COB 4 Annex 7R 1Identifying the maximum rate of commission (or equivalent), the market average and the example

Identifying and describing the maximum rate of commission (or equivalent), the market average and the Example

1.

A firm must state in each fees and commission statement it issues:

(a)

its maximum rate of commission (or equivalent) for each product group in the statement in accordance with Note 18 of COB 4 Annex 6 R2;

(b)

the market average rate for each product group in accordance with Note 19 of COB 4 Annex 6 R2;

(c)

an illustration in the example column of an amount of commission (or equivalent) calculated by reference to its maximum rate for each product group in the statement and the example contribution levels stated in the tables (ie eg £100 per month or £10,000 lump sum) in accordance with Note 20 of COB 4 Annex 6 R2.

Maximum rate of commission (or equivalent)

2.

The maximum rate of commission (or equivalent) specified by a firm must be the maximum amount that the firm decides to retain.

3.

If the maximum commission (or equivalent) is not apparent from the rates supplied by a product provider then a firm must adopt the net present value comparison method set out below.

4.

For any product group, the maximum rate of commission (or equivalent) must not be more than a firm could reasonably expect to receive from any product provider.

Identifying a maximum rate of commission - comparison of net present value

5.

A firm must use the assumptions set out in paragraphs 8-12 below when calculating the maximum commission figures to be inserted into its fees and commission statement. Where a firm uses a tool provided by the FSA for this express purpose (for example a calculator provided by the FSA on a cd-rom for the purpose of calculating the maximum commission figures), the calculations can be presumed to have used these assumptions.

6.

The net present value for each commission (or equivalent) rate must be calculated as the sum of the discounted values of each commission (or equivalent) payment that the firm may retain for that commission (or equivalent) rate, using the assumptions set out in paragraphs 8-12 below.

7.

For any product group, the firm's maximum rate of commission (or equivalent) is the commission (or equivalent) rate in that product group with the highest net present value.

8.

A firm must use the assumptions outlined in Table 1 when calculating net present values.

Table of assumptions to be used in calculating net present values.

Regular premiums/contributions

Collective investment scheme

Net growth rate + 3%

6%

6%

10 years

Endowment

Net growth rate + 3%

6%

6%

Maturity

Personal Pensions / SHP

Net growth rate + 3%

6%

12% for 5 years then 5%

Maturity

Whole of Life

Net growth rate + 3%

6%

6%

37 years

Single premiums/contributions

Annuities

Net growth rate + 3%

6%

0%

16 years

Bonds

Net growth rate + 3%

6%

2.5%

7 years

5%

Collective investment scheme

Net growth rate + 3%

6%

6%

7 years

Personal Pensions / SHP

Net growth rate + 3%

6%

2.5%

10 years

Income withdrawals

Net growth rate + 3%

6%

0%

10 years

6%

9.

Commission (or equivalent) payments must be assumed to be payable as outlined in

The timing of commission (or equivalent) payments

Initial / indemnified commission

immediately at outset of the contract

Commission as a % of premiums

at the time of payment of the relevant monthly premium

Commission as a % of fund value

at the end of each policy month, immediately after any withdrawals and lapses, at a monthly rate of 1/12th of the annual % of the fund value

10.

Withdrawals must be assumed to occur monthly at a rate that is 1/12th of the assumed annual withdrawal rate.

11.

Lapses must be assumed to occur monthly, at a rate that is 1/12th of the assumed annual lapse rate. In calculating the net present value, no commission should be assumed to be payable on the proportion of policies that are assumed to have lapsed.

12.

Mortality rates must be ignored.

Describing the maximum rate of commission (or equivalent)

13.

Subject to paragraph 14, a firm must use each appropriate description in (ie one or more) to describe the maximum rates of commission (or equivalent) in its fees and commission statement.

COB 4 Annex 7R Table 3

Regular premium or contributions

i. "X% of the first 12 month's payments"

ii. "X % of each of the first n month's payments"

iii. "Y% of all payments"

iv. "Y% of all payments from month p"

v. "Z% of your fund value each year from year q".

