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Legacy ban could cost insurers hundreds of millions

The FSA’s ban on legacy commission is likely to cost insurers hundreds of millions of pounds.

Insurers have told Money Marketing the necessary systems changes to comply with the ban on legacy commission will double the FSA’s estimated costs of introducing adviser charging.

Zurich believes if system changes were made on all legacy products, the costs of the RDR “would comfortably more than treble”.

The FSA’s consultation paper on treatment of legacy assets last week confirmed trail commission for ongoing advice after the RDR will continue but legacy commission for changes to existing products after December 31, 2012 will be banned. It follows a letter sent to trade bodies in March clarifying the FSA’s stance. Until then, many insurers had assumed they would only need to change their systems for new business.

The FSA says the costs have already been priced in to earlier adviser-charging cost estimates from March 2010 which estimate one-off costs to providers of between £330m and £385m and ongoing costs of between £70m and £85m.

But Legal & General platforms and policy director Danny Wynn (pictured) says: “The ban would certainly double the costs we were intending to spend on adviser-charging. If we were to try to keep the entire legacy book open for advised top-ups and facilitate adviser-charging, it would more than double our costs.”

Aegon head of regulatory strategy Steven Cameron says: “I do not believe any providers that provided costs to the FSA a couple of years ago thought that what the FSA is now doing on legacy commission was what to expect.”

Aviva estimates its current RDR spend will increase by 25 per cent if all legacy products were changed to comply with the ban.


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Derek Bradley CEO PanaceaIFA 25th November 2011 at 8:58 am

    Another unintended consequence of RDR?

    How much more money must this cost? And why?

  2. Total madness. How about the FSA try my solution that will cost nothing:

    1. IFA agrees fee with client
    2. Insurer pays legacy commission
    3. IFA either refunds overpaid commission or bills for balance of fee.

    No systems problems, no bias from one product to another. What’s the problem.

    If the FSA persist on this line the providers will simply ban increases to existing problems and that will be truly detrimental to consumers.

  3. Sorry – fast finger typing – last line of previous post should have been ‘products’ not ‘problems’ – although that is doubtless what they have become.

  4. Has no one woke up to the fact that the FSA could not give a monkeys about any costs incurred in what they want as regards their pet projects. It does not matter to them as they will not have to pay for it. All these extra costshave to come from income, less profit, dividends go down,people dont invest, less tax for the economy. Do they never look at cause and effect in the long term.

  5. surely all that will happen is that insurers will do a review of their existing business and close to new business any legacy line of products where it is not worth changing the systems. So the result of this will be less choice for the client.

  6. RDR needs to be delayed. Taking away a large percentage of my business ive worked so hard to build over 27 years is a disgrace, Making the insurance industry pay hundreds of more millions of pounds to implement this is also a disgrace because ultimatly the clients will foot he bill.
    Please sign the on line petition ASAP,we need 100000 signatures, 30000 IFAs and a few clients each will do it, heres the link.
    By the way, ive studied hard and took my exam on Wednesday, RDR is NOT just about exams!!!!!

  7. could’nt agree more with Terry @9.43

    Such a disgraceful and throw away remark that it’s only going to cost betwwen £330-385m, very easy to say when its not your money.No thought for anybody,the Insurers, Avisers and the Client.Mind when did they last think!!

    Idiots running the asylum

  8. @Dave at 9:48

    Agreed. This is a very serious issue especially where a client’s health has changed. This needless bureaucracy may prevent clients taking advantage of the contractual guaranteed insurability on legacy contract.

    If this nonsense actually comes to pass, perhaps affected clients (or their bereaved families) may challenge the legality of the FSA’s actions. After all, the client and the insurance company made a contract which the insurance company would then not be able to comply with, at least in the conventional sense, because of the FSA’s actions. Perhaps insurers will make ex-gracia payments to such clients post mortem (net of the uncollected premiums) on the basis that it is cheaper to do that than update their systems. But then if they do that, they will not have collected the adjusted premiums and will be cross subsidising business in the interim in conflict with one of the key points of RDR. Also, they will not be treating their other policyholders or shareholders fairly.

    I think we’re all beginning to see why commission works so well.

    Oh, dear. This really is becoming a mess.

  9. It’a about time that more MPs exert pressure on the FSA. Banning legacy comission will have a seriously detrimental affect on all financial services business. Enough is enough now Mr Sants, listen to what’s being said!

  10. Well I suggest all aggrieved providers and IFA’s seek authorisation in Europe and we can then pay our fees to regulators who aren’t intent of destroying or industry at our expense. I’d even be prepared to pay FOS fees to give my clients some UK protection with the regulatory fees I’d no doubt save and my big fat commission payments which would then go unchecked (PS – I was lying about the commission Mr FSA!).

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