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FSA sets out when trail can be paid post-RDR

The FSA has set out when trail commission can continue to be paid on advice given on existing products after the RDR deadline of December 31.

The regulator has published a policy statement on the treatment of legacy assets following a consultation paper last November.

Today’s paper clarifies in what circumstances trail can continue to be paid:

  • Where top-ups are paid into a product – no commission will be allowed on the new investment amount, but trail commission can continue on the pre-RDR investment amount.
  • Advice that leads to no change to the product – trail commission can continue, although any new payment for the advice would need to take the form of adviser charging.  
  • Changes that take place automatically following pre-RDR advice, with no new advice post-RDR – commission can continue to be received, for example, where there are automatic increases to regular payments or rebalancing in accordance with pre-RDR advice, given that no new advice is provided post-RDR.
  • Fund switching within an insurance product- trail commission can continue on the product as a whole,  though new adviser remuneration would need to take the form of adviser charges. Top-ups would need to be treated in the same way as any other top-ups, i.e. new commission could not be paid on the new investment amount.
  • Offsetting trail commission against adviser charges – new commission cannot be accepted post-RDR, even if the adviser intends to refund it to the client, but trail commission for pre-RDR advice or transactions can be offset against adviser charges.

In November the FSA confirmed its intention to go ahead with a ban on legacy commission, which it defines as additional commission payable on pre-RDR assets where there has been a change to the product post RDR, such as top-ups to a life policy or the buying of new units in a unit trust.

However the consultation paper prompted the industry to raise concerns about the impact of the legacy commission ban on trail commission brokered on pre-2013 RDR business.

The wording of the paper, which said trail can continue where it is “payable for advice provided pre-RDR”, led Aegon and Aifa to suggest this could be interpreted to mean if any post-RDR advice is given, all trail must cease.

The FSA says it plans to monitor how firms are implementing adviser charging, and will also be closely watching the amount of trail commission firms take.

The FSA says: “Once the RDR rules have come into force, we will take action if we see firms acting in a way that could lead to consumer detriment, for example, recommending retention of higher charging products so they continue to receive trail commission.

“We will also monitor the overall level of trail commission in the market, to check whether it is reducing or remaining at current levels.”

Aifa Policy director Chris Hannant says: “This is a positive step forward for advisers whose business models were under threat from the proposed changes. It is now clear that advisers can continue to receive previously agreed trail commission when topping up a previous product or switching within a product.  This is a sensible outcome, which is good news for advisers and consumers, as it would have created a perverse incentive not to offer advice.

“We had previously established that existing trail commission, post 2012, will continue for firms until a product matures or is terminated.  However, it was not clear what precisely constituted termination of a product and what was merely switching. We are therefore pleased the FSA has responded to our calls for greater clarity and will continue to work with them on any further areas that are unclear.”


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There are 28 comments at the moment, we would love to hear your opinion too.

  1. How stupidly complicated. Exactly going forward why would anyone want to give advice on any investments its just not worth it. The system is over regulated and no longer economically viable.

  2. The FSA were incompetent to describe the selling of Single Life Settlement Funds to “Retail” investors as “Toxic” and “Ponzi”; this has forced well managed finds into suspension so that they can deal with the resultant panic. Such regulatory vandalism is unforgivable in the modern age and one would expect the regulator to be able to tell the difference between a well manage fund and a ponzi scheme. If they cant they should not exist.

    If the FSA knows or suspects an SLS fund to be a Ponzi scheme they should name it and investigate it; not condemn all funds in the class. One can only hope that crude definition of a “Retail” investor is updated to reflect the real world.

  3. Anonymous@10:51

    Its supposed to be no longer economically viable. That’s the whole point.

    The FSA doesn’t want IFAs and is doing all it can to kill us off. We are hard to regulate and don’t have the cash to meet compensation when needed.

    Product sales will be left to the banks and large organisations like SJP. That’s just the way it is.

    Please please please don’t post about how few complaints IFA’s get because that would assume some logic in the system.

  4. Here’s me thinking a “regulator” just “regulates”, and not actually dictates how someone should or should not be paid!

  5. Agree with the above
    Who would want to be an investment adviser?

  6. Becoming a headcase IFA 27th February 2012 at 11:11 am

    So if I switch a client’s funds, within their skandia ISA or investment account, I will lose thetrail commission?

  7. If they put as much effort into supervising and hounding crooked bankers and there staff as they do worrying in case some poor IFA makes money, think how healthy this country would be. But since IFA staff are mainly made up of “FAILED” brokers and advisers, then is it any surprise this is what concerns them more.

  8. @LM

    You’ve hit the nail on the head. Government (AKA the FSA) should not be dictating to business how business runs itself. That’s why the RDR is upside down and back to front no matter how one looks at it — it affects the relationship between a business and a customer.

