Commission payments to continue post-RDR
The Financial Services Authority has clarified when financial advisers can accept trail commission on products they advise on, post the Retail Distribution Review, which comes into effect on 31 December.
The RDR effectively bans advisers from taking commission from product providers as payment for recommending their products to consumers.
However, there has been a question mark over whether advisers will be able to accept trail commission – which is often around 0.5 per cent paid out every year – after the new rules come into effect, for recommendations they make prior to the RDR.
The FSA has announced that advisers may accept commission after 30 December 2012 if the recommendation to invest was made on or before 30 December, and there has been no change to the product or additional investment. They will not receive commission on top-ups or increases in regular payments to investment products.
So for example, a client has an investment of £10,000 today. They are advised in February next year – after the RDR rules have come into effect – to pay in another £10,000. In this instance, trail commission can continue to be paid on the original £10,000 but the new advice can only be paid for through adviser charges, with no additional commission on the new investment.
The FSA also said that trail commission can still be paid when there is a fund switch within a life policy, as technically there is no change to the actual life product itself.
‘Given that the trail commission relates to the product as a whole, we consider that the ban on new commission post-RDR does not affect the payment of trail where the product itself is unchanged, with no new money being paid into it,’ the FSA said.
However, the City watchdog warned that it would be watching the market in the run-up to the RDR being implemented to ensure that advisers were not switching their clients’ assets into life products to take advantage of the trail commission, or leaving them in a trail commission-paying product rather than switching them into a cheaper alternative after the RDR.
‘Once the RDR rules have come into force, we will take action if we see firms acting in a way that could lead to consumer detriment; for example, recommending the retention of higher charging products so they can continue to receive trail commission. We will also monitor the overall level of trail commission in the market, to check whether it is reducing or remaining at current levels,’ the FSA said.
What is the RDR?
The FSA has been analysing how financial advisers give advice to consumers for several years now. One of its conclusions was that the commission paid by product providers to advisers for recommending their product can result in ‘commission bias’. This means that consumers may be sold a product because it pays a high level of commission to the adviser, rather than because it is the best product for the consumer.
So from 31 December, advisers will be barred from taking commission as payment for advice. Instead they must explicitly state how much their advice costs and whether this advice is independent or whether their recommendation are restricted to the products of one or several providers.
There are ways to get the trail commission rebated back to yourself. Some advisers rebate some or all trail commission, such as Chelsea Financial Services and Bestinvest. Cavendish Online - which uses the FundsNetwork fund supermarket - also rebates 100 per cent of trail commission in exchange for a small fee.