FSA sticks to guns over legacy commission ban

The FSA has confirmed its proposed ban on legacy commission in a widely-expected move.

Legacy commission refers to new commission due to an adviser as a result of a change to a contract set up pre RDR, but which occured post RDR.

A change may be in the form of a top-up to a life policy or the buying of new units in a unit trust. This may, in some circumstances, trigger a new commission payment.

This would be deemed legacy commission and will be banned from 1 January 2013, in line with the regulator's general ban on commission payments to prevent product or provider bias.

The only commission payment that may remain after 2012 is trail commission agreed on a contract set up before the deadline. But any change to that contract will have to be agreed on an adviser charging basis.

There had been confusion over the difference between trail and legacy commission.

In a consultation issued today, the regulator confirmed its stance that it considers it would be "undesirable in principle" for legacy commission to be paid after 2012, because it would effectively be new money for that adviser, albeit as part of a contract signed before the commission ban.

"We consider it would be undesirable in principle for legacy commission to be paid to advisers after the RDR rules come into force, given that an important aim of the RDR is to move away from a situation where commission can lead the adviser's interests to be aligned with the provider, rather than the customer," today's paper reads.

"The introduction of adviser charging is intended to lead advisers to focus instead on product features that are attractive to the consumer, such as delivery of good performance and long-term growth or income."

The watchdog has devised guidelines to clarify how the commission ban should operate in practice in order to "ensure consistency across the industry."

Today's proposals come after the FSA issued guidance to trade bodies in March setting out its intention to ban legacy commission.

But the proposal triggered a backlash from life providers, which argued the move would be detrimental to consumers. The Association of British Insurers lobbied for the ban to be postponed.

In July, platform giant Skandia mooted the idea of a five-year ‘sunset clause' allowing advisers to receive legacy commission for a period of five years after RDR to allow for a smooth transition to the new rules.

Today's consultation ends on 16 January 2012. The FSA said it plans to publish a Policy Statement giving feedback in Q1 2012.