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FSA clears up confusion over existing trail post-RDR

The FSA has confirmed that advisers will be allowed to continue to receive existing trail commission post-2012, even when a firm is sold or joins a network.

FSA director of conduct policy Sheila Nicoll, writing in next week’s Money Marketing, says: “In requiring firms to abandon commission from 2013, we are not challenging your right to continue to receive trail commission for advice given in the past.

“If, at the end of 2012, an adviser firm has a right to receive trail commission, we will not be seeking to interfere with that. And if, for example, an advisory business is sold, our new rules will not prevent entitlements to trail commission from being transferred to the new firm.”

Nicoll says this applies to firms that change their authorisation from directly authorised to an appointed representative of a network, and vice versa.

She adds: “Of course, after 2012, it will not be possible to generate new trail commission entitlements and, over time, trail commission will peter out altogether in the investment market.”

The FSA previously said in its March policy statement that where a client moves to a new adviser, the client should receive the trail commission previously paid to the old adviser, leading Aifa to voice concerns about what would happen if clients are novated.

Aifa director general Chris Cummings says: “The recently announced trail commission rules threatened to undermine the financial stability of adviser firms. While trying to protect consumers, the FSA was in danger of fundamentally damaging firms, which in turn would adversely affect the customer.

“We are grateful that the regulator is listening to our concerns and those of the adviser community. We welcome clarification on this issue from the FSA.”

For Nicoll’s full article see next week’s issue of Money Marketing.

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Jennifer Nicholls 27th May 2010 at 12:30 pm

    Oh well at least she understands what trail commission is. I wonder if she knows what it is for.

  2. Anyone who takes this as read that they can continue to receive trail post 2012 without an explicit client agreement is very trusting indeed. I think the crux of this is the wording “right to receive trail commission”. And frankly who can seriously argue that a client shouldn’t have to explicitly agree. after all it is their money

  3. You must be joking 27th May 2010 at 12:48 pm

    The sun is shining and the FSA have come out with some common sense at last!

    Summer must finally be here!!!

  4. Patrick Schan 27th May 2010 at 1:19 pm

    to: Anonylous at 12:39 pm.
    No the trail commission I receive is NOT my client’s money. It is mine. I specifically tell clients that I will be receiving annual trail commission, which pays for my servicing their business and is part of my overall remuneration. If they change their minds and want to have it paid to themselves, in the future, they are moving the goalposts. There might not be anything I can do about it but that doesn’t make it morally right. An agreement is an agreement and too many IFAs seem willing to roll over and accept being screwed.

  5. The oxford Compact and the Collins Gem dictionary and Thesaurus, do not have the word
    NOVATED.

    Will the FSA get a grip and start using words that we understand.

    Jack Morris

  6. Agree with anonymous at 12.39 The trail is not the clients, it belongs to the adviser through an agreement made with the client.The adviser could have taken all payment up front but chose a % up front and the rest as trail. This makes good business sense as it helps during the lean times. If I sell a car with a transferrable warranty I can not go back to the showroom and ask for the warranty payment to be returned to me.The fsa must not interfere with broker/client agreements, otherwise none of us will have secure business models. If they can interfere with trail, whats to stop them interfering in fees and telling us to pay them back? This madman type power which the regulator has at present needs serious consideration by the new government. Otherwise no one in their right mind will enter an industry/ profession call it what you will, where the lunatics in charge can change things at the stroke of a pen, without due regard to the law.

  7. Martin Bamford 27th May 2010 at 3:48 pm

    I’m interested in the view of a couple of advisers here, both anonymous, who believe trail commission is a form of deferred initial commission.

    In the current pre-RDR environment I am sure that this is one way in which this commission can be treated, assuming it has been disclosed as such to the client at outset.

    Looking at this from a client perspective, I’m not sure that many investors would feel comfortable in paying a lower initial cost of advice, subsidised by an open-ended payment of commission to compensate the adviser for being so generous at outset.

