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FSA clarifies that legacy commission is to be axed

The FSA has written to trade bodies to clarify that legacy commission will be banned under the RDR.

In a letter sent this week, the regulator also confirmed that trail commission will be allowed to continue, provided that a contract and advice is given before the RDR deadline on December 31, 2012.

The FSA defines legacy commission as additional commission payable under a contract signed before December 31, 2012 but as a result of an event that takes place after that date. The FSA announced its ban on legacy commission in its policy statement on the distribution of retail investments in March 2010.

Forty Two Wealth Management partner Alan Dick says: “What the FSA is trying to do here is ensure that advisers receiving commission are actually providing a service that has been agreed with the client, which is absolutely fair.”

But Adviser Alliance founder and director Alan Lakey says: “The regulator cannot see that most advisers deal with ordinary people who are not comfortable paying fees. These people prefer to work on a commission basis.”

An FSA spokeswoman says: “We keep up dialogue regarding RDR. In the case of legacy commission, the FSA has reiterated that this commission will be banned after December 2012.”


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There are 57 comments at the moment, we would love to hear your opinion too.

  1. What about contractual increases such as indexation, or whole of life maximum cover type plans?

  2. So the insurance companies are to get the benefits of the commission that would normally be paid to the advisor providing the service to the client. Nice one yet again the client dips out and the insurance companies pocket the cash!

    This means that when you takeover a clients affairs unless they are prepared to pay a fee on an annual basis, why should any advisor service the contract. For example change of address, change of name on marriage, put the policy into trust, explain the benefits, switch funds when the client is nearing retirement or maturity etc etc etc. Why take on the liability without the reward no matter how small it is.

    Why change something which has been around for years and has worked!

  3. SURELY, SURELY, one of these days by the law of averages the FSA will get something right. Alas, not on this occasion.

  4. Dialogue with whom? And what ever comes of such dialogue?

  5. How will this be policed I wonder. Does this mean renewals on all policies written before the deadline will no longer pay incremental initial or incremental renewal ? Sounds like a commission admin minefield to me … Very dangerous ground for IFA practices I think. Especially if they have no dedicated accounts resource … and even if they do it represents yet more cost and time issues. Maybe we should all go and work for the FSA – no requirement for profit or proper business management outcome there !

  6. Maybe the commission lost to the advisers will go to enhance the FSA fat cats pay. Oh and help pay for the increased budget requirements. Nice one chaps!!

  7. An FSA spokeswoman says: “We keep up dialogue regarding RDR.”

    What does this mean, exactly? From where I sit, it means “You can say what you like but we won’t take a blind bit of notice because we’re always right”. I certainly haven’t noticed much dialogue!!

  8. It appears that some people are unable to accept any decision as reasonable, this is clearly to the benefit of consumers. We can’t have arrangements for legacy commission payments being set-up it will undermine the new rules. Some advisers seem to think only of commission, commission, commission – no wonder the regulators have such a poor opinion of us and feel we are dinosaurs. Change is good it freshens things up and will clean up this industry which is long over due.

  9. RDR is about 2 things.
    1 Qualification standards.
    2 Commission or fees.
    It is costing 1.6 BILLION.. mad mad mad, bonkers bonkers bonkers.
    1. Qualifications….the bar has been set, make new advisers qualify at this standard and grandfather existing CAS advisers.
    2. Give the client a CHOICE as they will have to meet the cost. Commission alows clients to spread the cost over a longer term for those who may not be able to afford costs up front.
    Why can’t the clients be given a choice and why is it costing 1.6 BILLION?

  10. I am a little confused by this article. Is this talking about a specific product? As policy statement 10/10 Delivering the Retail Distribution Review Corporate pensions – feedback to
    CP09/31 and final rules, specifically states – allow commission to continue on existing GPPs set up before the ban on commission is implemented, including new members and increases in existing members’ contributions.
    This is lifted directly from an FSA document.

  11. Confused – what does legacy commission refer to and what is this about before and after 2012?

  12. What happens to monthly ISAs that role over? Do IFAs still receive the commission based on the original advice?

  13. There will be poor wee orphans everywhere.
    Never mind, maybe the banks will take them in.
    Failing that, the fsa can always up our fees so they can get “money guidance”
    The big companies are in for a windfall.
    Why not do us all a favour and someone somewhere ban the fsa after 2012. Now that would be a result.

  14. Hi Ed, Do you remember speaking to me after your act at the comedy store last week.

  15. Ed Stapleton | 31 Mar 2011 10:31 am

    Ed, I do not mind you expressing a view but I do object to sweeping statements such as ‘clean up this industry which is long overdue’ The majority of people in this industry are of integrity and are valued by their clients. I sincerely hope you are not expressing a view held by your clients when you make such a statement.

