5 Transition
67. The industry is now in a period of transition
before the implementation of certain aspects of the RDR on 1 January
2013. Some of those writing to the Committee expressed concern
over practices that have emerged before the move to the new rules,
and what may then develop after the implementation deadline. Evidence
we received from Rensburg Sheppards Investment Management Ltd
noted the following disturbing pattern in this run-up to the RDR
being implemented:
One of the consequences of transition of remuneration
structures to fee rather than commission based remuneration that
we are currently witnessing is firms moving to place business
pre-transition to secure as much income as possible through trail
commission while the facility is still available. Furthermore,
as "product providers" in some areas (where we provide
clients of IFAs with discretionary investment management services),
we are being requested to increase trail commission payments.
We believe that there is no reason to do this other than to secure
a larger income flow pre-RDR and protect their business.[84]
Further evidence on the rise of trail commission
prior to RDR implementation was provided by Consumer Focus. They
told us that:
We believe there has been growth in the payments
of trail commission by some providers, to some IFAs in advance
of RDR coming into force. Consumer Focus has used its information
gathering powers to require pension providers to disclose how
much trail, renewal and initial commission they pay IFAs for personal
pension sales. In one case the company's payment of trail commission
has grown by 80% between 2007 and 2009. This amounted to almost
£250 per client. In other words customers have been locked
into paying trail commission a few years before this practice
is banned. The other company that provided us separate data for
trail and renewal commission paid out between £11 million
and £13 million in trail commission and £5 million in
renewal commission over the last three years. This company has
a large back book of policies, but has written relatively little
new business over the last decade. This shows the long persistence
of trail commission.[85]
Following implementation of the RDR, Rensburg Sheppards
Investment Management Ltd expressed concern that trail commission
would influence the advice of some advisers. They told us that
"We are also concerned that clients will be discouraged by
advisers from moving their pre-RDR investments into a different
product post-RDR, as the ongoing income stream it generates for
the adviser will cease".[86]
68. The FSA assured us that they were aware of
the risk of inappropriate sales in the transition period before
implementation. Ms Nicoll told us : "It is one of the risks
that we have very specifically identified in the lead-up to the
RDR and is one of the areas that we are very specifically looking
to in our supervisory activity".[87]
When asked what action the FSA were taking, she warned "We
will stop firms carrying on—if we do find that they are
flouting the rules by taking trail commission inappropriately,
we will take action against them".[88]
She then provided the following information on how inappropriate
behaviours would be identified:
we do that now on the basis of file reviews and so
on, whether advice is suitable and, for example, we can look at
trends among particular advisers, compare particular advisers
against other advisers. Particularly the way that we supervise
smaller firms is by looking at trends and looking at returns data
and we will continue to do that in the lead-up to the RDR.[89]
When asked about the possibility of firms then holding
on to clients post-RDR implementation, to prevent the loss of
the continuing trail commission the firm received, she noted:
there may be an immediate effect, but I think if
individuals are being given suitable advice then our approach
would be exactly the same post-RDR as it is pre-RDR, in that we
would take judgments about the suitability of advice. There are
suggestions at the moment that there is too much churn in the
market because of initial commission and so therefore a certain
amount of less activity may be appropriate, depending on the circumstance
of the particular individual.[90]
69. We take the concerns expressed
about the adverse incentives towards poor advice that have arisen
in the transition to the RDR very seriously. We therefore recommend
that the FSA, and its successor, use all available tools to search
either for pre-implementation churn, or post-implementation holding
of clients, where that is not the best solution for the client.
We expect to see the results of any regulatory findings.
84 Ev w348 Back
85
Ev w257 Back
86
Ev w348 Back
87
Q 72 Back
88
Q 73 Back
89
Q 74 Back
90
Q 75 Back
| 
