By GRAHAM FROST 29/06/2007
The Financial Services Authority (FSA) this week set out its proposals to rid our industry of an age-old problem – mis-selling.
The vast majority of mis-selling exists for one simple reason, initial commission. As long as product providers are allowed to try and influence sales through paying high initial commissions to advisers, there will unfortunately be unscrupulous advisers willing to compromise their advice accordingly. To make matters worse, the highest initial commissions tend to be paid on the most mediocre products, as they’d stand little chance of attracting money otherwise.
Bestinvest has long pushed for a ban on initial commission and, while the FSA’s ‘Retail Distribution Review’ has not called for this, it is nonetheless a definite step in the right direction. The FSA is aiming to remove product provider’s ability to set commission levels and raise the bar in terms of adviser qualifications.
The upshot of the Review is a proposal for three categories of adviser, as follows:
Primary
A basic and low cost level of advice, restricted to a limited range of products. Advisers are only likely to require basic qualifications equivalent to the current Certificate in Financial Planning (the minimum qualification currently required to practice as a financial adviser). Advice would probably be formula driven (e.g. via decision trees) from a standardised fact find to ensure consistency.
General
Similar to the mainstream advice market at present as both fee and commission remuneration options will be allowed. However, these advisers will be unable to call themselves ‘independent’. Qualifications would be pitched towards the level of the current Diploma in Financial Planning, broadly reflecting the IFA market at present. Advisers opting for the commission route could have to keep more capital in store, reflecting the greater risk of having to pay mis-selling compensation in future.
Professional
This is intended to be the adviser of choice for customers wanting independent, expert advice. Advisers will require qualifications equivalent to the IFP ‘Certified Financial Planner’, CII ‘Chartered Financial Planner’ or Securities Institute Diploma, generally significantly higher than the typical IFA at present. Remuneration would need to be on a fee basis, as per the FSA’s new proposed definition: “any advisory remuneration derived in discussion with the customer and not influenced by the product provider."
These proposals would almost certainly preclude commission hungry salesmen from practising as independent advisers. Of course, it does leave scope for abuse in the ‘general’ category, but the FSA plans to devote more resource to scrutinising these advisers due to relaxing their monitoring of the ‘professional’ category.
What is less clear is whether commission will be unbundled from product charges (so called 'factory gate pricing'). The FSA's proposed definition of fees means it should be possible for adviser remuneration to be paid via a product provider if, for example, the customer doesn't wish to write out a cheque to cover fees. However, it seems this amount would have to be clearly levied within the overall product charges so the splitting out of commission from underlying product charges is a realistic possibility.
How does all this affect Bestinvest? Well, given our staunch independence, anti-initial commission approach and the high level qualifications generally held by our advisers, we appear to be a natural fit for the ‘professional’ category. From your point of view we expect it to be business as usual, especially since we could well be a couple of years away from these proposals seeing the light of day in any case.
Meanwhile we expect a lot of moaning and groaning from commission-led IFAs during the FSA’s consultation period on these proposals (until the end of the year). Even the Association of Independent Financial Advisers (AIFA) has attacked the proposals…suffice to say we’re not members!