FSA is back on the trail of commission

Last month the FSA published (PS12/3) further clarification and useful examples regarding when advisers can receive trail commission, post-31 December 2012, payable on legacy assets purchased by clients before the retail distribution review comes into effect.

Rules made in September 2011 confirmed that payment of trail commission can continue on pre-RDR assets and PS12/3 cleared up a misunderstanding by some who thought that any new advice on a legacy asset would always lead to all commission on the whole product automatically being switched off, which is not the case.

The FSA also identified further confusion on cases where new advice leads to no changes being made to a product, and also where the advice relates to fund switching within a life insurance product such as an investment bond.

Given that the adviser charging rules apply only where a personal recommendation on a retail investment product is given to a retail client, commission can continue to be paid on any increases to the investment or on fund switches where no new advice is provided.

New guidance in Cobs 6.1A.4AAG says that a firm can continue to accept commission after 31 December 2012 if there is a clear link between the commission payment and an investment in a retail investment product that was made by the retail client following a personal recommendation made, or a transaction executed, on or before 30 December 2012.

Examples of cases where a personal recommendation relating to a pre-RDR investment does not lead to additional investment includes no change to the product, a reduction in the investment amount or the level of regular payments, a change from accumulation units to income units or vice versa and fund switches within a ‘life policy’.

PS12/3 is a ‘must-read’ paper for all adviser firms. The FSA says it will take action if it sees 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.

Philip Ryley is head of financial services and markets for Michelmores