The FSA has refused to relax its ban on legacy commission under the retail distribution review despite providers’ concerns that it will cause consumer detriment.
The regulator published its consultation on the treatment of legacy assets after the RDR last week. It confirms that trail commission, defined as ongoing commission payable for advice provided before December 31, 2012, will continue.
However, legacy commission – additional commission payable where there have been changes or additions to the product after December 31, 2012 – will be banned.
Advisers will no longer be able to receive commission generated by top-ups to a life policy and the buying of new units in a unit trust.
The FSA has been holding discussions about legacy assets since it wrote to trade bodies in March saying trail commission can continue for ongoing advice but legacy commission will be banned.
The letter prompted widespread concern among providers who had been working on the assumption they would only have to amend their systems to cater for adviser charging on new business following the RDR.
In the consultation paper, the FSA notes providers’ feedback that it would not be worth amending all of their old systems to cater for adviser-charging and the ban on legacy commission.
Commission is currently generated automatically on top-ups to existing investments. Providers told the FSA if the ban on legacy commission is not relaxed, customers will lose out if providers decide they will no longer accept top-ups. Alternatively, providers said if they did accept top-ups, they will keep the commission as it would be too expensive to reprice the contract. The customer will end up paying twice for the advice, through adviser charges and commission.
The FSA says: “Allowing legacy commission to continue could perpetuate bias in the market, with advisers having a vested interest in recommending that customers continue to hold legacy products or to increase payments into them.
This would potentially create a systemic bias towards top-ups into existing products. We therefore consider that it would not be desirable to relax the ban.”
Legacy commission will remain payable for non-advised sales, although the regulator says it will consider intervening in the non-advised market if biases start to emerge after the RDR.
Increases to regular contributions and fund switches fall under the legacy commission ban. The FSA says it is likely that advisers re-registering a client’s assets from one platform to another will be able to receive commission. Legacy commission will also continue for firms providing discretionary management services, which make changes to an investment without advice, and for reinvested dividends without advice.