  9. looks to me that all of this has been set up entirely for the benefit of the banks and SJP type organisations. Anybody who has spent time putting clients into collective porfolios on platforms with regular reviews will post RDR need to go through the effort and cost of moving them onto an adviser charge.

    On the other hand, if you have been selling bonds to all of your clients for the past few years, there is no need to do anything with the client post rdr as you can simply continue to receive the trail and do whatever fund switches are necessary.

  10. Suggestion – read the FSA policy statement as MM are implying.

  11. so, let me get this straight…….if we use life bonds rather than collectives, which may be a better option for the client tax wise, we will get to keep the trail when we make switches. if we use ISAs and collectives we won’t?
    i thought the whole point of this (other than the VAT income the government will make) was to remove product bias?
    I am not sure this will help……..?

  12. I find it baffling that people are moaning now, having had the opportunity (due to the consultation paper)… if you can bother to find your way to the FSA site the Policy Statement shows that not even 100 firms/organisations responded. As you don’t even make posts in your own name, then chosing to remain anonymous is akin to silence and acceptance. So all your too late gripes are nothing more than hot air.

  13. its not that bad, trail will continue rightly so, I read this relating to initial commission for top ups??? where a transaction is made following the advice process. So any ‘new’ work you do will have to be correctly costed and charged for.

    I still am not sure though but I think it relates to both bonds and collectives which is fair enough.

  14. Winston Churchill, when discussing invasion plans for D Day, with the heads of the Navy Army and RAF, requested these men to outline and summarise their plans on one piece of paper so that he could understand the concepts and aims of the plans

    When did a 40 page statement become the norm for what is in effect a simple set of rules which encompass most of the scenarios one could imagine being involved in when discussing clients existing investments.

    One page V 40 pages. I know which one made sense to Winston, this 40 page diatribe is just another nail in the IFA sectors coffin. I have tried to wade through it but the logic escapes me, why would any regulator want to restrict the consumers methods of paying for advice and services from the only sector of the FS industry dedicated to acting in the interests of consumers, not the interests of providers.

    I know which one I would prefer to read and if you can make sense of the gobbledegook way these rules are being presented, the only conclusion as the potentially paranoid Soren implies, is that the FSA is determined, prior to the inception of the FCA, to close down the majority of IFA businesses and place the distribution of financial products into the hands of banks and organisations which do not provide any form of consumer protection.

    It is also a restriction of trade. The FSA was not formed to restrict trade or to implement such rules, it is supposed to be a regulator, regulating the conduct of business, not closing down the iFA sector.

    I am in the process of putting together a viable woodturning business, which does not have such daft rules, put the wood on the lathe, turn it with an appropriate tool into a shape which can be sold as a useful product for the benefit of a consumer.

    FSA = Restrict the activites of IFAs to such an extent as they will leave the industry within a year of implementing RDR and disregard the consumers rights to cost effective IFA services and a system which has been the engine of growth in FS and market capital investment for decades.

    Change everything, ruin everything.

  15. So that’s nice and simple then!
    Apart from all the other RDR burdens on us, these divs also making the ongoing commission a nightmare to interpret.
    No doubt there willl be serious differences of opinion when an adviser finds his trail cut off unilaterally by a provider without notice and the provider blames the system. Another client visit required to explain the issue, more paperwork top sign off, yadah yadah yadah, all the while the thin profits we make eroded even more and the stress quotient inexorably rising as we try and keep out nostrils above the rising tide, shackled to the post of RDR
    No I’m not waving, I’m drowning

  16. I can never understand why so many advisers are getting their knickers in a twist with respects to adviser charging versus commission as any adviser operating over the last 15 years should have been disclosing their commission/fees to clients at the inception of the policy.

    So what’s the difference between a 3% initial commission with a 1% trail commission and a 3% initial adviser charge and 1% adviser charge?

    Answers on a postcard.

  17. IFA Centre, the new trade association for Independent advisers responded to the consultation paper.
    In responding I made an observation about a “market imbalance” between ongoing advice and investment services on bonds and other investments which has been ignored in this Policy Statement. A bond is a product. A portfolio of OEICS is not.
    Switch funds within a bond (set up pre-RDR) and the trail continues as the product hasn’t changed.
    Switch funds in a portfolio of OEICS and the trail (obviously) stops on the fund you sold, it continues on the remainder (i.e. unchanged part) of the portfolio, and the new fund(s) bought have to be subject to adviser charging for intial and / or ongoing charges.
    The only exception is where the rebalancing is totally automatic and is not an advised transaction (my latest blog on rebelancing and discretionary powers refers).
    So trail doesn’t switch off on a complete portfolio immediately – bu it will be eroded over time as you recommend fund changes for your clients and the pre-RDR element of the portfolio gradually declines. Clearly the change is more dramatic if you for example make a wholesale switch from growth to income at retirement for example …
    I hope this clarifies things for Anonymous 12:10pm …

