Support for five-year ‘sunset clause’ on legacy commission

The advisory industry is backing calls for firms to be permitted to receive commission from ‘legacy’ products until 2018 – five years longer than the FSA intends.

Advisers said the ‘sunset clause’ would allow for an “orderly transition” to adviser charging and may protect consumers from being moved into inferior products.
Skandia, which suggested the delay, argued allowing advisers to continue to receive legacy commission could help prevent poor customer treatment.

Currently, the FSA believes it will be “undesirable in principle” for legacy commission to be paid to advisers after the RDR rules come into force on 1 January 2013.

It said this could lead to advisers being paid twice for the same work, once through adviser charging and once through commission.

Permitting legacy commission after 2013, it added, could perpetuate a bias in the market, with advisers “having a vested interest in recommending customers continue to hold, or increase payments into, legacy products”.

But Skandia said that, conversely, removing legacy commission in just 18 months’ time could have unintended consequences for consumers.

“Allowing this commission to disappear over an extended period, rather than in haste, would enable the industry to make a more orderly transition to adviser charging,” Skandia CEO Peter Mann said.

“The RDR aims of fairness, clarity and consistency will actually be better served by a pragmatic decision to apply a sunset clause to the payment of legacy commission.”

It argued that removing legacy commission completely from 2013 may lead to investors buying substitute products and incurring additional charges for topping up or switching.

Skandia said it was also concerned by suggestions the FSA may allow legacy commission to continue on insured products only.

“This would create an uneven playing field and could lead to bias in the products recommended by advisers.”

The FSA defines legacy commission as an ‘additional payment’ made to an adviser in relation to a contract signed before January 2013 but as a result of work which took place afterwards.

The UK Platform Group, which includes Cofunds, Fidelity FundsNetwork and Hargreaves Lansdown, has also thrown its weight behind the proposal, with group chairman Stephen Mohan backing the sunset clause in a letter he sent to the FSA last month.

Simon Cole, partner at Old Mill also gave his thumbs up to the sunset clause. He said problems could be created by abruptly “turning off the tap” on legacy commission after 2012.

“If you have a very stark cut-off date from which you no longer act for the client what does that actually mean?

“The process of unwinding those client positions will take time to manage. It is not just a case of ceasing to act for the client – you need to ensure, from a risk point of view, that it is properly managed.”