The Financial Services Authority will set all market average commission rates for menu commissions, however, adviser firms will be expected to update their document if the FSA makes changes, according to the FSA's conduct of business rules proposals.
Details at the back of the FSA’s latest depolarisation consultation paper in the CP04/03 Annex, under COB4 Annex 8R pages 61-65 note advisers will have to update the average market value details of each product within two months of any amendments to the FSA-collated rates, in cases where the amendment cut the previous market average by 4% or more.
There is no indication at this stage, however, to suggest whether the FSA will alter these rates on a set date, otherwise it might require advisers monitor on a weekly basis whether average commission calculations have changed.
Advisers will also have to compile details of ALL commission arrangements it has on different products in order to work out which is the maximum commission payable by the client, except in cases where the adviser only offers one product and therefore uses that commission rate as the maximum.
Two methods of doing so are offered by the FSA – the simple comparison, and the comparison of Net Present Value.
The FSA’s simple comparison says the adviser can simply make a comparison between each of the firm’s initial and renewal commission rates, and the corresponding market averages.
However, this could produce lengthy and costly menu documents where advisers offer whole of market or a large number of provider products, so an alternative calculation method is offered based on the net present value (NPV) of each commission.
"The net present value for each commission rate must be calculated by reference to the following factors" says the FSA:
For regular premiums/contributions, calculate:
- a) % of first year’s premiums – A
- b) % of all premiums – B
- c) % of fund value – C
- d) assumed investment growth – D
- e) assumed term/persistency – E
ONLY THEN can the adviser firm begin to describe its maximum rates of commission for each product group, by selecting the MOST appropriate of these descriptions:
- i) X% [of the client’s first 12 month’s payments]relating to initial commission[plus Y% of all payments each year, from month n.]
- ii) Y% of all payments each year
- iii) Z% of the client’s fund value each year (given the actual amounts will vary with growth), or
- iv)X% [of the client’s first 12 month’s payments]relating to initial commission[then Z% of the client product’s fund value each year from month n., the amount of which depends on fund growth year on year]
Lump sum examples must be calculated in a similar fashion, as one of the following:
- X% of the amount the client invests [then y% of the fund each year after the first]
- X% of the amount the client invests
- X% of the client's fund in each year.
An example presented by the FSA suggests information could be gathered as shown in the following in order to ascertain which is the highest maximum commission:
|Provider Commission||The Net Present Value|
|Provider||Initial||% of fund value||Calculation||NPV|
(When calculating the Net Present Value, a factor of 1 is applied to initial commission while 5.9 is applied to the annual rate of fund value commission)
The FSA notes - based on discussions with PricewaterhouseCoopers - it could be difficult to collect data from product providers and advisers in order to collate the market average data.
Product providers, for example, will be able to supply information at its end but will not necessarily know whether commission has been rebated to the client.
So information will be collated from all product providers and the FSA will survey a handful of adviser firms in order to try and ascertain just how many IFAs are rebatting commissions to clients.IFAonline
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