  18. Sorry Gillian – it does not explain things. What happens say on Transact where you switch say 25% of a fund into another fund. Now new money, entire funds not switched. There are still many detailed tactical questions which remain unanswered. Is the 75% remaining subject to adviser charging?
    We did respond and none of our legitimate concerns have been addressed. And the most important unknown is how platforms and back office providerrs will implement all this and give us time once they have done it to produce a proposition for our clients.
    And the cost of it all!

  19. As an IFA, why would you not just go to your clients who are on legacy trail commission and discuss changing to an ongoing adviser fee? Then you can take ongoing income from a client’s fund based on an agreed and documented adviser/client discussion?
    I don’t see what the big fuss is all about regarding trail really. Most of the platforms/Wraps/providers now have the ability to pay a % of the assets as agreed remuneration irrespective of the funds under management. Then the customer knows exactly what they are paying for and can check that they are receiving value for money.
    The clue may be in the word “Legacy” . Trail commission should be a thing of the past and be gradually phased out of our models as we see clients and switch them over to ongoing adviser charging.

  20. Sam, the advantage you have by using Transact over many of the other ‘platforms’ (Skandia being one mentioned earlier) is that you are already being paid by an adviser charging contract with your client and not by commissions so this is all irrelevant to you and you will be able to switch funds as often as your clients want you to.

  21. Transact are not the only platform who has been operating AC for sometimenow – Alliance Trust Savings also has a purely AC model. Its the older ‘traditional’ platforms that will potentially struggle.
    This is and has been for a few years, a great opportunity for IFAs to reconsider their operating models and stop worrying abiout how BoS & Platforms are going to cope – they will have to to remain in business! Sort out your own house and start looking at the progressive services that are already out there.

  22. @Sam : the paper is very clear – if the investments are “just investments” i.e. not wrapped up in a pension or bond (i.e. a product) then if you switch 25% of the portfolio then any trail commission being generated from those funds will stop when you sell the pre-RDR fund and the new 25% will be set up on an adviser charging basis i.e. no new initial or trail commission from the investment funds. The 75% pre-RDR money will continue as a Legacy asset and is not subject to adviser charging and any trail payable will continue.

  23. The message is very clear and we may as well stop moaning and get used to it.

    All of our income needs to come direct from our clients and not from products.

    I understand that the FSA has a little treat in store for us all that is likely to mean that Adviser Charging won’t work for initial payments anyway.

    If your clients are paying for your services direct, you have a business going forwards. If they are not you will hit the buffers sometime soon.

    Remember, there is dancing in the streets at Canary Wharf for every IFA that ceases trading.

  24. So what you are saying Gillian is that you could have £5,000 in L&G property fund subject to pre RDR charging model taking 1% trail in a Transact GIA. Then you could add a further £2,500 in 2013 to L&G Property fund at 0.5% under adviser charging. We therefore are allowed to continue to have trail at 1% on £5,000 and 0.5% on £2,500 even though all money is in the same fund under the same wrapper on the same platform. And that platform will segregate the fund holdings so they can continue to pay trail to us at the appropriate level of trail?
    It really should be a case of Adviser charging applying to the whole account and not just the top up.

  25. Sam

    “It really should be a case of Adviser charging applying to the whole account and not just the top up.”

    Quite so. This easement allows advisers to do nothing but continue to receive trail for so doing. In fact it is far more rewarding to sit back and get your commission than do a proper job.

    Well that will suit quite a few advisers.

    Except that presumably the FCA will take any adviser to task who doesn’t do a proper job.

    So advisers will have to justify not switching as well as switching.

    I don;t really se why so many advisers get so aereated by all this, even if the FSA clarification is a waste of time and should have led to far more consistency of approach and a simler rule.

    Rule 1 From January 2013 advisers will have to agree what fees they will charge a client for advice and how much they chage for ongoing investment review advice.

    There are no other rules.

    Ian Coley
    Medical Investment Services

  26. Wow..Just how many people use the word “switch” rather than “sale & repurchase” when referring to non life or pension wrapped assets..

    I can only assume the people making that mistake refer the clients to an accountant

  27. So if you are in a network and want to leave then this will mean that If the Network states thatthey earn your clients and you want to leave – the trail will remain with that network. So if you remain with the network after this year your trail commission will be tied to them forever. Does everyone agree with this statement?

  28. James 5.05 pm

    I think that you have just shown why some people have to leave the trade !!!

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