FSA rejects concerns legacy ban will create churn

The FSA has rejected the argument that its ban on legacy commission will lead to the churning of products due to providers’ inability to switch off commission generated on top-ups to existing investments.

Peter Smith
Peter Smith

The regulator published its consultation paper on the treatment of legacy assets under the RDR yesterday. It confirmed that trail commission for ongoing advice will continue, but legacy commission, where there are changes or additions to a product post-RDR such as topping-up a life policy or buying new units in a unit trust, will be banned.

Following the publication of the consultation, Fundweb has heard concerns from the industry about the unintended consequences that a ban on legacy commission could have on providers and advisers.

Providers’ systems are currently set up to automatically generate commission on top-ups to existing investments. Concerns have been raised that if providers cannot turn off this commission, which will be banned under the RDR, they will stop taking top-ups on existing investments altogether.

Alternatively, providers could continue to accept top-ups but not change their systems, meaning clients would effectively pay twice through adviser charging and commission factored into the price of the product.

But speaking to Money Marketing, Fundweb’s sister publication, yesterday, FSA head of investment policy Peter Smith says: “I do not accept that providers will not be able to turn off commission on legacy products. They clearly all can because despite IT being complex systems changes are possible. Our view would be that they can switch off commission.”

Smith says that while the FSA considered the industry’s call to relax or remove the ban, the industry did not provide any evidence to support such a move.

He says: “When people come to you and say there is an issue here that you need to think about then we obviously we think about it. But although a number of people have suggested to us that we should change the rules, nobody has provided any substantive evidence to us to support that argument.

“We have obviously gone through a process of consultation and cost-benefit analysis and of asking our board to make rules. If we are going to move away from that we need a decent reason. In the same way that when we publish things we put forward arguments and we try to substantiate them, we would expect people to do exactly the same thing.

“It is easy to say there is a problem, but demonstrate to me there is a problem. Show me how big the problem is. Advise me why I should change my position. These are the sort of questions I would ask people and if people can make those arguments then fine, but that is not where we are in this particular case. People have asserted the problem, but not substantiated it.”

Stephen Gay, director general of Aifa, says: “If providers decide not to facilitate top-ups to legacy products, or have to retain existing charging structures which priced in commission customers would either find themselves paying more, or having to take out new products. It is important for the FSA to clarify how this measure would not lead to a net detriment to customers.”