate. Instead, they are rely on disclosure to make the markets work which has been shown to fail in the past.”