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HSBC ordered to repay trail commission for lack of ongoing advice

The Financial Ombudsman Service has ordered HSBC to repay trail commission to a client who did not receive ongoing advice.

The bank was ordered to repay the 0.5 per cent trail commission and £350 for stress and inconvenience in a FOS final decision notice issued in August but only published this week.

Mr J had transferred his pension to HSBC in August 2006 in unsecured drawdown. He took his tax-free cash between 2006 and 2008 and left the rest invested.

In 2009, Mr J contacted the bank to ask for advice about withdrawals but complained of poor service and an inability to get a review.

In April 2013, HSBC acknowledged it had not met expectations. In December 2013 it offered to refund all trail commission from 2009 – when the tax-free payments stopped – plus a gesture for stress and inconvenience.

Mr J rejected the offer as derisory and demanded a full refund of trail.

FOS has instructed HSBC to repay all trail but it can retain its initial adviser commission for setting up the transfer.

Ombudsman David Ashley says HSBC had not provided an “appropriate” level of service.

He said: “Having moved his not inconsiderable pension funds to HSBC to ensure an adequate income in retirement, he was effectively left to fend for himself. Attempts to gain a review at a time when it was most needed proved unsuccessful.

“So although I accept that the first two payments of tax free cash were paid, I agree with the adjudicator that largely, no further service was provided after the contract had been arranged.”


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. There must be more companies that fall in to this category, especially those whom have continued to receive payments after advisers have left, retired, etc…

  2. Of trail is turned off, then a 15 year longstop needs to be applied from turn off as a minimum.

  3. This is the very news that Lloyds/Scottish Widows have been dreading. Question is though who will fight the corner of the average man/woman on the street who invested with them, then lost their financial adviser when they were made redundant? We need to step up as IFAs and get this money back. There should be an apfa organised campaign of some kind

  4. Agreed Victor M but this is in part what the sunset clause is there for. If you are servicing your clients move them to agreed fees, if not why are you receiving ‘servicing’ income.

    Yes there are circumstances where moving to fees is difficult or could be detrimental to a client I understand that but as an industry there are too many clients paying advisers they never speak too anymore for ‘service’.

  5. Trail is not and never was designed as “servicing income”. As businesses we want to make sure we can do our best for clients and in return receive additional business when it is in their interests. Trail was there as an option to defer higher initial commission.

    This sets a very serious precedent in as far as FOS have now “ruled” that trail commission was there to cover ongoing service and this opens up a can of worms.

    I am not trying to defend the bank refusing to provide service to the client in any way but this is just another classic example of FOS being able to do whatever they like with no from appeal process in place.

  6. @Dazz – I think you will find the sunset clause only affects platforms and if the drawdown was NOT platform and was an insured contract, this would not apply.
    I don’t disagree with the thrust of your implication that many newer firms used trail to cover on going advice, but Marty is right, trail WAS delayed initial and the FOS are interfering in contract law. I suspect this case will be appealed if there is scope for it, but the case needs to be looked at carefully to see if HSBC DID commit to on going service and advice in return for the trail first.

  7. I suspect it would surely come down to what HSBC determined the trail commission as being for.

    Yes, it’s essentially deferred initial commission but perhaps the TOB / advice said HSBC would service the client in lieu of it???

  8. It has always been pretty much standard practice amongst the banks to take as much initial commission as they could get away with and slip in some trail as well on the basis that the client was very unlikely to notice it or, if he did, was even less likely to try to quantify it or to ask just what would be provided in return.

    The original adviser who set up this arrangement has very probably long since moved on to other things and it almost certainly didn’t occur to the bank that they might be under any sort of obligation to appoint someone to provide anything in the way of ongoing service. The original adviser wasn’t doing so, so why would the bank bother to nominate anyone in his place?

    Over the years, I’ve picked up clients who’ve been in just such situations, one of whom repeatedly telephoned his bank, leaving increasingly angry messages that somebody should call him back. All his messages were persistently ignored, probably in the hope that he was just some temperamental old codger who’d eventually give up and go away.

    That’s the way the banks work, isn’t it? We’ve all seen it. Though I still think that the FSA@s RDR should have allowed Customer-Agreed Commission as well as C-A Adviser Charging, the judgement on this case appears to me to be a good one.

