With the remuneration profile of the financial services industry moving away from up-front indemnity to longer-term payments of renewal commission, it is wise to look at the basis of the new payment stream.
Already, we have seen that life office and unit trust managers do not apply the payment of renewal commission uniformly. Some will transfer the contract renewal to a new adviser and some will lock the commission in until the original broker cedes the agency.
It is all very unfriendly to the client who has, after all, agreed to the payment of renewal commission in return for ongoing service.
The irony of the spat that has been seen over recent times on rebates of commission to clients by discount brokers is that it fundamentally forgets the client.
The contractual basis of renewal
The contract between the provider and the client allows for payments to be made between the client and the adviser. The client enters into the contract after having the basis of remuneration to the provider and the adviser disclosed in the key features and illustration.
The client and the provider are key in this relationship. The adviser at this point has no contractual role as the payment of commission is an element agreed between client and provider.
Moreover, the adviser's contract with the client is based upon remuneration on an agreed basis, usually from product commission.
The provision of renewal to a broker who no longer advises on an investment seems illogical in the extreme. The fact that the client can authorise a trans- fer of servicing rights to a new adviser logically means that with it comes both the benefits and burdens of the contract. One of the benefits of the contract is the payment of renewal commission to the current adviser.
What is highly unfair is the fact that clients are not aware that they are being asked to agree to pay the original broker renewal commission even if they are not advising any further.
Legal issues surrounding protected renewal
Standing back for one moment, those providers which allow this practice are seemingly forgetting who owns the investment contract in the first place.
A contract between a client and a provider merely lays down the delegation of the investment management and charging structure on a product to the provider. What it does not do is give the product provider the ability to make decisions as to who and who is not to be remunerated for ongoing advice.
First, the locking in of commission equals paying for a service but not getting any. Second, a client has the ability to challenge any contract term locking in renewals to the original broker on the basis that it offends the Unfair Contract Terms Act 1977.
Although commercially locking in renewal commission has an advantage, it seriously hampers client choice.
I would suspect that a provider or original broker arguing that they are entitled to the lock-in without showing evidence that they made it clear to a client would fall on stony ground.
I have not seen a challenge to protected renewal on the basis I have set out but would expect one to be successful on the basis that judges are not in the business of sanctioning the use of client money without clients having some say and control in the manner it is used.
I doubt that reason-why letters are filled with paragraphs which spell out in no uncertain terms that by choosing XYZ provider you pay part of your ongoing cost to someone who may never work for you again. Any renewal-protected product borne of a reason-why letter without this explanation is vulnerable to challenge.
The new regulatory regime is about consumer choice and flexibility.
Protected renewals do not sit square in a consumer-friendly world. One angry client and that in my mind will be the end of them.