I wanna tell you a story

I ‘wanna’ tell you a story, as Max Bygraves used to say, of how the world of easy mass-market access to advice, now in intensive care, will see the life support machine finally turned off.

The potential for complete catastrophe cannot and should not be underestimated if our on-site snapshot poll of some 1,100 advisers is to be a guide. 

I am very aware that from the FCA’s perspective, and that of the TSC, the regulatory focus is always, rightly, going to be on consumer detriment. But, if FOS figures are a guide, adviser-caused consumer detriment is very low indeed and something that the regulators are well aware of.

However, with the focus seemingly being solely on the consumer, some foreseen warnings, while they are clearly being flagged, will continue to be ignored and as a result matters will only get worse.

The adviser community and their clients are seeing a system that has worked quite well indeed for the mass market, and for very many years, being swept away.

Trail removal will ultimately destroy many possibilities of aftercare and ongoing service to many adviser firms’ customers (low end savers as Mark Garnier MP refers to them). And by that, I also mean the resulting further reductions in adviser numbers as the quest for the perfect zero risk financial services consumer world will be met by the perfect regulatory storm.

Trail removal is part of that ‘storm seeding’ possibility and the initial removal date of April 2016 is approaching fast although some provider firms have jumped ship already.

I am not sure that politicians, regulators or even in some cases financial advisers are aware of the potential consumer detriment and commercial devastation that will, without doubt, follow if the problem is not addressed now.

Here are some points to consider regarding trail, it’s origin and importance to both advisers and their customers/ clients:

  • Trail or renewal commission formed part of adviser remuneration in most pre RDR contracts. Trail is a contractually binding adviser expectation.
  • It is managed and administered mostly by provider legacy computer systems that have not got an ability to ‘menu-ize’ in retrospect without huge cost and that is not seen as a viable or worthwhile spend
  • Trail is small in individual monetary amounts, paid subject to contracts remaining in force to an end date, maturity or claim event
    Not all advisers took ‘initial commission’ preferring to build up value and income streams from an increasing number of small but regular monthly payments, again paid subject to the contract remaining in force to an end date, maturity or claim event.
  • The accumulated value of trail, regular and/or renewal commissions, accrued over many years through many individual client policies, provides a recurring and stable income stream to the firm, in addition it creates the embedded value/ worth in an adviser business.
  • Trail was/ is a substantial part of adviser retirement or exit plans too as any advisory business owner would look to sell this income stream along with the goodwill of their business.
  • Up to and beyond RDR, firms were buying or selling businesses based mostly on the assumption that this income source will continue for many years to come.
  • The advantage to acquiring firms is that it provides an immediate revenue stream, increases their client bank, and the recurring trail income they have acquired can often be their primary means to fully fund the buyout.
  • Disadvantages to sellers are that the purchase money is not paid up front, often being paid over a number of years, typically 3 and has little security for the unpaid value.
  • If the acquiring firm collapses in that time (looking forward) due to the discontinuance of trail, the total seller’s consideration may not ever be seen in full.
  • More disadvantages lay ahead for the buyer if that trail revenue ceases, the value the firm thought they had paid for in their acquisition is reduced or disappears.
  • But they still have a contractual obligation to buy a business, over a 3-year term for example, that they can no longer afford.

Now we must consider the potential ‘knock on’ problems relating to the removal of trail commission, this I believe has not been understood as fully as it should.

Removal of the accumulated value of trail, regular and/or renewal commissions (that were the embedded revenue streams and value in an adviser business) by design, default or regulatory intent destroys the value of that firm to the extent that it no longer has any worth and so nobody will want to buy it.

What happens to their clients if the firm simply closes down?

Removal of trail commissions could mean that the acquiring firm is unable to pay the full consideration or in some cases none of the consideration.

The loser in this scenario is the seller, their resulting loss could be huge.

The outcome could be that the seller then sues for the unpaid monies due to them, but, the buying business may be so unsustainable, for lack of this trail, that it closes as it cannot meet it’s liabilities as they fall due any longer. What happens to the clients?

Acquiring firms may have paid the seller in full for the businesses they have acquired, but no longer get the monthly income trail- a big cash flow hit. This could mean it can no longer meet the regulatory fees and other costs involved in running the business and they close down.