Lump sums

i. "X% of the amount you invest"

ii. "Z% of your fund value each year from year q"

14.

A firm must adapt any of the descriptions prescribed by Tables 3 so that its fees and commission statements adequately describe the particular characteristics of a firm'scommission (or equivalent) arrangements. For example, a firm can and should re-express the percentage figure, in the description taken from Table 3, in a "shape" (that is a description of the pattern of payments) that it considers to be typical of the way in which it retains commission (or equivalent). This may differ from the shape in which the particular maximum rate of commission (or equivalent) is actually payable. Another example of the way in which a firm should adapt the descriptions in Table 3 is if the commission received by a firm is payable as a fixed cash amount per policy then alternative wording should be used by the firm to adequately describe the fixed nature of the payment in its description of the rate of commission.

15.

A firm that uses more than one of the descriptions in must make it clear that it has used more than one description (eg by inserting the word "plus" in between each description).

16.

The maximum rate of commission (or equivalent) must be rounded to the nearest 0.1% unless the commission (or equivalent) is a multiple of 0.25% of a fund value in which case it should be shown rounded to the nearest 0.25%.

Identifying and describing the market average

17.

The FSA will publish the net present value of market average rates on its website from time to time.

18.

A firm must express the market average rate in the shape or pattern of payments which most closely corresponds to the number, frequency and nature of payments in the shape or pattern of payments used to describe the firm's maximum commission (or equivalent).

19.

A firm can use any suitable tool or method to re-express the market average in its fees and commission statements, as long as that method uses the assumptions set out in 8-12 above (for example a calculator contained on a cd-rom of the type referred to in paragraph 5).

20.

The market average rate shown in the fees and commission statement must be a re-expression of the published net present value of the market average using the assumptions set out in 8-12 above. Subject to any rounding in the final description, this re-expression should have the same net present value as the published market average.

21.

A firm must describe the market average rate using the most appropriate description in the Descriptions column in Table 3.

The market average may be equivalently expressed by adopting the method set out in the worked example in COB 4 Annex 9G below, used in conjunction with tables of net present value factors that will be made available by the FSA. These factors will be calculated using the assumptions set out above. Alternatively, the market average expression may be expressed using such other tools, systems or methods as the FSA may make available from time to time.

Changes in the market average

22.

A firmmust ensure that its fees and commission statement are revised to take account of changes in the market average rates published by the FSA by not later than:

(a)

2 months from the date on which the FSA prescribes amended market average rates if the effect of the amendment is to reduce any of the averages for a relevant product group by 4% or more of the previous average; and

(b)

in all other cases at such time as the firm has occasion to revise its statements.

The example

23.

Subject to paragraph 25, a firm must use, in the example in its fees and commission statement, the description in Table 4 that corresponds to description(s) of the maximum rate of the commission (or equivalent) that appears in its fees and commission statement.

COB 4 Annex 7 R Table 4

Regular premium or contributions

i. "X% of the first 12 month's payments"

i. "£X initially"

ii. "X % of each of the first n month's payments"

ii. "£X spread evenly over the first n months"

iii. "Y% of all payments"

iii. "£Y each year"

iv. "Y% of all payments from month p"

iv."£Y each year from month p"

v. "Z% of your fund value each year from year q".

v. "£Z in year p, £Z + A in year p + 1, and so on (the actual amounts will vary in line with your fund value)"

Lump sums

i. "X% of the amount you invest"

"£X initially"

ii. "Z% of your fund value each year from year q"

"£Z each year from year p (The actual amounts will vary in line with your fund value)"

24.

A firm that uses more than one of the descriptions in Table 4 must make it clear that it has used more than one description (eg by inserting the word "plus" in between each description).

25.

A firm must adapt any of the descriptions prescribed by Tables 3 and 4 as are necessary to ensure that a fees and commission statement adequately describes the particular characteristics of a firm's commission (or equivalent) arrangement. Examples of the way in which the descriptions could be adapted are provided in paragraph 14 above.