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FSA rejects concerns that legacy ban will create churn

The FSA has rejected the argument that its ban on legacy commission will lead to the churning of products due to providers’ inability to switch off commission generated on top-ups to existing investments.

The regulator published its consultation paper on the treatment of legacy assets under the RDR today. It confirmed that trail commission for ongoing advice will continue but legacy commission, where there are changes or additions to a product post-RDR such as topping-up a life policy or buying new units in a unit trust, will be banned.

Following the publication of the consultation Money Marketing has heard concerns from the industry about the unintended consequences that a ban on legacy commission could have on providers and advisers.

Providers’ systems are currently set up to automatically generate commission on top-ups to existing investments. Concerns have been raised that if providers cannot turn off this commission, which will be banned under the RDR, they will stop taking top-ups on existing investments altogether.

Alternatively, providers could continue to accept top-ups but not change their systems, meaning clients would effectively pay twice through adviser charging and commission factored into the price of the product.

But speaking to Money Marketing today, FSA head of investment policy Peter Smith (pictured) says: “I do not accept that providers will not be able to turn off commission on legacy products. They clearly all can because despite IT being complex systems changes are possible. Our view would be that they can switch off commission.”

Smith says that while the FSA considered the industry’s call to relax or remove the ban, the industry did not provide any evidence to support such a move.

He says: “When people come to you and say there is an issue here that you need to think about then we obviously we think about it. But although a number of people have suggested to us that we should change the rules, nobody has provided any substantive evidence to us to support that argument.

“We have obviously gone through a process of consultation and cost-benefit analysis and of asking our board to make rules. If we are going to move away from that we need a decent reason. In the same way that when we publish things we put forward arguments and we try to substantiate them, we would expect people to do exactly the same thing.

“It is easy to say there is a problem, but demonstrate to me there is a problem. Show me how big the problem is. Advise me why I should change my position. These are the sort of questions I would ask people and if people can make those arguments then fine, but that is not where we are in this particular case. People have asserted the problem, but not substantiated it.”

Aifa director general Stephen Gay says: “If providers decide not to facilitate top-ups to legacy products, or have to retain existing charging structures which priced in commission customers would either find themselves paying more, or having to take out new products. It is important for the FSA to clarify how this measure would not lead to a net detriment to customers.”


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Of course providers CAN switch off commission. It’s just that there is no business reason for them to invest to do so. This is where the FSA proves yet again that it has no understanding of the commercial world in which it operates.

    I cannot see a problem here. We advisers have to agree a fee with our clients. If commission is available then that can be used to offset the fee. So simple but the FSA makes it stupidly complex.


  2. when will people get proper jobs, FSA mucking up everything trying to prove its better – did these guys recommend the HIPs?

  3. More windfall profit for the life companies then!

    I’ll be their company conferences will be good post RDR – time to change jobs me thinks!

  4. Beyond exasperated.... 16th November 2011 at 3:24 pm

    I really have no personal interest here but does this guy not realise that it will be as unlikely to cause churning as the entire RDR wasn’t going to raise the amount of high commission bonds sold by miscreants with 31/12/2012 in their sights? The naivete is absolutely staggering. This is the guy who last week seemed to wake up to the idea that KFIs might just be a tad long winded and confusing – and then suggested an extra column of figures. Changing systems will defintely cost, as usual who will ultimately pay? Will it really be of substantial benefit to anyone at all? Nope…. Why don’t the FSA come up with substantive arguments for their ideological, illogical, profligate money wasting?

  5. Does Peter Smith (or anyone else at teh FSA) have any idea about how much it will cost to ‘switch off commission’ ? No, of course he doesn’t. And does he care ? Of course he doesn’t.

    He’s just one of the jobsworths who are quite happy to heap vast unnecessary costs on to the industry (costs which will eventually land on Joe Public in one shape or form) in pursuit of their idealistic attack on commission.

    What purpose will it serve – has the FSA really done a cost-benefit analysis ? No, of course it hasn’t because it has no idea what the cost will be.

    Anyway, now that they have made their decision they can get back to planning their Christmas party and working out what bonuses they are entitled to…….you couldn’t make it up !

  6. Of course providers can turn off commission.

    Look what happens when there is a change of servicing agent – except this time round they’ll switch the “servicing agent” to themselves, hang onto the cash and the poor old client will continue paying the same charges and be subject to penalties on transfers if it’s a pension plus they’ll have to pay a fee to their IFA to tell them they’ve just been royally humped by the provider. Good plan FSA!

  7. Lets see if other industries are happy to adopt this type of disclosure and give up commission payments. I recently visited a BMW & Merc dealer and when I asked them how much commission they would earn from the potential sale the sales advisor “turned green”. I have yet to get a response!

  8. what about incremental or RPI linked cases.

    What about clients who’s health has deteriorated between reviews or do we expect the clients who are ill to pay more for the advice

  9. Regretably the FSA will not admit anything it does might be wrong, even when it has manifestly proven to be. Look at Sants’ comments a few days ago.

    One despairs but these guys are all pulling several hundred housand a year so they’re not going to back down are they.

    Pity they don’t make anything, just take

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