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Banks and building societies to stick with charging models despite FCA concerns

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Banks and building societies say they have no plans to review their adviser charging models despite the FCA raising concerns about payments based purely on product sales.

As part of its findings on how firms are implementing the RDR, published last week, the FCA highlights concerns about “contingent charging”, where a client only pays the adviser charge when they buy the recommended product.

The FCA says: “If a firm operates such a business model, we consider this to be a higher-risk approach than a time-cost charging model due to the need to sell products to generate revenue. Firms operating contingent charging should ensure they have adequate controls in place to manage this risk.”

The comments echo those made by FCA chief executive Martin Wheatley last month, who suggested “dealing bias” still exists where firms only get paid when a product is sold.

Lloyds Banking Group charges an upfront fee starting at 2.5 per cent on the first £300,000 invested, with a range of ongoing charges if new investments are made.

A Lloyds spokesman says the bank has the checks and balances in place to ensure a product recommendation will not be made if it is not suitable. He says: “We constantly monitor all aspects of our advice model to take into account client, market and regulatory feedback.”

Nationwide charges 3 per cent initially and 0.5 per cent for ongoing advice. Head of product, protection and investments Guy Simmonds says: “We undertook extensive customer research to understand consumer reaction to adviser charging and different potential models. 

“The overriding conclusion from this was that our customers wanted to be informed of the costs of advice and more readily understood a percentage of their investment, with a personalised illustration, as a basis for calculating the advice fee over hourly rates.”

Legal & General has bancassurance partnerships with 87 per cent of the building society advice market, including Nationwide.

A spokesman says: “We believe the contingent business model for adviser charging is appropriate for the majority of our customers. Our research ahead of the RDR implementation showed four out of five consumers, regardless of income, prefer to pay for advice through the product. Our consultants are salaried and do not need to sell products to achieve their level of remuneration.”

Barclays, which levies a percentage charge on assets placed through its advisory investment service, declined to comment.

Royal Bank of Scotland and HSBC charge a fee of £500 for a financial plan or where clients choose not to take up their recommendations.

Ernst & Young financial services director Malcolm Kerr says: “If firms are only generating revenue from selling a product, that creates a degree of risk which has to be managed very carefully. I am quite surprised so many firms have gone for a model that looks just like commission and I do not think the regulator imagined that.”

Lansons regulatory consulting director Richard Hobbs says: “Most firms have adopted this method of charging because that is what consumers want.”

Barretts Financial Solutions senior partner Kim Barrett says: “It seems strange the regulator allows firms to charge the way they do but then says it is risky. 

“It would make more sense to make everyone go down the fee-based route.”

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. Take the High Road 1st August 2013 at 1:00 pm

    ….and the problem for having a ‘contingent charging’ that is dependent on a product sale is precisely what?……if all industries operated on the basis their clients/prospective customers pay a fee for something they don’t yet know how it is going to benefit them(and have yet to be actually shown what the goods/services they are buying), no one would buy anything and the world would finally go bust……pointless regulator drivel as usual!

  2. Barretts Financial Solutions senior partner Kim Barrett says: “It seems strange the regulator allows firms to charge the way they do but then says it is risky.

    “It would make more sense to make everyone go down the fee-based route.”

    What utter crap. Direct fees might work for Barretts but id does not mean it is best for everyone else – There is no one size fits all solution in any indusrty so why try to force one on us. Lets try something different and novel. Lets actually give the client the choice of how they want to pay. That would be a good ide wouldnt it? Answers of less than two syllables please

  3. @tthr…the point being that if the best solution for the client did not involve a product, you would be forced to sell one that wasnt suitable in order to recoup your costs. Not difficult to understand really.

  4. tthr

    What about advice where there is no product? Your advice is worthless? But suddenly becomes worth something if you sell something?

    Hmm. I’d sit in a quiet room and think this out if I was you.

  5. @Matthew: Except this is nonsense. Advisers who use this model aren’t “forced” to sell anything. They shrug their shoulders and move on. They don’t try to browbeat a client into investing money which will then inevitably become the subject of a complaint. The cost of the occasional wasted meeting is factored into their business model.

    What about the risk that a client who is paying by the hour feels that they have to take out a product, even if they’re not sure it’s suitable, because otherwise the hourly fees they’ve paid for their previous meetings with the adviser will have been a complete waste of money?

  6. I work on a mixture of a fixed fee and % on implementation. Sometimes it works well and sometimes it doesn’t.

    I think that the regulator should make clear concise rules for us to follow then step back and punish the firms that break the rules.

    This idea of making complex rules and then picking holes when people don’t interpret them as you wish cannot be allowed to continue.

  7. @matthew…..Sorry Matthew, and in no way do I wish to support the Banks, but despite what you say, you would not be forced to sell anything at all! Its simply called business in any other field or walk of life. Sometimes you win sometimes you lose. I would suspect that most of us regularly give advice to clients for no financial gain. This may insult the professional value of some of us – so no doubt you will build your proposition accordingly – but why is it wrong if I as a business man decide not to charge for some advice and thereby win a client / relationship for the future. Maybe if you consider it as a marketing cost you will see that as you described it’s not that difficult to understand really. Simples

  8. EU law almost certainly prevents the FCA from banning % based fees.

    The FCA is effectively just a local council… Europe sets the rules.

