Derek Bradley, chief executive officer of Panacea Adviser, on the catastrophic effects on advisers should trail commission be switched off.
The Financial Conduct Authority (FCA) has been considering a ban on trail commission since June.
More recently, the regulator has let it be known it is carrying out a series of reviews into firms’ compliance rules to understand whether the lack of an end-date for the payment of trail commission on pre-Retail Distribution Review (RDR) business might lead firms to act in ways that risked poor consumer outcomes.
While consumer detriment must always be front of mind, the regulator seems to be missing the fact that stoppage of trail commission will be detrimental to many adviser firms and could also finally sound the death knell for the vast majority of the adviser market.
Don’t lose the trail
A poll we conducted into the effect of the removal of trail commission has found that 91% of some 1,100 respondents think the loss of trail commission would have a ‘catastrophic’ effect upon their business. Just 2% did not think the removal of trail commission would have any negative consequences for them.
This is a hugely serious matter, showing that not only are there ‘side effects’ of the RDR, as FCA chairman, John Griffith-Jones recently admitted, but there could also be some very real and harmful effects on the horizon.
Whatever the rights and wrongs of trail commission may be, the destruction by retrospection of a huge amount of intermediated distribution revenue is clearly unreasonable and has the potential to harm consumers as well as destroy many adviser businesses.
This issue has, unsurprisingly, sparked many comments among our members, stating “trail commission is contractual on contracts already in force”, that there has been “no explanation from the FCA [as to] why this has been introduced” and that trail commission has always acted as a “form of contractual deferred compensation” – and so the less paid in trail, the more vulnerable the business.
Aside from the fact trail is a contractually binding adviser expectation, one needs to look ahead to how this will affect the value of a firm.
Up to and beyond the RDR, firms have been buying or selling businesses, largely based on the assumption trail will continue for many years to come. With this income source gone, many exit plans will have to be completely reworked as the value of firms up for sale will be significantly reduced.
Moreover, those who have recently acquired firms could suddenly have a big cashflow hit – potentially making them unable to cover their running costs, let alone their regulatory fees or other unexpected levy costs. The unappetising but undeniable truth is that, for many of these businesses, the only option left will be to simply close down.
However, those who lose out most of all could be network clients. Networks are already under huge amounts of pressure following the recent FCA paper on inducements and the resulting cashflow reductions, on top of the sizeable fines imposed upon the majority of larger players in the market.
For networks to see their trail removed will mean the increased running costs will have to fall to their members’ wallets – who may not wish to, nor be able to pay these increased retention rates – and so be forced to leave.
Network collapses, should they be the unintended outcome victim of post-RDR charging and inducement restriction, would have a serious knock-on effect on surviving adviser firms with regards to inflated regulatory costs. So the vicious cycle will continue, with the buck – and the cost – finally landing at the door of the consumer.
The end of trail commission, set in motion in order to avoid any “poor consumer outcomes”, could very realistically result in thousands of orphaned clients from firms that have had to close unexpectedly as their mass market clients will not pay fees.
The remaining advisers will then be forced to ramp up their costs to sustain their new business model and the obvious result of this will be a further widening of the advice gap, as only the wealthy can afford to pay or understand the need for advice.
Advisers are looking for leadership to prevent this ‘perfect storm’ which could hail another blow to our industry, as well as to the customer. It is now up to the regulator to prevent this happening.
Let’s hope that the FCA considers the full consumer detriment that could arise from the stoppage of trail commission, before we have to deal with yet another unintended, but sadly not unforeseen, consequence of the RDR.
Bought plans in 1988 and 1989
To be added to model portfolio service
Launched 25 September