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Linda Smith: Clarifying trail commission on legacy business

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There has been misunderstanding in the advisory sector over the suggestion that trail commission is being banned for all investment business. This is not the case.

It may have been prompted by the rumoured position on the payment of trail by some providers or by the FCA’s consultation in September which proposed amending the rules on platform charges.

To test the water around providers’ intentions, we asked a number of them how they were managing trail now and if they had plans to change in the future. Those that responded confirmed they had no intention of switching off trail under the current regulatory framework. A list of respondents and their comments can be found in the members’ area of our website.

In respect of platform charges, the FCA aims to bring more transparency to the charging structure. It is amending its rules to ensure that platform services will be paid for by a platform charge which is disclosed and agreed by the investor.

A ban on rebates to platforms will come into effect for new business from 6 April 2014 but transitional provisions allow platforms to retain legacy payments from providers for existing business until the two-year sunset clause expires on 5 April 2016. 

The FCA makes it clear that it is giving firms this extended period for legacy business to allow movement of existing investments to the new explicit charging model on a gradual basis.

Funds that are clean of payments to platforms are already available on the newer platforms but we believe that the more significant impact for advisers will come from funds held on older platforms where advisers are paid from the rebates. While legacy trail to advisers is not in itself being banned, we are unlikely to see the introduction of new share classes which cut out the platform charge but retain trail for intermediaries. New classes will be completely clean and will not be priced to include a payment to advisers.

The rules banning rebates are in place now and securing advisers’ income streams in a way that is consistent with the current regulatory regime should be the priority. Many firms are already moving clients onto new fee arrangements when the opportunity arises, such as at a scheduled review. Advisers tell us this is manageable with active clients but more difficult with long-lost clients.

Depending on capacity, some advisers are using the change as an opportunity to get back in touch with clients whom they have not spoken to for some time and either make them profitable or lose them completely. Although some are predicting dire consequences for their business, early action now to mitigate the impact should make the change manageable.

Linda Smith is senior technical adviser at the Association of Professional Financial Advisers

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