Hot on the trail

Published by FT's Financial Adviser 1 December 2011.

The roll out of the RDR regarding the requirements concerning trail commission and legacy commission has not been straight forward.

The FSA has had to think again in response to the industry's objections to some of the proposals and clarify the distinction between trail and legacy commissions and what can he received by the adviser under the new regime.  To this end, the FSA has published CP11/26.

In this context, the FSA states that "trail commission" is ongoing commission that is payable for advice provided pre-RDR and which normally continues to be payable while the client holds the investment concerned.  "Legacy commission" is additional commission that might have become payable in relation to legacy assets where there has been a change or addition to the product or investment post-RDR.

The rules on adviser charging as published by the FSA in PS10/6 in March 2010 confirmed that trail commission can continue to be paid post-RDR (31 December 2012) and that it can be transferred to a different adviser - either through a bulk transfer of business (for example, on retirement of the original adviser) or where the client chooses to move to a new adviser, and the new adviser decides to seek transfer of commission payable in relation to the client's existing products.

Legacy commission has proved to be the stumbling block.  In CP11/26, the FSA says that "it became clear that the effect of the rules that we [the FSA] had made in PS10/6 banning new commission for advised sales of retail investment products had not been properly understood by some firms".

As far as the FSA is concerned, allowing legacy commission to continue post-RDR could perpetuate bias in the market, with advisers having a vested interest in recommending that customers continue to hold legacy products or to increase payments into them.

For this reason, the FSA is not proposing to relax the ban on receiving legacy commission and proposing no change to the rules. 
 
Philip Ryley is a solicitor and Head of Financial Services & Markets at Michelmores LLP, based in Exeter and London.