Investors are being warned to look closely at products recommended by financial advisers ahead of this month’s ban on commission.
Sales of certain investment products that pay large commissions to advisers have increased during the past few months, according to the financial regulator.
The Financial Services Authority is concerned that some advisers could be attempting to make a last-minute push to secure long-term commission payments ahead of the upcoming ban.
The retail distribution review (RDR), which takes effect on December 31 2012, is a package of changes intended to clean up the financial advice industry.
From 2013 advisers must pass qualifications equivalent to the first year of an undergraduate degree in order to work with clients, and must specify whether they offer advice on the whole of the market (and are independent) or are limited to a specific range of products (and so are restricted).
They will also have to arrange a fee with clients, making it clear exactly how much their advice costs instead of taking a commission from providers. Investors will be able to choose whether they pay the fee upfront or as a charge on their assets.
“It’s an evolution,” said David Geale, head of investment policy at the Financial Services Authority (FSA). “And it will be a significant change that people will notice when they visit their adviser next year.”
The regulator believes the new rules will improve the quality of financial advice in the UK and put an end to “commission bias”, which encourages some advisers to recommend products that pay the highest rates of commission rather than those that best suit their clients.
The Association of Investment Companies, for example, is hopeful that the ban will spur more advisers to recommend investment trusts, which are currently overlooked in favour of products such as investment bonds that cost savers more but pay out larger commissions.
Research from consultants BDO also found that more advisers could opt to recommend cash-based products in future, to meet new risk-based regulation.
RDR has taken more than six years to come into effect, during which the regulator has agreed to a number of compromises requested by advisers.
One change means that although the ban will prevent advisers from taking commission for sales they make next year, they can still take an annual sum, known as trail commission, from sales made before the end of this year.
Listen to Elaine Moore discuss the Retail Distribution Review on the FT Money Show podcast
Annual trail commission is typically 0.5 per cent for an investment Isa and more for pensions and investment bonds, and is taken out of a client’s money regardless of whether or not the adviser has done any new work.
Although advisers cannot take trail commission for products sold after the ban they can continue to take it for sales before then, until the product is closed. They can also continue to take trail commission on investment bonds even if the funds held within these wrappers are closed and new funds are opened.
According to the FSA there has been a marked increase in the sale of investment bonds in 2012.
Reporting its third-quarter results, Prudential, the UK insurer, wrote that onshore bond sales rose by 27 per cent in the first nine months of 2012 compared to the same period in 2011 and noted that this may be “Retail Distribution Review (RDR) related”.
“While our business is on track to be ready for the onset of RDR, we expect investment bond sales, in particular, to be impacted in the latter part of 2012 and into 2013 as distributors adapt to the new regulatory environment,” it wrote.
The FSA said that it was keeping a close eye on overall sales volumes in the weeks leading up to the ban to make sure that advisers were not significantly increasing their opportunities for commission.
“Once the RDR rules have come into force, we will take action if we see firms acting in a way that could lead to consumer detriment; for example, recommending retention of higher charging products so they can continue to receive trail commission,” it said.