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Against the grain

The FSA’s interim report on the RDR aims to boost consumer confidence in the retail financial products market by marking a separation between sales and advice. The argument that these changes are necessary to allow customers to tell the difference between advice and selling is spurious. The market has been operating for 20 years with tied and independent advisers distinguishing themselves with mandatory disclosure without evident problems.

The proposal that tied advisers must upgrade to an IFA or downgrade to out and out sales goes against the grain of the market, is at odds with EU practice and is inconsistent with combating financial exclusion. Nor is the provision of tied advice inconsistent with fair treatment (which is what the interim report implies). Given that the FSA calls for market-led solutions, firms should argue that they can treat customers even-handedly without needing to offer whole of market advice.

The problem with what the regulator has called this “simple landscape” is that it leaves investors with a too narrow choice between the potentially costly advice of an IFA or deciding on a salesman’s goods with no objective advice at all. Under the FSA’s proposed reforms, the middling sort of “tied” adviser to be found in banks and on the high street, offering general advice on pensions and long-term savings to the mass market will find their role banned or severely limited.

Thanks to their branch networks, building societies and banks may still be able to achieve mass-market sales. In fairness, the FSA has recognised the dilemma faced by banks at least and is said to be sympathetic to them continuing to offer advice on their own financial products. But faced with the dual obligation to acquire exacting professional qualifications and to present customers with a hefty bill, many traditional advisers with long-standing links with a provider will post the closed sign or polish up their salesman’s patter.

Not that there are only losers in these proposals. Aside from the upmarket advisers, the private client wealth managers who already operate at the enhanced advice level, providers who are able to manufacture products suitable for both the sales and advice sides of the market will also benefit.

But the British Bankers’ Association and the Association of British Insurers have warned that the FSA’s current proposals will confuse consumers and do little to enhance levels of financial awareness in the public.

The report offers a remarkable opportunity to contribute to the design of the retail distribution system and firms would do well to take advantage of it.

Simon Morris is partner at CMS Cameron McKenna LLP

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