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Chris Gilchrist: FSA will need a firm line with reluctant IFAs

Chris Gilchrist MM blog

Are we sitting comfortably? I don’t think so. As the clock ticks down to 1 January, it is becoming clear that in every segment of the financial services industry affected by the RDR, there are lots of processes, products and services that are not RDR-ready.

The real question is whether those who fail to be ready in time will get away with it.

Without going into the detail of how adviser charging affects DC scheme advice or client withdrawals from bonds or pensions – the kind of areas where unintended consequences of the RDR are showing up like long-lost members of the Adams family – I look at this from two perspectives, the political and the professional.

From a political perspective, the regulator now faces an active political group in Parliament representing financial advisers.

Financial advisers are mainly small businesses and can easily cast themselves as Davids being oppressed by Goliaths and, at a time when every government department is meant to be helping small businesses, such oppression is likely to get a bad press.

Furthermore, the regulator has already signalled that it knows where the soft targets are. Hammering the banks for incentivising staff to loot and pillage their customers is an easy win, and there are plenty more where that came from.

Obvious failures by product providers are likely to be met by reprimands and heavy fines. I hope that senior managers will be told they will be named and shamed for future failures, as the FSA has already suggested.

Bans on toxic products will provide another stick to beat them with. Great stuff.

So in the first phase of the RDR, it seems we can expect finger-wagging, slapped wrists, heavy-booting and penal fines for product providers that will keep critical MPs at bay and provide the odd decent headline for the FSA.

But what of advisers? It is well known that there is a significant minority of advisers who are simply pulling a fleece over their historic commission-based payments and calling it adviser charging.

But calling commission charges will not do the trick with networks, which are being told by the FSA that they will be looking for such practices. In fact, networks are under pressure to chuck out such advisers before 1 January.

A key point is that the new management information advisers have to provide to the FSA from 1 January will in principle enable a computer (let’s bypass the issue of whether there are intelligent human beings at Canary Wharf) to identify advisers (at an individual as well as firm level) who are looting and pillaging their clients.

You might therefore think that advisers using woolly adviser charging to disguise commission-based selling will be banned. But if such firms are directly authorised, you have to have a considerable (some would say unwarranted) degree of faith in the regulator’s ability and will to identify and stamp on such practices.

I fear the first year of the new regime will see a minority of directly authorised adviser desperados continuing to carouse in the last chance saloon.

From a professional perspective, I can only hope the regulator takes the cosh to them as well as to the big bad banks. My advice would be that to herd sheep you need dogs but to hunt wolves you need rifles.

Chris Gilchrist is director of FiveWays Financial Planning, edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. IF as the regulator has stated previously, Adviser charging can be stated in various forms, fixed fee, hourly fees, percentage of funds being invested, there seems little doubt that the majority of transaction based advisers will still use the percentage of funds basis.

    That is what is allowed, whether it is morally acceptable is largely irrelevant, we will see massive mid market consumer detriment whichever way the adviser charging issue goes.

    Is it fair to charge for 10 hours work at £150 per hour (Fee = £1500) to arrange a Stocks and Shares max contribution ISA (because that is what it takes roughly to perform all the tasks required to justify and document and implement the advice, when a commission option was set at a maximum of 3% of funds (£338.40) + ongoing 0.5 % service charge which would in effect take up to 15 yrs to make up the difference.

    Who exactly is going to benefit from the commission ban. Most consumers will not wish to pay directly for advice on a time charged basis, so either advisers stick to the percentage of funds option as a fee for smaller funds of less than £50K otherwise the whole market will go to the dogs and consumers will be the ultimate loser.

    Small fund investments do not generate enough profit for a firm to survive unless done without advice and in volume. Under the current regime no one can do that.

  2. Hello Girls!

    Government telling business how to run business always has and always will be a recipe for disaster.

    What is the FSA so afraid of in letting the consumer choose how to remunerate their IFA? Those that prefer fees have been free to choose that route. But hat choice has been taken away. For now.

    The insane intensity with which the FSA has pursued its commission witch hunt is but a flimsy disguise for the real motive – bringing IFAs within the scope of VAT.

    Why don’t they just have the honesty to admit it: THEY’RE DOING IT FOR THE MONEY.

    I predict that the calamitous disruption to the distribution of financial products and advice in the post RDR world will cause as rapid a U turn back to commission as we have ever seen. I can see commission being reintroduced as an option as early as May 2013. Yes, the RDR will cause that much consumer detriment.

    Just off to find someone for the weekend.

    Love and kisses

    Larry xxxx

  3. I have just read through the blurb surrounding FundsNetwork’s new arrangements for disclosing the charges they will make for use of their platform. Basically, the customer will be told that FundsNetwork will charge 0.25% of the value of the holding, either explicitly or as a bundled part of the AMC.

    Given the way in which the platforms helped to simplify clients affairs and make it so much easier to put an unfettered portfolio of funds together, that 0.25% has, in my view always been a bit of a bargain. But the main point is that nothing is changing. RDR has cost the industry £billions and for what ?!!! Oh, and instead of giving the client 20 pages of crap that they’ll never read, we have now to give them 30 pages of crap.

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