Count down to RDR: The final piece of the jig-saw? Paper on ‘legacy assets’ issued today
Yesterday, we held a successful event in London on the key challenges and implications of implementing RDR in the UK following our report issued earlier this month.The event was supported with some great and insightful content from the FSA, Focus Solutions and Altus – oh, and of course ourselves.
At the event, the FSA told us that the long awaited final guidance on the rules for handling legacy assets were imminent.What they didn’t tell us was how imminent...the consultation paper was issued this morning with a target response date of 16 January 2012.It is already generating plenty of debate in trade articles. From our research, the treatment of ‘legacy assets’ was considered to be one of the key final pieces in the jigsaw that would enable product providers to complete their designs for RDR readiness at the end of next year.
From a quick scan of the consultation paper, it would appear that the original intent has been maintained.My current interpretation (pending a more detailed review) is that if advice has been given on a ‘top-up’ decision, then adviser charging applies and not commission.Trail commission on products sold prior to RDR continues and is unaffected.If the client decides to ‘top up’ their policy themselves without advice, then existing product rules on commission continue.
Beyond the obvious behavioural and motivational implications, from an operational and technology perspective, this presents some interesting challenges – especially from the view point of a product provider facilitating charges on behalf of an adviser.
- How does the product provider (or the regulator for that matter) know if advice has been given or not?What is the nature of the ‘hand shake’ that needs to take place between adviser and the product provider to determine whether the ‘top-up’ needs go via the advice charging route or the commission route?
- Each product open to ‘top-ups’ (and therefore the system supporting it) will need to be able to manage both adviser charging and commission and switch between them depending on whether advice has been given or not.
- Likewise, illustration systems, documentation, and financial performance reporting will need to change to cater for advice charging and commission in a similar way.
The best way to bring this to life is through an example.From my understanding, if a client has £50k invested in their pension, has an additional £50k to invest, and takes advice resulting in this new amount being paid into their existing pension, then trail commission will be paid on the original £50k and an advice charge will be payable on the additional new £50k.
In this scenario, the system supporting the product will need to differentiate which part of the investment pot was advised and which part was not. If you consider that most product providers do not have just one system supporting multiple products and that commission logic is often embedded inside each legacy product system, then this change may need to be repeated for as many systems as there are open products.
Sounds like a pretty tough and complex implementation challenge – especially when you consider that there are now less than 283 working days between now and the RDR deadline, and that the consultation paper is not yet final.
Product providers now need to work through this paper to assess the impact on their plans and finalise designs if they are to be ready in time. It will be interesting to see if any product providers choose to close books to ‘top ups’ owing to the inability to make a solid business case to keep the books open, or if any product providers seek to secure direct ownership of the client to avoid the complexity.This is an area that we will be watching with interest!