The FCA’s long-awaited platform paper last week sounded the death knell for advisers’ legacy commission revenues, with most of the ‘trail’ payments now likely to dry up by 2016, experts said.
The regulator ruled that ‘bundled’ rebate payments from fund managers to platforms, which are taken from the clients’ annual management charge, will be banned on new fund sales from April 6 2014.
In an aggressive move, the FCA also imposed a so-called sunset clause that will force platforms to give up the ongoing fund manager rebate payments they receive from previously sold business by April 6 2016.
The FCA also said it would “generally expect” to see clients shifted onto new ‘unbundled’ clean-fee share classes, which charge sharply lower annual fees from clients as they do not hand back commission payments either to advisers or to platforms in most cases.
Advisers said the paper made the extinction of advisers’ trail commission by the time the sunset clause came into force look inevitable, in a shift that could see many adviser firms lose a large share of their revenues.
Philip Milton, managing director at Philip J Milton & Company, said: “Lots of advisers have been building up trail as a way of giving their businesses value. This can be good and proper but this prosective value will be hit if the line of trail income ceases.”
Colin Parkin, managing director of Ample Financial Services, said: “Advisers are going to be affected by this, they won’t be happy but it is going to happen.
“A friend of mine has been buying up closed books of business paying trail commission - this ban could wipe out 80 per cent of his business.”
Informed Choice managing director Martin Bamford described the FCA’s move as a “wake up call” for advisers who had been slow to react to the RDR’s move to adviser charging.
“The writing has been on the wall for trail commission for a while - this just confirms it,” Mr Bamford said.
FCA head of investment policy David Geale told Investment Adviser that the platform rules were focused solely on rebates to consumers and payments from product providers to platforms, and were not intended to accelerate the move away from adviser commission.
“We expect the payment of trail commission to reduce over time,” Mr Geale said. “We expect advisers to charge an explicit fee for the services they provide, and that is the way they are moving.”
Chris Hannant, policy director at the Association of Professional Financial Advisers, argued that a ban on payments to platforms did not necessarily mean commission would be affected.
Fund management trade body the IMA repeated its call for advisers to be issued with their own sunset clause banning them from receiving trail at a future point.
Elsewhere, the FCA also extended its ban on cash rebates being handed back to consumers by platforms to non-advised platforms last week, while confirming that client rebates in the form of fund units could continue for both types of platform.
Platform clampdown:
The revamped regulator the Financial Conduct Authority released its much-anticipated platform paper last week. Here are the key points for each party involved:
-Fund supermarkets:
Pressure will mount as income will not be available from legacy book after April 6 2016.
-Advisers:
Likely loss of trail; increased due diligence as pressure falls on advisers to check platforms are obeying rules
-Fund groups:
FCA has urged groups to reflect pre-RDR rebate deals in new clean-fee share class prices
-Wraps:
The wraps have always given rebates from fund providers back to clients so won’t have a legacy book to deal with