  16. So – lets say that we have an index linked policy and we are both advising on the cover on an annual basis and we are receiving commission on the incremental increases.

    The FSA have baneed that commission ??

    That is interference with an existing contract – I would be interested in a lawyers comments.

    So commission is to be replaced by fees or customer agreed remunaration – it will be interesting to see how many (if any) insurance companies seek to support the IFA by finding a way of concverting incremental commission to customer agreed remuneration.

  17. Never mind adviser commission payments.

    Are the FSA not aware of the bonuses (another word for commission me thinks) some of the provider consultants are earning?

    They get a lot more bonus than I get commission from the hard work I do I can tell you. And without the risks.

  18. This is excellent news! All we need to do is built in 20% extra cover for inflation over 4 years (keeps the clients and the FSA happy) wait until the end of any clawback period (say 4 years for example) then rebroke everything in sight and get more money from the client.

    Has anyone at the FSA even thought that this might actually be costing the clients money year on year? Don’t think so.

  19. John Kenny-Levick 31st March 2011 at 11:43 am

    I agree with the principle that I believe is the inspiration behind this FSA rule: TCF. So, it makes sense and is right.

    Does anyone know how the FSA or providers paying such commission will prove what service is being delivered to any clients with contracts paying the type of commission which is classified as Legacy?

    Are there clear criteria about what is defined as satisfactory service?

    Are there to be rules in place for providers to treat fairly the adviser community who genuiely comply or will the advisers find themselves spending money in time fighting the providers to be fair when they stop paying commission attaching to the relevant contracts?

    If anyone knows the answers or where I can get them please tell me.

  20. It is costing the client more and more each year already and when VAT is applied it will cost them 20% more.

  21. If Ed Stapleton is correct that change is good then let us rejoice for those Japanese families who have changed from having decent lifestyles to being homeless as a result of the tsunami.

    It swept away all those houses and has left them with a clear landscape to build on.

    Change can be good, bad or a bit of both but it is not invariably good.

    My concern is that the RDR will sweep away commission which, for many clients of modest means, may be the worst option apart from all the others.

    It is change but I am not convinced it is for the better.

  22. Indexation commission is a contractual obligation between the advising firm and the life company. If it is axed, the only beneficiary is the life office ! I would debate whether the FSA can actually terminate (or amend) a commercial contract in this way. The adviser would have taken into account the prospect of legacy commission when deciding the fee/commission payable at outset – and such commission also provides a small return for servicing the policy (answering future questions and encouraging the client to maintain it in force).

    It is difficult to understand the process by which this moronic regulator comes to make its edicts. Especially when almost everything it does ‘flies in the face’ of improving the situation for consumers.

    I have no problem with imposing examinations in the hope of driving up standards of advice but everything else is almost certainly going to drive up costs for consumers who can afford to pay for advice and cut off millions from advice other than that which will be provided by banks.

  23. Those who doubt the willingness of providers to ignore contractual increment commission should look no further than Standard Life and the brutal murder of personal pensions in 2000. No indexation commission quotes were honoured.

    I am very worried by this sudden mention of “legacy” commission. What is it? Could someone please define the term?

  24. to Anonymous @ 12.04pm:

    ” cut off millions from advice other than that which will be provided by banks.”

    That says it all, doesn’t it?

    Funnily enough the client gains NOTHING from making this change, the insurance company just make more profit.

    Completely in character for this regulator: benefit the banks and big insurance companies. A reverse Robin Hood.

  25. When I purchased a client-bank a few years ago I did so on the basis of a multiple of recurring income. The recurring income was made up of indexation commission, renewal commission and fund based trail. Now am I to understand that I will no longer be entitled to that income that I have paid for in good faith without getting every client to agree to a fee of the same amount paid for via offset? So much for less red tape for small businesses!

  26. Some of you lot are from a comedy club for sure!

    From what I see, the FSA has said the ban is for products AFTER RDR. This means that if a pre-rdr product agreed to pay increasing commission based on alterations, then that should continue.

    Post RDR there will either be no commission or commission for insurance products. In the case of the former, the premiums may be cheaper.

    So you set up a life policy for a client….a few years later they need different cover….so you advise them to get another one. How much of that will be covered by renewal commission?

    As Ed said, I get the feeling most are beginning to just think “here we go, all those renewals are under threat”

    Of course most clients won’t pay for protection advice – thats cos they don’t really need complex advice. If they need a life policy, yes it has to be sold, but they can buy it online cheaply. I see no “value add” there….so most of this is a waste of time.

