Think-tank the Centre for Policy Studies (CPS) has lobbied the government and House of Lords to introduce an outright ban on legacy trail commission.
In the white paper Put the Saver First, which is due to be published on Friday, research fellow at the CPS Michael Johnson has proposed that legacy trail commission should not be allowed after the retail distribution review (RDR) comes into force on 31 December 2012.
Johnson argued an end to legacy trail commission would help to improve transparency because most clients did not realise they were paying it.
‘This is all around transparency. How do we raise people’s awareness so they know exactly what’s going on?’ said Johnson.
‘I start off by saying in an ideal world this should stop because it’s all part of the problem. If I got financial advice in the past and was paying commission on an ongoing basis, almost certainly unwittingly, and I was to move my assets to another provider, that commission would stop. If I was to move or sell, that would stop. A lot of people don’t know that.
‘Most people aren’t aware they can do that because most people don’t understand what legacy commission is,’ he said.
In February, the Financial Services Authority (FSA) said advisers could continue to receive legacy trail commission after 2012 for products sold before the RDR, provided no further advice was given on those products.
Johnson said in the event of a trail commission ban, advisers should be required to tell their clients the value of any trail, calculated to the client’s normal retirement age, as at 1 January 2013, and that the FSA should provide a table of the appropriate discount rates to use.
Christopher Petrie, director of Christopher Charles Financial Services, said the ban would not be necessary.
‘Trail commission will eventually wither on the vine,’ he said.‘You have to let the new system come in before you start making changes to the old. A lot of businesses were built on the old trail commission basis, so if you want advisers to survive, you have to allow that transition to happen.’
Johnson’s white paper also proposed curbing the Investment Management Association’s power to label fund sectors, arguing this had contributed to the Arch Cru scandal.
The paper, which has been reviewed by the House of Lords, Labour and Conservative MPs and providers, argued that IFAs needed to focus on financial planning rather than advice and that the labels independent and restricted should be removed from the vocabulary.