What happens to their clients?

The consumer is a very big loser too in all this. They may prefer that trail pays for ongoing servicing and advice. Removal would mean they would then have to pay a fee that they may not wish to or be able to afford to do.

What happens to them?

The possible outcome, the perfect storm.

The loss of trail, a regular income flow, could make many adviser businesses unsustainable; in fact the effect would be catastrophic if our poll of nearly 1,100 advisers is a good indicator.

Many advisory businesses, both in the IFA and banking sector have closed in the run up to RDR leaving many orphan clients, most of those  the RDR survivor firms will not/ would not service as they would not/ could not pay fees that trail commissions have often, historically subsidised.

Politicians on the TSC are focused on this problem to the extent that they may look at the adviser gap effect in mid to late 2014 but it will get a lot worse before it gets better.

Fewer adviser firms mean higher regulatory costs for those that are left.

It also means that the liabilities of those firms, such as they may be, that have closed down will pass to the FSCS for any miss selling issues.

Those firms remaining in business will ultimately pay for any claims against these firms by higher FSCS levies and their PI costs will hike, if they can actually get it.

Many of those surviving firms may find, due to increasing regulatory costs that they can no longer pay those levies and close down. What happens to their clients?

The result, more burden on the FSCS and higher costs for the firms left is the outcome And fewer firms to fund the FCA and FOS regulatory costs.

But the biggest losers of all could be network clients.

Networks are also under pressure from the outcome of the recent FCA paper on inducements.They are coming under big financial pressures as the impact of FCA inducement removal could run to millions a year from their cash flow.

To see their trail removed will mean the lack of cash seeing increased budget balancing cost falling on their members, who may not wish to pay, or cannot afford to pay, preferring instead to leave and start their own firm or move to another advisory firm- if they can, or leave the industry.

Network collapses have a detrimental ‘tsunami like’ financial effect on those firms that are left and particularly in that brave new post RDR world.

Disenfranchised ‘consumers’ (clients) are left with nobody to turn to for advice, if they do not wish to or are unable to pay fees and in fact even if they do wish to pay fees.

The tsunami is coming, but are the regulators ready to deal with it, and will the consumer understand as it washes over them that what was being done in their name by regulation is the very thing that has made the disaster happen.

This requires urgent attention and a regulatory stop placed on the removal of contractually agreed trail to provide stability in a sector already under much transitional and evolutionary financial pressure.

Or will the tsunami, when it has passed, result in no need for regulation as there is nothing left to regulate.

Max Bygraves died in 2012, if our poll is even a half accurate guide, many advisory firms will die and many consumers will be very badly served as a result in 2016 unless something is done.

Now that would be a story!

Hit me baby one more time

How much more must the world of financial advisers come under attack?

Nearly 1,100 advisers have now voted on our poll “Will the removal of trail commission have a negative effect upon your business”?

90% say it will be catastrophic!!!

We have seen many comments like those below across a number of LinkedIn groups on the subject as well as our site:

“Does anyone know if the FCA has publicly given any view on Friend’s Life’s decision to stop paying trail and not passing back to the relevant customers either”?

“Trail commission is contractual on contracts already in force. It was disclosed to potential investors before they invested and one can only presume that they were content with it”. 

“Can someone please enlighten me about the reason for switching off trail if a change occurs with investments, which seems to be applied differently according to product provider. I have seen no explanation from the FCA why this has been introduced”?

“I think there is an argument for the regulator to ask companies that stop trail commission payments to justify why they have done so, in the interests of TCF”.

“I always viewed trail and renewal commissions as a form of contractual deferred compensation. The providers retain their business largely through the efforts of their reps/advisers/agents so they had to provide some inducement to maintain servicing . That inducement came in the form of trail and renewals. The less paid in trail and renewals the more vulnerable was their business long term”.

So, do advisers just sit there and let it happen? Does anybody care? Politicians are not interested until the FCA review happens.

You can read my mail trail to Mark Garnier MP on the matter. It spells out clearly the issues and why advisers would find the removal catastrophic yet he cannot do anything and neither can parliament.

This is like a house of cards about to fall down as a single ‘teeny tiny’ card is accidently touched!! An unintended consequence

What do you want doing about it?

When do you want it done?

