Advisers are responsible for considering a potential legacy ‘double-charge’ from providers using old pre-2013 contracts when making recommendations and it is not the responsibility of firms to compensate clients through rebates, the Financial Services Authority has said.
Yesterday (6 February), FTAdviser sister publication Financial Adviser revealed that almost 700 advisers had written to the FSA, warning that clients are paying twice for products: once through adviser charging and again through high product fees that have not dropped despite the Retail Distribution Review commission ban.
Speaking to FTAdviser, one concerned adviser cited a Prudential bond as an example, arguing that the company is not returning a 6 per cent initial charge on top-ups which used to go to advisers as commission - and nor has it increased allocation rates to make up for this.
Previously, an adviser would have the option of rebating some of that 6 per cent to clients, an option which also is no longer available.
Russell Pickering, IFA at Tyne and Wear-based RWP Consulting, told FTAdviser there were specific reasons why clients may prefer to continue investing in the older product, but expressed concern that they may be put at a disadvantage when doing so.
Specifically, he said the older contract allows customers to treat top-ups as part of the original investment when it came to the amount they were allowed to withdraw each year.
He said: “How can I justify saying to my client, ‘we are taking 2 per cent, oh and by the way the Pru is taking 6’?
“They don’t have to change their terms, all they have to do is enhance it with the commission. If they can reimburse commission on execution-only, why can’t they do that on advice?”
In a consultation paper published last year, the FSA acknowledged that that providers may not update less profitable or smaller products and that this could result in customer detriment.
In fact, in the paper the regulator cited this as being positive in that it would offset costs to the industry of implementing legacy commission proposals, which the Association of British Insurers had previously said could cost £460m.
The FSA went on to say the potential for double-charging could also be a positive influence in mitigating the risk of clients “not being advised to switch product when it would be in the consumer’s interest to move... into a new, non-commission paying product”.
The regulator firmly placed the responsibility on advisers’ shoulders, saying advisers would have to take product costs into account when deciding what was best for the client.
A spokesperson for the FSA said: “Where an adviser is providing a personal recommendation to a client we would expect them to consider the product cost as part of the suitability process for their client.
“Where a product is clearly more expensively costed than the norm, an adviser may have reasons to still recommend that product and still deliver fair treatment for their client.”
A spokesperson for Prudential said: “The charges associated with some of our pre-RDR products have not changed on the implementation of RDR. However, a change to the charging structure is not something we’d rule out for the future, depending on customer demand and other considerations.
“We expect that customers will decide together with their financial adviser whether an advice fee is appropriate for post-RDR top-ups on bonds that were originally taken out pre-RDR. In some cases, these customers and advisers may consider that our new RDR-ready bond will be better suited to their needs.”
Russell Warwick, distribution change director at Prudential, said: “Legacy is a problem for the whole industry. We do have a new version of the contract.
“Is it cost effective for us to change a historic system? It’s a challenge for the industry. For me, it’s a more difficult area than new products.”
