A large part of the problem in the FSA’s treatment of commission is its different use of terms to those widely-used in the industry.
Most intermediaries refer to ongoing commission from an advised sale as ‘trail commission’, and this refers to commission on the initial investment and that on any changes or top ups made afterwards.
In its Consultation Paper (CP11/26) on RDR adviser charging and the treatment of legacy assets, published in November last year, the FSA separated trail commission from legacy commission and defined them as such:
- ‘trail commission’ – by which we mean ongoing commission that is payable for advice provided pre-RDR, and which normally continues to be payable while the client holds the investment concerned;
- ‘legacy commission’ – by which we mean additional commission that might have become payable in relation to legacy assets where there has been a change or addition to the product or investment post-RDR, such as a top-up to a life policy or the buying of new units in a unit trust.
Short-lived use
In its most recent policy statement the FSA drops any explicit reference to legacy commission, perhaps realising nobody actually used the term.
The very fact they coined it would seem to be nonsensical because it is not going to be allowed in the post-RDR world and was not widely-used in the pre-RDR one.
“It is not a phrase we use,” says Gavin Haynes managing director at Whitechurch Securities, “We call it trail commission.”
To avoid any doubt, commission will not be allowed on top-ups to an investment, but advisers will be allowed to change platforms and still receive a commission if the underlying investment is unaffected. If an investor changes adviser, trail commission will be paid to the former one until the new one switches out of the previously held investments, then it will cease.
Perhaps the biggest concern and one voiced by Ian Cornwall, director of regulation at the Association of Private Client Investment Managers and Stockbrokers, is the lack of incentive advisers will have to switch clients out of funds paying trail commission that are no longer fit for purpose.
The FSA has said it will keep a supervisory eye on this, but in practice Cornwall says it will be hard to sort the wheat from the chaff.
As Haynes says: “Advisers will have a large incentive to let sleeping dog funds lie”.
Do you think this is a genuine risk? Or are these fears overstated? Let us know below…
