Uncertainty around the treatment of legacy products after the retail distribution review means it is difficult for providers to ensure customers’ best interests are served.
The FSA has stated that legacy business is exempt from RDR rules, including increments to contracts sold before the RDR that would attract commission. However, it has hinted that this issue is still under discussion with mounting pressure from the industry on the FSA to provide clarification.
Although the majority of rules are now clear, delay on the legacy issue is driving continued uncertainty with boards, senior executives, programme managers and designers already struggling to deliver business change thanks to the RDR, Solvency II and pensions reform.
Clarity on this issue is required to ensure the major providers are compliant on time, to ensure distributors can be certain of their future cashflows and to safeguard customers’ interests.
The specific areas where clarity is needed covers the whole value chain from the customer to the fund manager and include the following:
- Increments to investments sold prior to the RDR are set up to pay initial and trail commission. Will these payments be permitted after the RDR? Will an ongoing service need to be demon-strated to attract the commission?
- lIf the FSA bans cash rebates, will receipt of cash rebates be permissible on business sold prior to the RDR deadline?
- Changes to existing funds, including transfers, re-registrations and fund switching will in future attract an advice charge but whether a commission is still permitted on such changes on business sold before the RDR is unclear.
Providers will need to invest in rationalisation and simplification of their products after the RDR to reduce the scope for customer confusion on the legacy/new business distinction.
The industry must seek solutions to these unresolved issues, even in the absence of further FSA clarification. Providers must secure their existing change programmes to ensure they have a viable business model come January 1, 2013.
Providers also need to explore potential scenarios for legacy business, both for compliance and for comm-ercial viability, and plan how to implement the solution that is both compliant and delivers value to customers.
Finally, providers must define their legacy business model, including how best to deliver profit to fund new business, how to achieve the most effective deployment of technology to improve transparency of charges and demonstrate value to the customer.
Mike Eaton is head of RDR at KPMG