  27. Here we go again.

    Do advisers really object to not being paid in these circumstances?

    And really think the status quo has worked for years?


    I welcome any rule change which leads to the removal of legacy commission – absolutely right.

    Presumably those whingeing are those who who think it’s OK to be paid for a service they don’t actually provide????


    Of course the providers shouldn’t pocket the money either.

    The legacy commission should be paid to new adviser, which the FSA don;t seem to have a problem with or should be reinvested for client’s benefit.

    How can anyone possibly object to its removal from the hands of previous advisers?

    Ian Coley
    Medical Investment Services

  28. to: Ian Coley.

    Call me cynical, but I suspect that if something doesn’t get paid that was *going* to be paid, this money will not go to the client.

    The fair way would be to pay the funds into the client plan and let the adviser take this as a fee if agreed.

    What will happen in real life? Any funds that would have gone to an adviser (rightly or wrongly) will be kept by the insurance company. Everyone wins. Except for the adviser and, more importantly, the client.

  29. To Ed, i think you should find work in another area! maybe with the FSA , Its people like you that have put IFAs in the rediculous position we all find ourselves in.

  30. Harry, “Of course most clients won’t pay for protection advice – thats cos they don’t really need complex advice. If they need a life policy, yes it has to be sold, but they can buy it online cheaply. I see no “value add” there….so most of this is a waste of time.”

    I forgot that clients are fully aware of IHT limits, how it all works and they all know how trusts work and when they buy the policy everything is all fine so why do we need advisors? I know this is not the main talk on these comments but that comment did astound me!

  31. What impact will this have on practice buyouts, partly based on the trail that the FSA now wants to ban? Just when you thought it couldn’t get any worse the FSA comes back for more. I fear we are witnessing the extinction through over regulation of the UK financial services industry.

  32. Gold old Harry supporting thev IFA once again! If you like them that much go and get a job with them.

    The FSA are out for themselves.

  33. to Al lover | 31 Mar 2011 1:34 pm

    Yeah thats right its all my fault the rules are changing and instead of accepting the fact – BECAUSE IT WILL HAPPEN – blame anyone, everyone, anything. The brave will survive the clever will find their niche, the moaners will get what they deserve nothing.

  34. anon !! You must be new to the business and call yourself a Wealth Adviser !! is that IFA ? is that someone who does’nt sell term assurance and advise on trusts nor advise thier clients on one of the lagest financial commitments in the lives (no i dont mean a bugatti) I mean thier mortgage., or is that stuff all to below you guys? perhaps you decribe moaners as the people who are tired of endless and tireless regulation and rules that have led us all to the end who prefer to make comment rather than take all the rubbish that you seem prepared to take. you should apply to the FSA for next role !

  35. Matt – point taken, but lets look at it this way:

    Client goes online and buys a live policy above NRB and doesn’t place it in trust.

    On death it still pays out. That’s more money than what they would have got had they not done anything. So, lets say they buy a policy above the NRB and there’s some IHT to pay….they still have some money! If if the IHT liability was high (with 2 x NRB) I think most would have actually sought advice regarding a trust anyway.

    So lets not go there shall we?
    My point still stands – this is not complex advice and I don’t see why people should have to pay for ongoing servicing of an existing insurance policy.

    Pissed off IFA – no surprise to see you still learning to write then! 11 plus sitting recently?

  36. Pissed Off IFA | 31 Mar 2011 2:09 pm

    Gold old Harry supporting thev IFA once again! If you like them that much go and get a job with them.

    The FSA are out for themselves.


    And IFAs aren’t?

  37. Two years ago I asked the FSA where I stood with regard to GARs post 2012 i.e. with existing PPP, S226, S32 etc where the internal annuity rate favours the client and comission was costed at outset. The reply was worrying in that it had never been considered relevent.

    I have a bunch of lovingly tended dinosaur pensions whose maturities I have looked forward to with pleasurable anticipation. A recent example was a Scot Mut S32 with 15% pay rate, 66% spouses pension, 3% indexation AND 2% COMMISSION.

    Given the many years of nurture I have given to my charges why should I be denied the graduation party?

  38. Hey anonymous, was Ian on at the comedy store on the same night?

  39. Come on lads.
    Enough is enough.
    How much more can we take?
    The time has come to form a rebel army and march against the dictators in Tripoli Wharf.
    Has anyone got Obama’s ‘phone number?

