Advisers and fund managers have been forced to consider the prospect of radical change after the FCA surprised the industry last week by raising the possibility of a sunset clause for trail commission.
The watchdog said it would canvass opinion on whether it should consider phasing out trail commission, having previously stated it had “no plans” to do so.
A number of adviser firms still rely on commission payments from legacy portfolios, prompting claims that many could leave the market if the payments were phased out.
Laying out its thoughts in the long-awaited asset management market study, the FCA acknowledged a change would “have a significant impact on the advisory market”. But the effect on asset managers is less certain.
“The key issue [for advisers] would be that for some legacy products there would be no way to replace trail commission with ongoing advice charges,” said Scott Gallacher, an adviser at Rowley Turton.
Dennis Hall, chief executive of Yellowtail Financial Planning, added: “I think there will be a large number of adviser firms and individuals who would suffer financially.” But he added business models should have shifted since the introduction of clean share classes in 2013, and the FCA’s subsequent decision to ban trail commission for on-platform business.
In contrast to advisers, asset managers had been lobbying the FCA to consider a ban, saying the continued existence of trail artificially inflated fund fees and has resulted in too many share classes.
This is despite the large back books of business that may be negatively affected in the event of a ban.
One asset manager told Investment Adviser it would take a revenue hit if trail commission was phased out.
Others, such as KPMG regulatory specialist Julie Patterson, suggested the move would be “revenue neutral” for fund firms.
“The more share classes there are the more complex it is. And the more complexity you have, the greater the risk of an operational problem,” Ms Patterson added.
“As far as the fund managers are concerned, the fewer share classes they operate the better.”
But fund firms also have reputational issues to consider.
The FCA noted advisers had threatened not to write future business should trail commission be ended, as happened last year when Standard Life Investments turned off the payments across its fund range.
Efforts to address trail commission have continued in the meantime.
BNY Mellon recently ran an initiative to reduce the payments by contacting investors directly, asking them to speak to advisers about moving into cheaper share classes.
Mr Hall added: “If this does happen, fund firms must not be seen to benefit by turning off trail, but not reducing charges correspondingly.
“I think the advice side should be able to cope with this as it is unlikely to happen immediately, giving firms the opportunity to replace any lost revenue.”
Focus back on Mifid II’s ‘complex product’ issue
Having completed its asset management market study, the FCA is to issue final clarification on whether investment trusts and other non-Ucits funds will be classified as non-complex under Mifid II.
Esma, the European regulator, updated guidance last month suggesting all non-Ucits funds would be classed as complex. This would mean that discretionary fund managers (DFMs) and advisers selecting these products for investors would be required to conduct additional appropriateness tests.
Esma’s statement appeared at odds with earlier guidance issued by the FCA, which said products such as investment trusts and other non-Ucits retail schemes (Nurs) would not automatically be classified as either complex or non-complex.
The UK regulator is due to publish updated Mifid II guidance in a policy statement next week, and may be forced to fall into line with its European peer.
