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Batting the averages

Concerns are growing over FSA market-average figures.

The FSA’s new payment menu is troubling IFAs and product providers who want to see changes made to the way that some market-average rate of commission figures are set.

The menu disclosure document features a firm’s own maximum rate of commission along with the FSA established market-average commission rate for certain product groups.

The averages have sparked concerns that some figures are too low and accuracy needs to be improved. Some suggest consumer education is an issue so clients can make an informed assessment of an adviser’s maximum commission rate set against the market average.

Aifa policy director Faye Goddard says most of the figures look realistic but some areas are of concern – lump sums into collective investments and single-premium bonds. “With these two, we are not totally convinced that the data that’s been provided to the FSA is related purely to an advised sale. We want to see the data that is collected is reflecting an advised service if that is what somebody is giving,” she says.

Goddard says she understands it is a complex system and management consultancy Deloittes has looked into the FSA’s methodology in establishing the market averages but she says Aifa wants more transparency on what has gone into the data to arrive at the market rates.

She says: “If there are problems about getting data that really does reflect the market, then at least if we are aware of what is in the pot, then we will be able to discuss it. It is about transparency, we want to know exactly what has been factored in, in detail, and to see if there is a weighting that is distorting what we would expect.”

She says Aifa is pursuing the issue with the FSA.

Scottish Equitable business development manager Steven Cameron also points to single-premium bonds and single premiums paid into collective investment schemes, as problem areas.

He says there are several reasons why the figures in these categories might look low, such as the inclusion of cases where a very small rate of commission has been paid for a policy set up on an execution-only basis or where discount brokers have arranged transactions for a small commission, without giving full advice. He believes this often happens for single-premium investment business.

Cameron says: “What we reckon may have happened is the provider has submitted data and submitted it on every case where any commission was paid and that has included both full sales advice and also execution-only sales.”

He hopes that regulatory intervention under way to encourage providers to identify no-advice cases will help.

Another factor is fixed-term bonds of durations as short as one year. Cameron says these tend to pay less commission than a with-profits or a single-premium bond with an indefinite term and could be bringing down the average.

Cameron describes the market averages as a “difficult exercise” and says the FSA has handled it well but he wants to ensure that lessons are learned.

“There is not a lot that we can do about it now. The averages are the averages and that is what is going to be included in the menus from now on but what I would like to happen is perhaps to explore this with the FSA and the industry and see if perhaps we can find a way of arriving at more accurate averages in the future, which cover proper full advice,” he says.

Brunning Newman Houghton director David Brunning is less complimentary on the FSA’s efforts. “It is a stated objective of the FSA to put pressure on and reduce commission and this is how they are setting out to achieve it,” he says.

He adds that the industry needs to keep making “strenuous” representations to the FSA about the figures but he is not expecting a warm welcome.

Brunning says: “I am convinced that they already know the numbers are wrong and obviously arrived at strangely but it takes them towards their goal of putting pressure on, and ultimately reducing commission.

“It is another step where the FSA are interfering in a market economy by artificially trying to limit remuneration and they should keep out. An inefficient and expensive IFA will be deserted by their clients.”

The FSA says it does not accept that averages in some areas are too low and states that, wherever possible, execution-only business was excluded and only commission on advised business included in the calculations.

It says it challenged the data from providers if it thought it appeared too high or too low and then had its own work scrutinised by an independent party.

However, it does accept that some execution-only business will be included due to the fact that providers have previously not typically captured data on whether intermediated business was advised or not, saying this could be a factor in relation to lump-sum collective investment schemes.

FSA spokesman David Whitely says the “robustness” of the market averages is important and the Regulator plans to re-evaluate them annually, while also investigating whether any shorter-term adjustment is needed before most advisory firms start using the figures in their menus on June 1.

Whitely says: “Our research showed that the lack of clarity under the current regime inhibits the effectiveness of competition. For the first time, consumers have access to useful information without the need to do their own research. We want consumers to get value for money and if the impact of the menu is for the market to reduce some commission, this would be a logical outcome.”

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