  9. Becoming a headcase IFA 1st August 2013 at 2:43 pm

    @ matthew and Ian

    I disagree tthr would be forced to sell an unsuitable product in order to recoup his/her costs. I think it only fair, as I don’t know him/her, that they are ethical enough to take the financial hit on not selling anything. They may well land a nice big case next week and make it up there. There is nothing wrong with cross subsidising, like all other businesses do. If I go into Curry’s and take up 15 minutes of the staff time and don’t buy anything they don’t charge me a fee…they make it up on the others that do buy.
    Also, is it not possible that tthr has a system where they charge a fee of £500 for a review if their advice is not taken up, but offset that fee against the percentage fee they get paid if the advice is followed?

  10. And while we’re at it let’s outlaw solicitors being paid on a no win, no fee basis. Or stop dentists recommending treatment they might make money on. Or accountants providing additional tax planning services.

    Let’s get real. At some point caveat emptor has to kick in and trust plays a part. You can legislate and make rules as much as you like but you can’t outlaw unethical or immoral behaviour.

    For the crooks and undesirables you need to invest in detection and prosecution/removal. I would humbly suggest that point has been reached. The law of diminishing returns means that there is little or nothing more to be gained, and a lot to lose, from additional rules, guidance, huff and puff.

  11. I get the reason for this. It’s the ongoing conundrum of good advice versus earning a decent income. How to motivate a business to grow through sales when you can’t be seen as “selling”
    The majority give good sound advice but there are some that do not.

    I do read these articles I wonder when we can roll this good practice into other industries. Perhaps a 3 meeting factfind to establish my need for double glazing. The advantages and disadvantages of each upgrade of a mobile phone …..

  12. Do as the FCA and charge a percentage!
    Call it; commission, fee. percentage, bonus, charge, what ever, the bottom line it is an amount of Money.
    A simple statement, the cost is £xxx paid from/by where ever.

  13. Ma heid is near bustin', man 1st August 2013 at 3:11 pm

    “I disagree tthr would be forced to sell an unsuitable product in order to recoup his/her costs. I think it only fair, as I don’t know him/her, that they are ethical enough to take the financial hit on not selling anything. They may well land a nice big case next week and make it up there. There is nothing wrong with cross subsidising, like all other businesses do. If I go into Curry’s and take up 15 minutes of the staff time and don’t buy anything they don’t charge me a fee…they make it up on the others that do buy.
    Also, is it not possible that tthr has a system where they charge a fee of £500 for a review if their advice is not taken up, but offset that fee against the percentage fee they get paid if the advice is followed?”

    Precisely what we do, Becoming a Headcase IFA. I am so sick of all the smarty-pants hourly rate chargers, serving very high net worth parts of the country, telling all the rest of us to ignore the feedback we are getting from our lesser HNW client’s.

    My clients want % based fees routed through the products. We asked them. That is what they told us almost unanimously.

  14. Overcharging one client to pay for the lost time with another is not exactly fair.

  15. These ifas must have loads of people ringing them begging to pay £750 to set up a £100 pm pension. Commission and selling is not a dirty word, it just means most ifas now don’t sell regular premium products. In 10 years people with pensions will have taken them and the majority of under 50s working class people will have to work to 66 onwards.

  16. I also work on a mixture of a fixed fee and % on implementation & agree that about 60% of the time it works. What I can’t understand is how the FCA allow certain Organisations to interpret the new arrangements so differently. How can they dislike firms charging out of products & allow them to get away with it.

  17. ‘Overcharging one client to pay for the lost time with another is not exactly fair’

    Idiot

    £0-£32,010 20%
    £32,011- £150,000 40%
    Over £150,000 45%

    Cross sub

    Now find a hole

  18. So Nationwide claims to run its sales force on the basis that its consultants are salaried and do not need to sell products to achieve their level of remuneration. Really? So all they’re required to do is turn up for work every day but if, by the end of the month, they’ve racked up zero sales, that’s perfectly okay? No pressure at all actually to sell anything? And those who do sell lots of product are in no way incentivised to do so? Cobblers.

    That aside, I really don’t understand why the FSA is still wringing its hands and fannying about over this issue. If it’s concerned about product sales being dressed up as advice and wants to separate the two, then why doesn’t it cut through the crap and stipulate that not less than a minimum proportion of the total hoped-for remuneration must be charged upfront, prior to the presentation of any product/s? That’s an advice charge. Anything related to the sale of a product is nothing but commission by another name.

    Then again, when did the FSA ever manage to come up with a solution to anything that’s simple and straightforward? Doubtless the FSA’s next internal debate on the subject will conclude that what’s needed is yet another 80 page guidance document. Yes, that’s it, more guidance, more verbiage, more crap with which to burden an industry already lost in endless thickets of regulatory documentation and struggling to make sense of it all. It’s why the FSA needs a budget of £578.4m to justify its existence (or is that figure already out of date?)

  19. James, would you be happy going to a garage who explained your service would cost more than normal as they gave another guy a free service this morning because he was unwilling to pay for thier time?

  20. And the FCA will do b….. all about it because it’s the banks.

    If an IFA had done 1/100th of what any of the big banks has done, the FSA would have banned the senior management, levied a fine that would really hurt and possibly instituted criminal proceedings.

  21. So charging hourly fees would get rid of those of questionable morals?

    I think not. As another article on here showed many solicitors bump up their hours to make sure they earn a sufficient amount to make a profit so it would make no difference.

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