What is ‘advice’? Why ‘legacy’ commission is proving a headache for advisers and providers

BDO director of risk and regulation Alex Ellerton wonders whether the FSA wants trail commission to cease on a fund switch.

Trail commission and the Retail Distribution Review (RDR) have long been a topic of debate between industry and the regulator. With the recent publication of final rules on remuneration, it appeared we were all on the same page. But, alas, we are not. There is one particular aspect – an important one for providers and advisers – that still appears to be causing some anxious discussion.

Legacy issues

In November the FSA reinforced its longstanding policy intention that trail commission can continue to be paid after the end of 2012 for pre-RDR advice, and that advice post-RDR must be paid for by way of adviser charges.

More recently, it published Consultation Paper (CP) 11/26 to address the question of legacy commission and, in particular, how it differs from trail commission:

• Trail – ongoing commission that is payable for advice provided pre-RDR.

• Legacy – additional commission that might have become payable in relation to legacy assets (that is, an asset which was originally purchased as a result of advice given pre-RDR) where there has been a change or addition to the product or investment post-RDR.

One cannot consider legacy commission without also considering the question of what does and does not constitute ‘advice’. The FSA has proposed amendments to its Perimeter Guidance Manual, whereby a whole range of typical recommendations are identified and considered to be advice or not.

IT concerns

So, let us consider a recommendation to pay an additional lump sum into a particular fund (where the investment was originally advised on pre-RDR). The recommendation to pay the additional lump sum is clearly advice.

And the FSA’s intention here is clear – that adviser charging applies to the additional investment though trail commission can continue to be paid on the original investment. An easy principle to understand and an easy principle to accept in many ways... were it not for the practical implications such as amendments to product providers’ systems.

The prospect of serious additional IT costs has prompted providers to consider whether they should remove the option for customers to make additional contributions to pre-RDR products.

As a result, the Association of British Insurers protests that this ban on legacy commission will potentially create a bias away from top-ups into existing products, thereby raising the likelihood of unfair customer outcomes.