Ten need-to-knows about the trail commission rules

The FSA has finalised its guidance on when firms can (and can not) receive commission post-Retail Distribution Review (RDR).

Here are ten need-to-knows about the guidance:

1 Commission on retail investment products will be banned from 1 January 2013, but trail commission due on pre-RDR assets can continue unless new advice is given. This includes where changes take place automatically (auto portfolio rebalancing, for example) following an agreement between adviser and client.

2 But there are one or two caveats: What happens, for example, when new advice is given which does not lead to a change to the product or investment amount? In this instance, the FSA asks for clear evidence that the commission payments relate to advice given pre-RDR. If you can provide it, the trail may continue.

3 How about where the advice relates to fund switching within a life insurance product, such as an investment bond? Well, this may continue too, although, controversially perhaps, advice leading to a fund switch elsewhere would see the trail commission switched off. Does this create an unlevel playing field? The Investment Management Association thinks so. Prudential does not.

4 So what about top ups and increases in regular payments? This is where it could get confusing (and administratively nightmarish). Say you recommend a client pays another £10,000 post-RDR into an existing £10,000 investment set up pre-RDR. You can continue to receive trail commission on the original £10,000 (if that was how payment was agreed in the first place, of course), but the advice leading to the additional £10,000 investment can only be paid for via adviser charging. The same applies to an increase in regular payments.

5 You win a new client and seek re-registration of the trail commission being paid to the customer's previous adviser. What now? Well, the FSA said you will need to do something for that money (regardless of whether the original adviser was!). You will need to set up an adviser charging arrangement and can, if you wish, offset the trail against your advice charge.

6 The FSA is standing by its guidance that allocations of more than 100% could potentially mislead clients, but it said firms that currently have policies with allocations of over 100% have the option of allowing top ups on pre-RDR products on the same basis if they show they are complying with COBS rules (i.e. not misleading clients). Some insurers said they should be allowed to continue to offer this is they are not facilitating the payment of adviser charges.

7 The regulator believes providers and platforms should be able to rely on advisers to inform them if there has been advice. But it will not produce guidance on this: firms and platforms are free to decide for themselves how they will ensure commission is not paid for advice.

8 Following on from point 4 above, the FSA said advisers should be required to remind clients of any trail commission they are receiving and discuss with them why an existing product may be better than a cheaper, post-RDR alternative. But, again, it will not produce guidance on this.

9 An adviser who receives post-RDR trail commission for pre-RDR advice (this is permitted, remember - see point 1) can rebate it to the client.

10 The FSA will monitor firms' compliance with its trail commission rules. It said advisers recommending the retention of higher-charging products so they can continue to receive trail commission would likely be red-flagged.

Read the FSA's policy statement HERE.