Robert Cochran, Key Account Pension Development Manager, Scottish Widows.
Robert Cochran: The learning outcomes from today’s session will be threefold. We’re going to review the legacy rules for dealing with pre-RDR business in a post-RDR environment, and there seems to be a lot of interest about that at this time.
We’re also then going to look at some of the FSA’s guidance around replacement business and centralised investment propositions. That’s still very very current. And to put it all in its place we’re going to recap on the FSA pension switching guidance. So those are the three main learning outcomes.
I’d like to start off with the issues around legacy rules. And the issues around legacy rules were not really clarified until February last year. The FSA brought out a paper, PS12/3, and that was about the distribution of retail investments, RDR adviser charging and treatment of legacy assets. So it came quite late into the picture around RDR.
And it made some pretty clear rules and some rules that were pretty difficult to manage. So the first thing is not a surprise to us, no commission payable for advice provided post-RDR on legacy products.
I say not a surprise to us but as the initial rules from RDR came out we weren’t expecting this to apply to legacy products. A bit of lobbying went on and the FSA decided to make the position perfectly clear, so no commission payable for advice provided post-RDR on legacy products.
That brings us into some issues around fund-based renewal commission and how that’s treated. So here’s clarification around some of the FBRC rules. First of all fund-based renewal commission can continue in a policy transfer to a new adviser, but it must be disclosed and the new adviser must offer service commensurate with the cost, so it’s not that different from ongoing adviser charging, it’s just that it’s still called fund-based renewal commission.
The second thing is an adviser cannot simply turn fund-based renewal commission into ongoing adviser charging en masse. So when you looked at the rules that were coming in, that would probably have been an elegant solution for us as a provider to say let’s take all of our existing business and move that onto ongoing adviser charging.
But that breaks one of the principles of ongoing adviser charging, and that is that it’s a relationship between the adviser and the customer, setting out an agreement specific to the service that’s being offered on that occasion. So we cannot simply do that, and there’s no point in advisers writing in and asking us to do it for your booker business, it’s a unique relationship with each one of your customers.
The final thing I’d like to say about fund-based renewal commission is yes, if you buy someone else’s book then the fund-based renewal commission can be transferred across to that new adviser on a bulk basis. The new adviser must at least match the previous service offered.
These are FSA rules, it doesn’t mean that that’s what will happen with every provider or every product, and as we’ve settled into 2013 advisers are beginning to realise that different providers and different products from different providers will be dealt with in different ways. And it’s important that you clarify those rules, but these are what the FSA have set out.
Let’s take it down a stage and let’s look at some of the exemptions. We know what the intention of the regulator was, and we know what the headline is, but let’s look at the exemptions. The first and biggest exemption to legacy rules is group pensions.
And it’s still pretty clear for group pensions any schemes that were set up pre-RDR, or where the advice was given to set these schemes up pre-RDR, and they were on a commission basis, then for new members and increments to those schemes commission can continue to be paid. There’s another whole set of questions about how consultancy charging will work, but as regards to legacy policies, they’re treated differently from individual pensions.
The next item we’ve got is indexation. Indexation will lead to clients having increments post R-Day, but the advice given which has led to those increments was given pre R-Day. Indexation means that the policy can continue on a commission basis. The most contentious issue around this whole paper is non-advised.
We know that any non-advised increments or non-advised changes to a policy will not disturb the commission that will sit in there. Now that won’t be true of every provider, but that’s the FSA rules. I’m going to come back to that in a couple of minutes, because it’s a real key issue.
Other areas where they relaxed a little when they brought out PS12/3 was they said if there’s a reduction in premium or amount then that will not disturb the commission which was payable on the existing plan. If the advice was to not change the product in any way then yet again that will not disturb the current remuneration structure on the plan.
And then there was the whole issue around fund switches, so if the fund switches within a life and pensions wrapper then it can continue to generate fund-based renewal commission, and continue to operate in its pre-RDR way.
However, if it’s outside of a life and pension wrapper then it’s deemed to be an advice point, and that will switch off any fund-based renewal.
And that’s really because fund-based renewal operates in life and pensions funds at wrapper level, whereas in things like ISAs and OEICs and other direct investments, that would be generated at the fund level rather than the wrapper level. So that’s why they took life and pensions out of this.
The whole issue of commission and legacy products has been getting a lot of coverage within the press, so if I go back to the end of January, in the consumer press we had BBC's Money Box programme, Paul Lewis reigniting the whole issue around trail commission.
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