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Leader: Are you prepared to lose a chunk of your revenue?

Natalie Holt website

In all the regulatory wrangling that surrounded the RDR, the then FSA’s position on trail commission took a long time to clarify. Advisers and providers were unclear of the rules on whether trail was acceptable, and what the triggers were for trail to be switched off. As a result, the regulator was forced to make rules setting out exactly when trail would be payable post-RDR.

The advice sector had time for a small intake of breath, before the FCA struck again in the form of the ban on payments between fund managers and platforms. The two-year sunset clause on legacy payments agreed as part of the reforms effectively switches off trail on advised platform business with effect from next April.

Finally, advisers understood that for the most part, trail on pre-RDR business would continue. Unfortunately, the situation was as clear as mud for anyone outside the advice bubble – one national newspaper journalist once told me the RDR was not an easy sell to consumers because the rules around trail and platforms made it a difficult concept to explain.

It is a situation that is about to get murkier still thanks to policymakers in Europe. Mifid II is a wide-ranging regulation that will impact how client calls are recorded, the definition of independence, consumer protection and the regulation of pensions, to name but a few.

What has got less attention is the significance of a ban on commission payments, which would switch off any commission, including trail, on all advised business in the UK.

There are several reasons why this issue has not come to the fore, not least because of a lack of definitive information from the regulator. There is disagreement between the FCA and trade bodies about how the rules should be interpreted, and whether the FCA has any scope to act outside the diktats of the European Commission.

Part of the challenge the regulator faces is that it would need to argue that keeping trail commission is in the public interest. This would also need to interact with the Government review into the advice market announced this week.

While many firms will be predominantly fee-based, advisers will need time and certainty of the rules to prepare for the loss of an average of 13 per cent of their revenue. Unfortunately neither are on the cards.

Natalie Holt is editor of Money Marketing

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Time for the FCA to earn their fees, otherwise the 13% drop in income may have a direct impact on their funding.

  2. If MIFID II is coming in during 2017 why is the FCA seeking to start this mess in March 2016. Libertatem has been asking for a moratorium on Trail for at least a year. The new Advice review makes this even more important.

    13% may be an average – my research found a number bigger than 50% for some firms.

    There a no winners in this – except some providers who will receive an extra 0.5%

  3. If I have understood this correctly it all looks like a storm in a teacup. Commission isn’t allowed but a fee is. So perhaps CAR will be too and remuneration can still be paid (with the client’s explicit agreement) from the platform. Even if it is not then just invoicing directly is no big deal, my old clients always had the choice and significant numbers paid me by cheque. It shouldn’t be too big a hurdle. Only perhaps for those who are a little coy about the amounts they are trousering.

    On the other hand if the client doesn’t think you are worth the fee then perhaps you need to have a serious rethink.

  4. Once we’re out of the EU we’ll be free from MiFid and all the other diktats imposed on us by Brussels. We’ll be free to run our own ship the way we want to. Bring on the referendum.

  5. Many readers will be aware that we have been concerned for some while about the impact that the removal of trail will have on businesses. The impact is varied, the threat real, in fact more real than even we realised.

    In December 2014, we worked on an impact study via a Panacea survey with Garry Heath who was working on the second edition of “The Heath Report”.

    The Heath Report Two (THR2) has been created to examine the consumer detriment caused by the regulator’s actions in introducing the Retail Distribution Review.

    As Garry says “It does not seek to be a learned academic document but to assemble in one place a clear description of what RDR has created and suggest lessons that might learnt”.

    The report also wishes to explain the social value of IFA sector and present the arguments for making changes in regulatory accountability to ensure that RDR represents the last time the regulator can abuse its power.

    THR2 has been created for the consumption of the financial services industry, its regulator and in particular the politicians who created an Act which has created a regulator over which they have no control – which in a democratic country is totally unacceptable.

    This journey started with a Panacea Adviser Conference in January 2014 at which the effects of RDR were discussed and in particular the way the loss of Trail commission might compromise a significant sector of the IFA community.

    Panacea Adviser completed a comprehensive survey in late 2013, 92% of respondents thought the removal of trail would be “catastrophic to the future of their businesses”. This survey has been repeated at the end of 2014 & the new catastrophic figure is 94%.

    In April 2014; the Panacea Team, Lee Travis from NMBA and Garry Heath met the FCA which dismissed the survey of 1,752 advisers, representing over 50% of the direct authorised IFA firms, as “unimportant

    At this April meeting, the FCA informed us that it would issue an internal review early in the autumn which we expected to be in praise of RDR.

    In the end, the FCA employed European Consulting and Towers Watson to produce and issue 2 lacklustre reports which were smuggled out in the week before Christmas to a distracted media – hardly the action of a confident regulator.

    These reports suggested that there was “no evidence of consumer benefit” leaving the FCA to opine that RDR’s “longer journey will benefit consumers”.

    This is reminiscent of Mr Micawber’s hope “that something will turn up”.

    The Interim THR Report was issued in September and gave ammunition to politicians on the Treasury Select Committee, to ask some uncomfortable questions of Martin Wheatley. It also found considerable traction in Europe and Canada; both of whom face regulators keen to follow this latest dangerous regulatory fashion. Interestingly, the RDR infection which started in Australia is now waning there.

    There will be a point at which RDR in the UK becomes untenable. And in turn your firm’s viability.

    I think we are nearly at those waypoints, download the full copy of the THR2 http://www.panaceaadviser.com/img/20/THR2_The_Abandoned_16m_March_2015.pdf.

    I think you will be very surprised, and especially those firms that thought they had no problems!

    As the Hendrix song goes: “There must be some kind of way out of here, said the joker to the thief”.

    But where?

    You can hear a podcast on the subject here: https://www.brighttalk.com/webcast/8117/147807

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