FSA to clarify trail fate when clients switch adviser

Issued: 13/05/2010 00:00:00

The FSA is set to clarify the fate of trail commission when clients switch adviser from 2013 following concerns from advisers and providers

According to the Association of IFAs (AIFA), the FSA has identified the "unfortunate" ambiguity of the RDR directive on trail and will address practitioners' concerns.

In last month's final rules, the regulator caused alarm after declaring it "expects" legacy trail commission to be paid to the client when they change adviser after 2012.

Critics said the directive threatens to "devalue" adviser businesses, disrupt firms' expansion plans and "finish" IFA consolidation vehicles, as companies' worth is often gauged from its trail income.

Last week, IFA support provider Tenet said it had received assurances from the regulator trail would not be "put in jeopardy" if there is either a change in firm ownership or a change in an adviser's regulatory status from 1 January 2013.

But the FSA continued to insist publicly trail commission can not be transferred from a client's previous adviser to their new IFA, "for whatever reason".

Now AIFA says clarification is imminent.

"I think it is unfortunate there has been this ambiguity over this section of the paper," director general Chris Cummings says.

"The FSA has recognised that, in trying to protect consumers, it risks undermining the financial stability of some firms and we are pleased FSA is working with us on this.

"It is not in the FSA's interests to undermine the stability of businesses."

AIFA says it has identified 16 different scenarios, for example where one IFA practice merges with another or where a buyout takes place, where the future of trail commission plays a central role in the negotiations.

Tenet suggested the directive (see below for the exact RDR wording) may be referring to arrangements whereby trail commission is not taken as "part of the product", but to justify ongoing work.

The company's distribution and development director Keith Richards said the FSA's own definition of trail - that it is part of the initial commission spread over time - pointed to that conclusion.

According to the FSA, trail isn't necessarily connected with an ongoing service, but is more a "feature of the product".

Angry advisers described the RDR directive as "a nonsense".

Garry Heath, chief executive of Financial Inspirations, said: "This [move] makes the transfer of business almost impossible.

"If I am buying the databases and agencies of retiring IFAs, the only attraction, besides a bit of new business from time to time, is its residual income."

So What, Exactly, Did The RDR Document Say On Trail?

Chapter IV: Adviser charging and inducements

4.18 Change of adviser

"Where a client changes advisers, for whatever reason, they are likely to have to agree 4.18 a new level of service with their new adviser. This may, or may not, involve paying a regular fee for ongoing services. The position of any trail commission relating to products bought through the previous adviser will depend on the agreement between the product provider and the previous adviser. That agreement will determine whether the trail commission continues to be paid to the previous adviser or can be switched to the new adviser. Where the commission can be switched, we would expect it to be paid to the client, given that the new adviser did not provide the service for which the commission was payable. We will be monitoring behaviour in the run-up to the new rules taking effect, to make sure that firms are not seeking to tie consumers into commission-based agreements against their best interests."

Source: Scott Sinclair, IFA Online, 13th May 2010