  8. Paul Standerwick 27th May 2010 at 4:36 pm

    In response to Martin’s comment I have a relatively simple solution compared to RDR and I’m not anon:

    If clients don’t want to pay trail commission or don’t feel “comfortable” with it they shouldn’t agree to it in the first place. Personally I rarely take trail but if an adviser wants to sell an ongoing service or for that matter as use trail as a form of deferred initial that should be up to him/her, as long as the clients aware of the situation and agrees to it what’s the problem??

    What the hell does novated mean, is this a mistake or the FSA trying to sound clever?

  9. The key comment fo rme is “She adds: “Of course, after 2012, it will not be possible to generate new trail commission entitlements and, over time, trail commission will peter out altogether in the investment market.”

    So even though we have yet to have a finalised proposition we now know the FSA does not intend for us to have trail commissions on new business post 2012. Does this mean we will not be able to charge a servicing fee as mentioned above for the ongoing administration and service calls. There are 3 cost elements to any advice – the advice iteslf, the implentation of that advice and the ongoing servicing/review of that advice. I appreciate not all advisers provide all three steps and not all clients will want to pay for all 3 but the vast majority will expect all three to be provided but may not necessarily want to write a cheque each time.

    Once RDIP has been finalised and published we will know (hopefully) what can be done. But we need to know now not 31st December 2012 so that any re-structuring etc can be accommodated in good time and existing clients informed accordingly.

  10. For ‘clears up confusion’ read changes its mind over an unfair and impractical rule.

  11. Robert Donaldson 27th May 2010 at 6:12 pm

    Moving goalposts is the order of the day with the FSA and the Government.

    As an advisor it is handy to have a crystal ball occasionally into which you can gaze to guess what is going to happen to pensions, check what tax changes are on the way and then try and see through all the mist what way you should run your business at some time in the future.

    Our industry is basically very shot. Give us a path to run on and stop moving the goalposts so that we can get on with the job of giving clients sound advice which allows us to earn a living.

  12. Anyone tried to ‘novate’ a client policy AND receive trail commission recently? It seems most Life Companies already assume RDR is here. They also impose a minimum CAP of several hundred pounds before paying out- and then only monthly!! My previous network went to the wall last year and transferring policies has become a nightmare with the much reduced administration departments.

  13. Novated, yes intersting one. Is it from the Latin Novatus? to nominate

  14. Martin Bamford

    Ask Royal Skandia, they claim IT IS deferred initial commission and do not (in Asia at least) transfer the renewal fees to a new adviser. Of course they can get away with it out here, but not for much longer one feels.

  15. ” clears up confusion” = We did not realise that, when we were trying to stuff you this time, the idea we came up with was so stupid, it could have come straight from one of the contestants on Junior apprentice.Or perhaps I do these youngsters an injustice?

  16. Ewart Matthias 28th May 2010 at 11:24 am

    Some years ago we had the debate about the ‘right’ of taking high up front fees for transacting new business and the thinking was that advisers doing this were greedy, dishonest, etc. The argument was that good advisers would take a low percentage of commissions up front and that the trail would in fact ‘compensate’ the adviser for the commission not received and pay for ongoing service. Today it seems we are saying that trail is in fact not that and that the client is giving it to the adviser as a gift, which is absolute rubbish.

    No one here is asking the client what they want or feel, the FSA certainly aren’t, their view is that the average client is thick and vulnerable and needs protecting from the rapacious adviser. The issue of fees or commissions should be governed, yes, but not proscribed. The client should choose because they may prefer it that way but nobody is asking them are they?

    It isn’t good that we have some IFA firms placing themselves on a pedestal wanting to occupy the moral high ground with regards to charging fees. We need a broad concensus on trail, commissions and fees for when we start putting ourselves in self seeking camps it is the old ‘divide and conquer’ and we all lose.

  17. Why not simply charge a fee and set the level at 0.5% of funds under management up to £1,000,000 then reduce charges on a sliding scale.

  18. Richard Brydon 28th May 2010 at 11:41 am

    I have taken reduced initial commission/client charge over a number of years. The receipt of this money leaves not only an obligation on me to look after these clients in the future but it is also vital if I want to maintain this important income stream.
    In the old days there was no option for trail and clients received no service, now they do, at least in my case.