  40. Julian Stevens 1st April 2011 at 9:54 am

    It wasn’t just Standard Life that shafted us as of 6th April 2001 on all the PP’s we’d written with them throughout the previous decade ~ Norwich Union, CU, GA, Friends’ Prov, Clerical Medical and probably all the others did the same, as a result of which we’ve transacted no business with any of them since. Our stock response to calls from their rep’s seeking to court business has been “If and only when you’ve restored the original commission terms on all the contracts we wrote with you pre-April 2001, we may have something to talk about. Until then, forget it.” And that’s the last you ever hear from any of them.

    I have no crystal ball to tell me what the future may bring ~ the FSA seems to have an inexhaustible store of imaginatively meddlesome and unhelpful ideas to make life more difficult for all of us. But I identified straight away that CAR-based contracts are the way forward, under which the remuneration, both initial and ongoing, to be paid to the adviser is a matter of written agreement between the client and the adviser as opposed to being controlled by the provider and vulnerable to subsequent unilateral (always downward) modification. Okay, you have to give up indemnified payment for your work but, if you’re in business for the long term, this is a better remuneration model, giving you smoother and stronger cashflow and no clawbacks (which were never pro-rata anyway). I find it difficult to understand why so much entrenched resistance to making this transition remains. Certainly, once we embarked on it nearly ten years ago, I found it surprisingly easier than I’d anticipated.

    But taking on legacy business and, for so doing, receiving no payment for it in accordance with the terms on which the contract was originally written, just because of some unthought-through edict from the FSA, is almost certainly going to be extremely unhelpful to everyone except the providers. Will the terms on which any incremental business is accepted be more favourable for the client to reflect the absence of commission? Given the problems that nearly all providers (all the traditional ones, anyway) seem to have updating their systems in respect of old contracts, I’d think it very unlikely. So the client will have to pay fees that he probably won’t want to and the provider will keep the commission that would otherwise have been payable.

    From the Statutory Code of Practice For Regulators: “Effective and well-targeted regulation is essential in promoting fairness and protection from harm. However, the Government believes that, in achieving these and other legitimate objectives, regulation and its enforcement should be proportionate and flexible enough to allow or even encourage economic progress.”

    Banning commission after 2012 on increments to legacy contracts hardly seems to accord with the above ~ in fact, quite the opposite. But then, having granted itself a unilateral opt-out, since when did anything the FSA do reflect anything in the Code?

  41. no money. no service. simples.

  42. To ALL

    I wonder how some of the contributors to this debate have the audacity to call themselves professional. The standard of spelling and grammar is appalling which does beg the question what is the standard of advice, in addition their written communication with clients must be laughable and littered with basic errors undermining whatever work they have done. The childish arguments show a lack of real skill to debate rationally with insults and anger abound to compensate for this shortfall. No wonder there is a fear of Level 4 Qualifications I think some have proven beyond doubt they probably can’t even spell it, let alone pass it.

  43. I completely agree with Bob Donaldson.
    We get thousands of pieces of copy correspondence for inactive policyholders on plans arranged many years ago which we must file and keep but who won’t pay fees. It would be fine if, and this is a gigantic if, the insurance companies made ALL correspondence on all plans available on line and didn’t send out these mountains of paper, which cost them less to generate than it costs us to scan and file.
    Why does the FSA think WE should pay for this administrative burden? THEY are retrospectively changing the policy terms.
    If there is anyone at the FSA with an ounce (or should that be gram?) of intelligence could they please crawl out from under their stone and explain it to their mentally challenged colleagues that in the real world you have to start from where you are with legacy products.
    If the FSA wants to start the “churn to end all churns” they seem to have picked upon the perfect excuse. Who thinks they won’t blame this total lack of foresight on someone whose initials are HS….?

  44. Why is it that the fsa want to drive down earnings for IFAs whilst at the same time increase their own insatiable coffers?
    If they continue to demand more and more whilst expecting IFAs to survive on less and less, somewhere along the line the pressure valve will blow.
    The fsa may be unaccountable but they had better be careful,if the powers that be will not control them, a rebel uprising against this form of oppression may just materialise.
    What they propose is nothing less than state interference in private enterprise, a very slippery slope and one they may live to regret.

  45. Is this some sort of April Fool’s joke?

    If not, the joke is on us and the consumer. e’ll have less money to pay our FSA fees and the customer will not benefit as the life offices will simply keep the renewal commission.

    In any event, I thought that the FSA had previously decided that commission can still be paid under pure protection’.

    In regard to trail from investment business, the FSA has said that pre-RDR trail commission can still be paid post-RDR. I hope I’m right in thinking that pre-RDR-trail (otherwise known as renewal) commission on pre-RDR protection business can still be paid post-RDR.

