The FSA has rejected industry concerns that its ban on legacy commission will lead to churning due to providers’ inability to switch off commission generated on top-ups to existing investments.
The regulator published its consultation paper on the treatment of legacy assets under the RDR last week. It confirmed that legacy commission, paid in cases where there are changes or additions to a product after the RDR, such as topping up a life policy or buying new units in a unit trust, will be banned.
Providers’ systems are currently set up to automatically generate commission on top-ups to existing investments. Concerns have been raised that if providers cannot turn off this commission they will stop taking top-ups on existing investments altogether.
Alternatively, providers could continue to accept top-ups but not change their pricing systems, meaning clients would effectively pay twice through adviser charging and commission factored into the price of the product.
Speaking to Money Marketing last week, FSA head of investment policy Peter Smith said: “I do not accept that providers will not be able to turn off commission on legacy products. They clearly all can because despite IT being complex, system changes are possible. Our view would be that they can switch off commission.”
Aifa policy analyst Jacqui Thornton says: “Our fear is this might lead to increased recycling in the market, particularly with regular premium products. Also if clients end up paying twice, through commission priced into the product and adviser charging, that cannot be good advice.”
Informed Choice managing director Martin Bamford says: “We have examples with providers where we or a previous adviser established pension products years ago. When we try to top those up, they cannot accept our new instruction for adviser-charging, they simply pay us whatever the original commission basis was. I cannot see providers being able to handle this with their current systems.”