As Britney sings ‘Give me a sign”! Because at Panacea Adviser we want to see some protective action now!

gertcha, cowson, gertcha

It’s called the tipping point.  Individually and as an industry we all have one, it’s the point when enough is enough and action has to be taken.  

My tipping point arrived last April.  

Previously I had suffered from two fraudulent attempts to empty my wallet by one West Country CMC that subsequently suffered enforcement by the MOJ.  Unfortunately a little slap and a ticking off is of small consequence when the reward for chicanery and sharp practice can be £000s.

For too long advisers have had to assume the position and endure the aftermath of devious and predatory claims management companies running rampant without effective challenge.

Readers will know that I have long lamented the ease with which CMCs are able to draft barely literate letters suggesting mis-selling and containing detailed lists of rule breaches.  These claims are supposedly on behalf of their clients – many of who remain totally unaware of the allegations being levelled or only believe they have been mis-sold because of false claims made by the claims management company.

Such complaints waste time and money and may even involve the intrusion of an Ombudsman investigation even when no product exists and therefore no mis-selling can be present.

Matters will be different from now on because on October 9th Accrington County Court issued a verdict which will have a profound impact on CMCs and their future behaviour.

In April I received a grammatically inept letter from Aims Reclaim, a trading title of Aims Legal Ltd, a Blackburn-based CMC.  Aims Reclaim and its parent company currently operate under special measures imposed by the MOJ.

Their letter requested the return of my client’s premiums in line with FOS guidelines listing specific seven allegations relating to a PPI plan.  I have never arranged PPI so my sharp retort threatened legal action for defamation.

Aims Reclaim refused to retract so I invoiced them for £100, for wasting 40 minutes of my time.  This they declined to pay, citing an obligation to investigate under FCA rules.

As a result I commenced a small claims action, which they chose to defend thereby resulting in a four-hour train journey to Accrington court. 

Having heard my representation, and having seen a letter from the client confirming that no such allegations had been made by her, the Judge invited Aims Reclaim to present its case.  Its representative claimed that the letter was merely an ‘enquiry’.  Judge rejected this pointing out that it contained seven specific allegations.

After studying case law the Judge established that Aims Reclaim owed a duty of care and that their letter, with its unsubstantiated allegations, had breached that duty.  The descriptive she used was “lamentable” and I was awarded my £100 plus costs. 

Aims Reclaim then had the audacity to request a confidentiality clause, which the Judge summarily refused.

What does this mean for advisers? 

Firstly, it is clear that should any CMC send a letter listing alleged breaches, which have not been specified by their client, then they are likely to find themselves receiving an invoice for wasting the adviser’s time. 

Secondly, professional liars who claim to work on behalf of their client will have to extend far greater caution because I, and no doubt others, will have no hesitation in repeating this exercise.

Thirdly, can I ask that the banks, building societies and insurers follow this example?  If every unwarranted fishing expedition and fraudulent attempt was met with an invoice then the present plague of CMCs would be cured.

It is far too easy for advisers who have wasted their time investigating erroneous or fraudulent claims to simply breathe a sigh of relief when able to put the matter to bed.  However, it is only by exposing these claims and ensuring CMCs pay the price that we can start to cure the industry of this canker.

Alan Lakey

Highclere Financial Services

Editors comment:

As many will know, Alan and I have been on a bit of a crusade against CMC’s for some time, more of which can be found on this site. This case should be taken as setting a precedent, all firms should now look carefully at claims coming in from CMC’ s and if they fit the ‘tipping point too far’ category, follow Alan’s lead.

You can see the court judgment documents here


Advisers may not be aware but during the summer the Claims Management Regulation Unit revised and re-issued their Publication Policy to give them more scope to publish action taken against CMCs. This was ahead of development of their website to include an ‘Enforcement’ page where you can find recent enforcement action and current/ongoing investigations. The page can be found here –https://www.claimsregulation.gov.uk/enforcement.aspx – with enforcement actions and investigations on separate tabs.

Finally, and I would appreciate any adviser or compliance feedback on this. If you see clearly false claims coming in from CMC’s, possibly even from clients, immediate recourse to the courts ‘could’ place a stop on the matter going to the FOS as they cannot investigate cases if legal action in regard to the matter is underway?