The Financial Conduct Authority is considering implementing an “end date” for trail commission payments on pre-Retail Distribution Review business, amid concerns that the continuation of commission payments on undisturbed business may lead firms to “poor consumer outcomes”.
According to the regulator’s June board meeting minutes, published online, the FCA is concerned that the lack of “end date” for legacy trail could “lead firms to act in ways that risked poor consumer outcomes”.
Some in the industry have previously said that the lack of a so-called ‘sunset clause’ for trail commission could lead advisers to leave portfolios untouched even in cases where a switch may benefit the client. Under the FCA’s RDR rules, any ‘disturbances’ to a portfolio would cause trail commission to cease.
The FCA’s minutes revealed the regulator has several other concerns in the post-RDR world. It believes, for example, there is a need for a clear distinction between advised and non-advised sales, particularly where non-advised models that could be “misconstrued” by customers as advice, such as where “decision trees” are used.
In addition, the regulator questioned whether the continuation of commission payments for non-advised retail investment sales created potential risks.
The FCA also believes there needs to be further clarity over the cash value of adviser charges and the “optionality for customers of paying for an ongoing service”.
Board members discussed whether it was possible to further “analyse the calculations underpinning the estimated cost of distribution for the banks/insurers that had recently withdrawn from providing mass-market advice”. It also said that it was not yet clear whether there was an advice gap, but that there is a need for “continued monitoring of developments in this area”.
Finally, there was also some concern that firms using contingent charging models had an increased risk of ‘churn’ given the need to sell products to generate income.
Earlier this month, the regulator warned advisers have to be “upfront” about whether they are independent or restricted before they give advice.
In a thematic review on how firms are implementing the RDR, the FCA found firms are not being clear about what proposition they are offering clients, and the regulator said intermediaries must use the terms ‘restricted advice’ or ‘independent advice’ in describing their service to clients.
The board minutes also revealed there would be a post-implementation review in 2014 when the RDR had been in place for an appropriate period.
The FCA said it will undertake thematic reviews to examine these issues in more detail, and this is due to be published in the first quarter of 2014.