  9. Very hard to understand whether this was a fair decision by FOS without knowing the full facts. How much was the commission on the “not inconsiderable” pension fund? Was there an agreement with the client that HSBC would give up initial commission in return for trail? HSBC could have felt quite justified in not carrying out the significant work required for a drawdown review for, say, £200p.a.

    Nevertheless, advisers have a duty of care to clients and HSBC shouldn’t have let the client believe that he was benefiting from ongoing service when none was being offered. If they believed that the commission income was insufficient to provide the client’s service, they should have managed his expectations before the situation arose.

    Interesting that Mr J complained of poor service in 2009 and HSBC acknowledged their failings in 2013. Nice to see their complaints procedure working so swiftly.

  10. Some advisers sacrificed initial commission for trail commission. Trail commission can sometimes be seen therefore as payment for the initial advice.

  11. @Marty, ‘is it a servicing commission or a deferred initial commission’? that depends on what the commission agreement actually said. In some instances trail (by unit deduction or not) is a servicing commission payment being contingent on the client continuing to receive ‘service’ from the adviser (ahem…bank in this case). Its up to the client who their adviser is and who gets the ‘servicing trail’ in this situation.

    There were also agreements on a deferred initial basis where the ‘agent’ was guaranteed to receive an amount back and was not contingent on the customer.

    All I’m saying is that there are many types of ‘trail’ and when disputes arise it depends on what contracts and commission agreements say. I don’t know the details of this HSBC case but it was probably a contingent on service type.

  12. It should depend ENTIRELY on the TOB or client agreement. Mine has always said that no further advice would be given unless requested…… No initial – all trail in lieu of. Of course we should provide ongoing service but it is one thing to do this voluntarily and another to be contractually required.

  13. @Bones -Ours said no on going service or advice until we changed to a fee basis pre RDR, at which time payment for service was linked to the service and is why I would argue a longstop MUST apply clock start ticking where the consumer ceases paying for a service if the advice is the product, this becomes logical as it is the consumers choice not to get their boiler or car serviced and the same should apply with suitability on going.

  14. It is interesting that the adviser had to ” Repay Trail Commission “, as I understand this is a contract between the Product provider – and The Adviser – for which the Client SHOULD PLAY NO PART ! The remuneration agreement between product and provider is a result of their ” Agency Agreement ” – which the FCA and FOS appear to interfere in areas which are none of their bleedin’ . . . .business. Secondly, the clients agree to the remuneration package up front and the illustrations provided reflect these charges – which the client is aware of and agrees to – until they change their mind – and send in letters of complaint . I am unaware of the background but if a clients is found to be ” entitled to Trial Commission ” he or she should have an agency agreement with the product provider – instead of the Sinister attack by unethical and dysfunctional individuals – willing to waste everyone’s time – including a Regulator ( FCA ) and Ombudsman ( FOS ) – who are not up to the JOB. The Law on Agency is clear ! It seems the FCA and FOS are unaware of the Law of England ( or Scotland ). My understanding is it is illegal for commissions paid – to be passed to clients ( under Breaches of Law ) – and these should be removed form the individual – who has gained an ” unfair advantage “, and an ” unfair financial advantage “, as a result of their deceit – with help and assistance form Sir Nicholas Montague ( Chairman of FOS ) and his treacherous colleagues at the FCA. Keep it Real – gents !

  15. @phil Agree completely. The position post RDR is quite different. trail CAR ( don’t get me going about fees not yet really being fees, but rather commission in another form) needs to be justified by service.
    If HSBC were daft enough to make a promise that they did not keep then the FOS are correct. If HSBC did not promise any ongoing service then ,unless contract has no meaning, the FOS is not correct.

  16. Given that this relates to a drawdown plan, it speaks for itself that ongoing reviews were necessary for what is classed as a higher risk transaction, even if only tax free cash had been taken to that point.

    Whatever the rights and wrongs of treating trail as servicing payments or deferred initial payments, there is a responsibility to ensure that clients do not self advise on more complex matters, unless they specifically state that they understand the risks involved, in which case they do not need an adviser and no reviews are necessary.

  17. Why was my last comment not published? I have received nothing from Money Marketing to say it was declined or that it was contentious. This is censorship without consultation. Do I have to email the journalist direct to get my reaction and response across. Feedback would be polite Money Marketing…come on!

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