Over the coming weeks, I am sure that Money Marketing is going to carry some starkly contrasting views on the latest FSA proposals for a menu approach to disclosing the cost of advice. I think that good intermediaries should be giving three cheers while firms that offer an indifferent service should start to worry.
The first important point to make about the menu is that it will apply to all firms which give investment advice. So it will affect the representatives of banks and insurance companies who give investment advice just as much as IFAs.
The second point is that the menu is not intended to convey the message that cheapest is best. We will support its introduction with consumer awareness measures and the message we aim to put across is that it is important that the client looks carefully at the service being offered by a firm, not just at the cost. It is for that reason that, near the start of the menu, firms have a space in which they can describe their proposition. It is there that the firm can explain the value it can add for clients in return for the remuneration it gets.
My third point is that while the menu certainly intends to encourage more competition, it is also a confidence-building measure. It would be ideal if consumers were prepared to pay a fee for advice but we know that most are unwilling or unable to pay by fee. Paradoxically, while consumers are happy for their adviser to take commission, this is often coupled with deep-seated suspicion about the influence which commission might have on the standard of advice provided. By getting early information about commission into consumers' hands, the menu intends to help address suspicions.
I am sure that one feature of the menu which will rankle with some firms is that it is heavily prescribed. Step back and try to see things through consumers' eyes. If a consumer is trying to decide whether to deal with your firm rather than a competitor they need to have information which is similar both in content and look to help them make valid comparisons. That tends to drive us down the route of prescriptive rules when in other contexts we are trying to get away from that approach.
The most challenging aspect of the design has been the section dealing with commission or commission equivalent. Here, we have had to ensure that we do not burden consumers with so much information that they have no hope of absorbing it. But the information needs to be as fair as possible so we have gone for an approach where the menu covers the main product groups directed at the mass market, distinguishing between monthly contributions and lump sums.
Monthly products include collective investments, endowments, whole life, long-term care and personal pensions, including stakeholder. For each product group, the firm gives the maximum commission it would take if it were to recommend such a product and the client is given an example of what that would mean in cash terms on a specimen investment.
One of the difficulties that consumers have at present in assessing such information is that they have no yardstick by which to compare information. We are addressing this by requiring every menu to include the market average of commission taken for each product group. The FSA will collect the data to construct the average and promulgate it to firms.
Consumer testing of the menu included a phase where we used real advisers to interview real consumers. Viewing video footage of these interviews, I was encouraged at the ease with which advisers were able to use the menu to go with the flow of the interview and at the conversation it prompted about the cost of advice.
The consultation paper also gives feedback on the depolarisation proposals in CP166. While most of the proposals stand, there are some important changes for IFAs, all of which are relaxations from CP166. These permit firms to continue to hold themselves out as independent where they are enrolling employees in a group personal pension and do not offer employees a fee option.
They raise the trigger level at which a firm has to disclose in its initial disclosure document that it has a connection with a firm whose products it might recommend. They allow firms to include terms of business with the initial disclosure document. They also liberalise the reasonable direct benefits' rule so some support for software or other computer facilities can be provided.
David Severn is head of retail projects at the FSA