In its Asset Management Market Study – Feedback and Final Rules to CP17/18, issued yesterday [5 April 2018], the Financial Conduct Authority (‘FCA’) confirmed its position remains unchanged in respect of trail commission applicable to pre 31 December 2012 products, stating:
We received a range of feedback on both sides of the debate. We are grateful to respondents for sending us their views, which will inform our wider consideration of trail commission. We are still considering the issue and have no immediate plans to bring forward proposals for policy change at this point.”
From 1 January 2013, the Retail Distribution Review introduced a ban on trail commission for new products. In its Consultation Paper published in June 2017 and Asset Management Market Study Final Report, the FCA reached out to the industry to gauge what the impact would be on the market if it was to introduce a ban on all trail commission in respect of investments sold to clients before the Retail Distribution Review (‘RDR’) came into force.
It seems that the feedback from the industry has highlighted a number of significant concerns should trail commission be stopped. Although the number of self-employed advisers reliant on trail commission for future income should be reducing in light of the RDR, when the adviser comes to retire or sell the business, the trail commission is still a significant element of the value of the business. On a larger scale, it appears that a ban on pre RDR trail commission could be felt most by those large firms which acquired multiple books of legacy investment business before the RDR rules came into force, whose income stream could be significantly reduced if trail commission was no longer payable.
Is it time to review your business model?
Despite the FCA confirming it has no immediate plans to change the policy in respect of trail commission on pre 31 December 2012 products, there are significant voices within the industry calling for firms which are reliant on trail commission to review their business models as speculation is made about the expected life span of trail commission going forward.
It seems that at the very least, a sunset clause, introducing a gradual ban on trail commission may be considered and therefore businesses whose income stream is largely dependent on trail commission should review their business model now with a view to protecting their future growth and success should a change be implemented in the years to come.
The customer’s perspective
What is trail commission and why was it stopped by the RDR?
Trail commission is an annual fee which is paid by customers to financial advisers or other intermediaries such as discount brokers and fund platforms that recommended or enabled the purchase of funds or other investments. The commission is paid over the term of a product, such as a pension or other investment. The commission represents the way in which the adviser receives payment for the advice given.
In summary, the RDR brought an end to trail commission on new products sold post 31 December 2012 to provide customers with greater transparency as to how much they were paying for the advice they received, in addition to the cost of the product, rather than the cost being wrapped up in the cost of the investment itself. The concern with trail commission was that it meant customers were potentially paying more for their investments without understanding the advice cost element, and also advisers who received the commission were more likely to recommend products to which commission was attached rather than ‘commission-free products’. Advisers can still receive trail commission on investments sold before the end of 2012.
From the customer’s point of view, the removal of trail commission could mean investors are getting greater transparency regarding the price they are paying for the financial advice they receive and will perhaps result in being offered a broader spectrum of products, rather than the lack of commission offering being a barrier to certain products being recommended.
Are you paying trail commission on your investment?
Customers may not necessarily know whether or not they are paying trail commission on their investments given that they were entered into some time ago, particularly if they cannot recall the information given to them at the time of purchase, and if they are paying it, who is currently receiving it to make the appropriate enquiries. The Financial Conduct Authority has published guidance on its website as to a customer’s options if they believe they are paying commission on their investments and wish to stop.