The Financial Services Authority (FSA) has published a new Consultation Paper this morning, proposing rules for the treatment of commission payments to financial advisers at the end of next year.
CP11/26 explores the treatment of legacy assets once the Retail Distribution Review (RDR) is implemented on 31st December 2012.
Within the paper, the FSA defines ‘trail’ and ‘legacy’ commission, before describing the new rules that will apply to each.
Trail commission is the ongoing commission paid to an adviser which remains payable for the duration of the investment. Legacy commission is any additional commission that becomes payable when there is an change or addition to an existing product, such as an investment top-up.
In simple terms, the new rules mean that trail commission can continue to be paid and payments of legacy commission will be banned.
Where an investor switches adviser, either individually or because the business of their existing adviser has been purchased, the trail commission can continue to be paid. If this happens, the new adviser will need to disclose the trail commission payments and ensure they provide a proactive ongoing service in return for the remuneration.
The legacy commission ban will only apply to advised sales on or after 31st December 2012. Non-advised sales, where the investor makes their own decision to top-up an investment for example, can continue to pay legacy commission to the adviser.
We believe there are two big risks associated with this legacy commission ban.
Firstly, it could lead to the churning of investment products previously established on a commission basis. There will be situations where the most suitable course of action is for an investor to top-up their existing investment, rather than surrender it and reinvest the proceeds in a new policy.
Secondly, we can see a scenario arising where advised sales are described as non-advised sales, in order for the adviser to get round the legacy commission ban and continue to get paid the commission.
It is going to require proactive monitoring by the FSA to ensure these two risks do not become widespread activity at the end of next year.
Here at Informed Choice, we support the commission ban being introduced on 31st December 2012 and believe that a properly managed legacy commission ban also makes sense. It will lead to a far more transparent outcome for the investor, with the influence of commission removed from decisions about product recommendations.
What investors will need to ensure between now and the end of next year is that their financial adviser is not trying to exploit a window of opportunity to sell products in return for high commissions.
As we saw with the Which? investigation today, there are still financial advisers out there who feel it is acceptable to sell investment products paying opaque commission of over 8% to unsuspecting investors. This sort of behaviour needs to be stamped out by the FSA now, rather than waiting for the Retail Distribution Review to come into force next year.
Photo credit: Flickr/The Wandering Dutchman
