Last week, Money Marketing revealed that Clerical Medical had written to 2,000 clients to check personal details and ask if they were still using the IFA who had advised them on the product.
Following this, Clerical Medical cancelled the trail commission paid to the advisers of several hundred clients.
Anand Associates financial architect Bhupinder Anand is disappointed by Clerical’s decision which he believes could hit advisers hard.
He says: “This decision is crafty, nasty and not playing by the rules of the game. The root of the problem lies with the perception of trail commission itself. In the past, it was deemed to be for the benefit of the clients but in fact it really comes down to building value for the adviser’s business. Clerical Medical risks devaluing the future business of IFAs who are based on trail commission.”
Professional Partnerships director Gill Cardy says: “I understand the intellectual argument it is making but unless Clerical Medical is promising to advise the client in return for pocketing the 0.5 per cent – and I don’t think it is – it is disingenuous to turn off the income to the adviser.”
A Clerical spokesman confirms that the commission will not be rebated to the client. He says: “If the customer does not have an IFA, we put trail commission in suspense. This can be paid to a new IFA that gives ongoing advice about Clerical Medical products. We support IFAs by not giving customers a discount if they do not have an IFA.”
Clerical says its regulatory obligations force it to act if it receives information that the client is no longer being serviced by the IFA.
The FSA is examining the wider issues around provider and distributor relationships and the remuneration for distributors. A spokesman explains: “We expect providers to review their distribution channels by collecting and analysing appropriate management information and assessing the performance of the distribution channels through which their products or services are being distributed and acting when they have concerns.
“We expect distributors to comply with any contractual obligation they have to the customer, for example, to provide ongoing advice or periodic reviews. If there was an expectation given to customers that ongoing advice would be given, then failure to do so is likely to be a breach of the requirement to treat customers fairly.”
Uncertainty over TCF requirements is high among IFAs, despite recent guidance and case studies released by the regulator.
Cardy says the current lack of clarity around TCF could potentially cloud the client’s perception of the value of advice given by an IFA. She says: “Say I provide customers with information and services and give them access to online valuations, this might not strictly be called active advice but it is all part of the service.”
Prudential, which claims it has no plans to change its remuneration strategy, says the episode shines a light on an area where the industry needs more guidance from the FSA.
Spokesman Darragh Leeson says: “The issues raised by the Clerical Medical decision fall into a grey area and one that advisers and providers alike need clarification on in light of regulatory and TCF considerations.”
Pharon director Nicholas O’Shea says the real repercussions of Clerical Medical’s decision concern the client. He says: “It will be detrimental to the client who will be orphaned as they will no longer receive a service. This is a breach of contract and fundamentally wrong. In any case, who is Clerical Medical to judge? Surely, it is down to the individual policyholder?”
Other providers remain supportive of current commission-based remuneration for advisers and say they have no plans to axe trail commission in such circumstances.
A Skandia spokesperson says: “We are constantly evaluating the remuneration package we offer to advisers and clients but have no current plans to remove trail commission from advisers.”
Aegon and Zurich both say they have no plans to follow in Clerical’s footsteps. Zurich says it will continue to support advisers by providing its current remuneration options to advisers and clients.
Zurich UK life business development director Tony Solomon says: “As a provider, we recognise it is important to support advisers as they make the transition towards a fee-based business model. We believe the move towards a fee-based approach and adopting customer-agreed remuneration will create greater transparency and will help build long-term relationships between advisers and their clients.”
The company notes that it is seeing more and more advisers looking to trail commission as their preferred method of remuneration to create long-term value in their business.
Bloomsbury Financial Planning partner Jason Butler says the move by Clerical should serve as a warning to advisers who are relying on trail commission as a basis for the future of their business.
He says: “The value of a business should not be based on the renewal commission you get from a third party, it should be about the service that an adviser provides to the client and what that client is prepared to pay directly or indirectly.”