This is possibly the biggest bone of contention for advisers in the investment space. In the FSB’s RDR Update published in December 2016, the following information was conveyed:
Commission on investment products
As indicated in our December 2015 General Status Update, the intention is to implement the prohibition on investment product commission in two steps, namely by first disallowing commissions on lump sum investment products and thereafter on recurring contribution investments. Our view is that this staggered approach will smooth the impact of the shift away from commissions for affected financial advisers.
In the case of recurring contribution investments, the prohibition of commissions will be subject to the low income market exception contemplated in RDR Proposal TT. We do not propose a low income exception to allow commissions for any lump sum investment products.
These changes are only envisaged for phases 2 and 3 of RDR, and provision will be made for phasing this in over time.
Compulsory and living annuities
The FSB previously highlighted an anomaly regarding remuneration in respect of compulsory annuity products. If such annuities are regarded as investment products for RDR purposes, adviser remuneration in respect of these products will be restricted to advice fees only. In the case of living annuities, advice fees are typically structured as an ongoing fee for ongoing advice, recovered from the living annuity’s investment value from time to time. In the case of fixed interest annuities, the inflexible nature of the product means that ongoing advice fees cannot easily be motivated, thus effectively restricting adviser remuneration to an up-front advice fee – which a number of customers may be reluctant to pay. The abolition of commissions could therefore inappropriately skew advice toward living annuities. On the other hand, if commissions were to continue to be permitted on fixed interest annuities only, this could conversely inappropriately skew advice toward these products.
To limit these risks of regulatory arbitrage, we are considering permitting a level of commission to continue being payable for any compulsory purchase annuity sale (both fixed interest and living annuities) below a certain purchase price threshold. The compulsory nature of these products and the fact that the investment size is determined by the proceeds of the customer’s retirement savings pay-out, arguably limit the risks of commission-driven “over-selling”. Such an approach is also consistent with broader retirement sector reform objectives encouraging annuitisation. We will consult further on this option, including an appropriate threshold.