  19. The question here is who pays?. If we receive payment from the provider, that is deemed to be commission and it is clear that the FSA are unhappy with this and rightly so, particularly if clients are unaware of the amounts involved.
    If the client pays that is a fee whether it comes direct from the client by cheque or is taken from the investment, preferrably a non bundled collective from a wrap where all discounts on management fees are paid back to the client account. Our fee then comes from this account and is agreed with the client at outset.
    Some may say that this is commission in another form but at least the client has signed a specific agreement which clearly explains how we will be paid and they are given the choice of whether to pay us by cheque or from the client account.
    On this basis, we should be fine (I hope!!).
    Would be glad to hear Martin Bamford’s comments on this as he does appear to have a good understanding of this.

  20. I am in agreement with Tony Ress on this and in part with Martin Bamford.
    I do think that is was a true misunderstanding on the part of the FSA, balanced by a continuing misunderstanding by advisers posting here.
    I think what we need to get our heads round is as from Jan 2013, Trail COMMISSION will end, but there is nothing to stop the same level of ongoing fees being deducted from new contracts, provided they are agree with the clients as an ongoing charge for specified work undertaken. For me, we already work on that anyway and I think all posting on here tend to agree that is fair. If you do ongoing work for a client you get paid, if you don’t you don’t and the client can switch it off which clearly demonstartes advice has ceased to eb provided from a contractural perspective and will put us in a better position to demonstrate to teh FOS why a timebar or longstop would apply i.e. if the client turns off the ongoing adviser charge post 2013, clocks start ticking.
    As we as a firm work at present, if a client chooses to become a customer or ex customer (please see definitions of client and custoemr in the dictionary), then provided they appoint a new adviser, we as a firm are happy for the former clients individual plan, whoever that is with, including Skandia to be transferred to the new firms agency and for them to receive any commission for the ongoing work they intend to do or for them to “discount broke it” as that is evidence to us to demonstrate forecably to the FOS that someone else has assuemd responsibility for ongoing advice and if a negligent act of my firm is not picked up by their new firm within the common law timesclaes of 6, 3 and 15 year longstop, that barring the FOS truly believeing they can get away with opening a case once this has been explaiend to them in excess of 15 years on one of my cases, that I will immediately wind my business up and spend every day until I retire making their lives HELL.

  21. Oh yes, the isue however was with mainly protection policies, which are not (currently) part of teh RDIP, many of which have piddling trail income, which we as a firm don’t account for against individual clients unless they exceeed £10. It is this money that pains for letters to clients, mainitaining records and files for teh lack of a longstop, FOS and FSCS levy’s (and interim levys) etc and these should not be switched off in 2013.

  22. David Townsend 28th May 2010 at 1:56 pm

    Am I alone here in knowing how to use Google!?

    novation [n??’ve???n]
    n
    1. (Law) Law the substitution of a new obligation for an old one by mutual agreement between the parties, esp of one debtor or creditor for another
    2. an obsolete word for innovation
    [from Late Latin novatio a renewing, from Latin novare to renew]

  23. Well done David – I was going to point out that it was Money Marketing, not the FSA that used this word. Thanks for the definition.

  24. Incompetent Regulators Award Team 31st May 2010 at 5:35 pm

    It makes me sick that IFAs have to go with a begging bowl to the FSA monkeys to clarify their own stupid rules. This is a continuation of corporate abuse by people who no nothing in what they are meddling in!

  25. The verb novate and it various derivatives have been in common use within our industry for at least the past 12 years. If the implications of novation are not part of your business plan maybe maybe it is time that they were. Most of my clients sign an agreement authorising the provider to pay me an agreed fee which is reviewable. Sounds like trail, spends like trail but is subject to fee agreement.

  26. This is my first time i visit here. I found so many entertaining stuff in your blog, especially its discussion. From the tons of comments on your articles, I guess I am not the only one having all the leisure here! Keep up the good work.

  27. business advisors Oxford 30th March 2011 at 12:45 pm

    I have just recently found your blog and absolutely love the posts. Thank you, thank you. I am still .NET programming but can’t wait to try these things in Ruby and it is a great help to see such clear examples.

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