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Created on Tuesday, 06 December 2011 10:29

FSA Rules on Trail Commission ruling and the Consultation paper on Legacy Assets were published last week.

RE-registration of commission

The FSA has now ruled that trail commission can be re-registered once a client bank is sold.  A confirmation was issued by the regulator stipulating that businesses buying client banks can re-register the trail commission in one lump sum and do not have to offer an on-going service.   This means that if an Adviser sells their client bank to another firm or adviser when they retire and there is a bulk transfer, the trail commission can also be re-registered.  This is good news as it means that businesses would not lose their value if the founder or head decide to leave and sell the business.

Advised and non-advised sales commission

Currently commission can be paid for both advice and non-advised sales of investment products.  The RDR rules will prohibit the payment of commission for advised sales, but not for non-advised sales.   This means that once RDR rules come into force, firms will have to ensure that if any ‘additional’ commission is paid, it is only paid in relation to non-advised sales.

The distinction between trail commission and legacy commission:

Trail commission- is the on-going commission that is payable for advice provided pre-RDR and which normally continues to be payable while the client holds the investment concerned.  Trail commission can continue to be paid for pre-RDR advice.   Trail commission for re-RDR advice can continue to be paid for pre-RDR advice until it ends naturally i.e. if the product matures or is terminated.

Legacy commission– is additional commission that might become payable in relation to legacy assets where there has been a change or addition to the product or investment post-RDR, such as top ups or buying of new units in a unit trust.

Although the rules on Trail commission have been published, there is a NEW consultation paper on legacy commission is to consult on ‘guidance’ to when a ban does and does not apply.   Taking into account this guidance the questions firms need to ask themselves post RDR to determine whether the adviser charging rules apply to a change in a produce are as follows:

1)      Has there been a personal recommendation to a retail client in relation to a retail investment product?  If the answer is ‘no’ the adviser charging rules do not apply and there is no ban on the payment of commission.  If the answer is ‘yes’ the firm should ask itself question 2

2)      Was the personal recommendation made before or after the RDR rules came into force?  If the answer is pre-RDR then the recommendation will not be caught by the RDR rules which ban the payment of commission.  If the answer is post-RDR, no additional commission can be paid.

If you have any questions you can call Jeanette Cook on 0845 519 0100 or go to www.fsa.gov.uk