Trail and tribulation

Aegon has warned that the Financial Services Authority (FSA) will need to be careful about how it polices trail retention after the retail distribution review (RDR) and says the regulator risks skewing behaviour against keeping clients in suitable products.

The FSA published a policy statement on the treatment of legacy assets last week which says trail will stop if advice leads to product changes and trail cannot be paid on new investments. But trail can continue to be paid in certain circumstances, including fund switches within life products and in the event of automatic product changes.

The regulator has said it will take action where it sees firms acting in a way that could lead to consumer detriment, such as recommending clients keep products in order to continue receiving trail.

It will build its monitoring of trail retention into its supervisory work next year.

But Steven Cameron, head of regulatory strategy at Aegon, says there is a danger that by focusing its supervisory efforts on trail retention, the FSA will indirectly encourage advisers to move clients out of suitable products.

Cameron says: “I am intrigued to see exactly how the FSA will identify what risks it wants to protect against, how it will identify what success looks like in a post-RDR environment and where the burden of proof will lie. We must avoid the burden of proof being too heavily skewed in any one direction.

“I would not want to see advisers having to justify why they did not move the business. That seem quite bizarre when one of the starting points for the RDR was to discourage unnecessarily moving clients to new contracts.”

Cameron adds that the regulator will have to be careful about how advisers perceive any monitoring of trail. (article continues below)

He says: “The FSA needs to be very careful that it takes a balanced approach. It is right for it to be on the lookout for systemic activity which could cause consumer detriment but that could work both ways.

“Detriment can be caused equally by not switching into new contracts or through switching into new contracts. Emphasising one over the other is a very dangerous thing for the FSA to do.”

Nick Cann, the chief executive of the Institute of Financial Planning, says: “As part of the FSA’s visiting and review process there is going to be far more focus on the advice

He says it will be time-consuming for the regulator to identify trends where firms are retaining trail to the detriment of the client.

He adds: “What is likely to happen is if advisers are worried about losing trail they will not provide any ongoing advice to these clients in case they risk the revenue stream. That is worrying.”

Phil Deeks, risk and regulation manager at Deloitte, says the FSA will look to target firms that make a strategic decision not to advise clients on trail-paying products.

He says: “The FSA is likely to look at firms that segment their client bank but identify a pocket of clients, such as those in high-paying trail products, where it is in the firm’s best interest not to contact them. The FSA is going to be keen to clamp down on firms that consciously identify those people and leave them alone.”

Gordon Crothers, managing director of Attain Wealth Management, says it would have been easier for the industry and the regulator if the FSA had decided to phase out trail over time rather than allowing it to continue to be paid in certain circumstances.

Crothers agrees with Cameron that by focusing on trail retention, the FSA risks creating a bias towards new products but he also believes some advisers may use continued trail payments to avoid discussions with clients about adviser-charging.

He says: “From our point of view, we want to move clients off trail-paying products as soon as possible. Where we have not moved clients is because it is not in the clients’ best interest to do so. The trail commission we are getting from them is lower than the annual fees we charge to all other clients. We are actually worse off than if we moved them.”