Kevin O’Donnell: FSA fear over long-term trail legacy

Money makes the world go round and too many people, regulators in particular, forget that it makes the IFA world go around too.

Without the incentive of earning a decent living and building up a valuable and profitable business, I doubt many IFAs would get out of bed in the morning and who would blame them? It is, after all, why most of us go to work and it is why the issue of legacy commission under the RDR is a vitally important one for the intermediary sector and providers too.

There are, of course, many reasons to go to work. Job satisfaction, learning new skills, self-esteem, career development, working with interesting people, mental stimulation, engaging with the wider world and so on. I am sure you can add a few, but fundamentally IFAs work to make a living and commission has been the mainstay of that living for over two decades and will, at least in part, remain important for many years to come.

Advisers’ ability to add to their income by selling commission-based investment products will, of course, end on 1 January 2013 when the RDR and its many changes arrive, not least of which is the banning of commission and the introduction of adviser charging. Most advisers have accepted the inevitability of this and are preparing for it, but the issue of what happens to the legacy commission contracts in place from previously-sold business is a thorny one and it is one the regulator has been consulting on.

The FSA proposals (CP11/26) on legacy commission closed for consultation last week and have been controversial, attracting quite a bit of unexpected flak from several quarters, among them the Investment Management Association.

The fund managers’ trade body warned that the FSA’s proposed guidance was “unclear and incomplete”, and could result in increased costs and less transparency for consumers. It said that there is a lack of clarity on when commission can and cannot be paid for legacy business in certain circumstances. For example, after 1 January 2013, if a consumer seeks advice on an existing investment and is advised to make no changes, can commission payments continue? It is one of several grey areas which need clarification, according to the IMA.

The IMA added: “Guidance needs to be clear as to which party is responsible for instructing commission to cease. Fund managers will not know whether or not advice has been given. They will be dependent on information provided by advisers, platforms or other distributors as to whether or not they should continue to pay commission.

“The IMA has consistently urged the FSA to introduce a sunset clause, after which time all commission payments would cease. Otherwise there is a risk that consumers will be left in unsuitable investments indefinitely while advisers continue to receive commission.”