    Again, previous contributors have asked “what about commission generated by contractual indexation of policies” is the FSA proposing that the life offices simply keep the commission that
    would otherwise be payable to the IFA?

    It really would appear to be the case that the FSA wants to exterminate (I’m afraid it really does feel like that to me) IFAs and leave the public to the tender mercies of the Bancassurers.

  46. @Stu W

    Whilst you may be able to spell, your standard of punctuation is a different matter.

  47. Have any of you actually seen this document, or read it?

    1. Trail commission is safe post 2012 on products sold before 1/1/2013.
    2. Contractual increments and increases (and related commissions) are safe post 2012 on products sold before 1/1/2013
    3. Top-ups post 2012 will not be able to pay commission (legacy commission).


  48. Lets face it initial commission and trail is why Equitable life went bump!!!! It has to be the route to all evil as all failings in history were down to that. Nothing to do with lack of regulation or crooked individuals!!!! Don’t have a problem with RDR, transparency & choice. Shame every time someone phones me I will have to send an invoice including admin time. Clients going to love that one!

  49. The FSA must be discussing these areas with companies that already have millions in trails and renewals already. Surely it’s about time they listen to us, read the blogs and get some common sense. David Cameron has expressed his desire to encourage entreprenuers to help the economy recover. This is while the FSA is allowed to dump thousands of advisers and associated workers on the scrapheap. It’s time the thousands of us started an industry protest!

  50. I might have missed the point here but I thought commission was only being abolished on investment contracts. This would leave all FIB, PHI etc indexation commissions intact.
    I think that what will be stopped is full commissions payable on (mostly) pensions whenever there is an annual indexation-This strikes me as being far more positive than previous posters seem to think. Thats if Ive got it right. I look forwards to other thoughts.

  51. Surely the account/policyholder has the right to choose who receives any trail commission etc.

    Transfer of servicing rights could easily include confirmation that the client wants any ongoing commission is to be paid to the new adviser…..

  52. David

    I would argue the LACK of commission and trail was the reason Equitable went down the tubes. They could control their distribution costs but didn’t. They certainly didn’t expose their products to competition from Standard et al, by distributing through IFA’s to any great degree. I joined the industry in 1985 and within 6 months I’d heard rumours about Equitable’s difficulties from several actuaries. London Life – no commission to IFA’s- no busines from IFA’s to speak of. Why? CLIENT’S DON’T LIKE PAYING FEES FROM THEIR OWN POCKET.

    All I can see with RDR is the same reasons endowments went out of favour – generally no investment for the first 2 years of any contract. Can anyone actually see clients going for this model? I think not. The alternative – do you really want to wait 25 years to get paid?

  53. The only problem I can see is that there are many advisers who intend to retire come RDR. So how do they sell their client bank/business? Most advisers work out the cost of their business by the amount of trail commission – so RDR makes it impossible for these advisers to sell their business. This also leaves many orphaned clients.

  54. Does this mean we will no longer be responsible for the advice for these contracts as we will no longer have any contractual agreement with the client or the provider?
    May be worth losing just to be risk of any future misselling scams and claims.
    perhaps the cost saving will be in our PI Insurance premiums and FSCS levy?

  55. I appreciate I am being slow on the uptake here, but I have serious trouble working out how this applies to fund based, trail, indexed or indemnity commission. I can see that indemnity is out the window and that’s fine, but most of our clients pay us by fund based or premium based ‘commission’. We’ve given up trying to understand this kafkaesque nightmare. We’ll just see what comes in post 2012 and send a new set of terms and conditions with our hourly fee tariff to any client where the income stream ceases to make servicing viable. Presumably they’ll either sign it and start paying fees or go elsewhere. I fully expect the providers to ‘interpret’ these nailing jelly to a ceiling regulations to suit themselves which will I am sure involve trousering large amounts of money with no gain to the clients at all – and the likelihood of a fee being charged for work they thought their adviser had already been paid to do. It’s a bit of a jaw dropper that RDR is being billed as good news for consumers – looks like a massive disaster/rip off for most of them with only providers rolling about with laughter at the windfall they will receive. TCF? Hmm…..

  56. Surely this would constitute a breach of contract if the provider failed to pay legacy commission?

  57. I made the decision after 26 years as an IFA to quit, during which time I received no complaints. Many of my clients held down “ordinary” jobs with average pay – and not able to pay upfront fees. I would call on numerous occasions to sort out queries without financial reward, with the modest renewals suffice. I fear it’s these type of people who will lose out with the advent of a change to fees.

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