Friends Life is cutting all trail commission to advisers within its Premium Select Bond from 18 October 2013, blaming the high costs of facilitating legacy payments on a new system following the departure of Axa Isle of Man as administrators.
In a letter to advisers, seen by FTAdviser, Friends Life says the offshore bond’s current administrators, Axa Isle of Man Insurance Management Ltd, will “shortly cease” its duties and administration responsibilities. It says administration will be taken over by technology provider HCL.
However, the firm warns that “migration is complex and the cost of replicating legacy business on a new system can be high” and that it will therefore cease paying commission owed to advisers from 18 October.
The migration also affects the Friends Life MLC Investment Bond. Although Friends Life stopped selling these bonds in 2010, it estimates that a total of 800 policies will be affected.
Despite trail no longer being paid, the cost of the bond will not decrease to reflect this. Therefore any adviser looking to continue receiving income via adviser fees risks “double charging” the client.
This is not the first time the problem of double-charging has emerged. In February of this year the Financial Services Authority told FTAdviser the onus is on advisers to take potential higher cost to client into account.
The FSA said it did not have a problem with the double-charging itself - and it confirmed that providers will not be required to rebate clients where their systems are not able to facilitate legacy trail payments, allowing them to effectively pocket the difference.
Tony Cohen, managing director of Nsure Financial Services, estimates Friends Life will net around £400,000 based on 800 policies with at least £100,000 in each and a commission of half a percent. Speaking to FTAdviser, he said he will no longer work with Friends Life as a result of this.
He said: “I have never, ever, in 30 years, had a firm write to me and say, ‘you know that money we owe you? We aren’t going to pay it anymore’.
“It’s small beans for us. It’s costing us two grand a year. But £2,000 is due to us for next year and the year after and the year after. If you went out and tried to buy a £2,000 per year income you would need to spend £50,000. It’s a big deal.”
Friends Life is not the first firm to announce it would cease to pay trail on certain products due to the costs involved.
For example, in March Standard Life admitted it is switching off trail commission on certain pensions products for adviser clients even where a new transaction is non-advised, as it claims the cost of ascertaining whether a transaction is advised or not is “prohibitive”.
