RDR rules to create ‘zombie’ asset books

The FSA is expected to permit some ‘legacy’ investments - made before the RDR comes into force in 2013 - to continue to pay out commission post-2013.

However, advisers will not be able to receive ongoing commission – known as trail – from either assets invested after the RDR deadline or some pre-RDR investments that are altered as a result of new advice under the RDR.

Gary Withers, EMEA managing director at the firm, said this will create difficulties for companies with large books of legacy investments and could lead to firms selling off their pre-RDR business in a similar fashion to the selling of so-called ‘zombie’ books of closed life assets by life and pensions firms.

He said: “The debate that’s going on with the RDR is how does it apply to existing books of business? Commercially it would be very difficult if existing business is effectively repriced.

“There has got to be some period of switchover at least, but I think [the RDR rules] will eventually just be for new business. The industry could develop like life businesses with some run as legacy businesses and some as more active participants.”

The FSA is still grappling with the question of how to treat commission on products sold pre-RDR that receive new advice, and has come under fire for issuing unclear guidance.

In addition, investment management companies are split as to which model of ‘clean fee’ share class will be appropriate post-RDR – some have stripped out both platform fees and commission, while others have chosen just to remove commission.

First State has yet to decide how it will price its products following the implementation of the RDR from January 1, 2013, Mr Withers added, but will “wait for the debate on platform fees to conclude and then follow the industry”.

Last week, Legal & General Investments’ managing director Simon Ellis warned the amount of regulation from the UK and Europe would slow down the ability of firms to launch new funds, but Mr Withers played down the effects of regulation on First State’s operations.

Although, he said financial services companies may face more challenges when attempting to passport products into other European jurisdictions.

Mr Withers said: “Passporting funds will involve much more negotiation with regulators. [But] the most important thing now is to respect the individual countries.”