The FSA has failed to identify properly what is wrong with the
industry and what needs to be achieved by changes.
What is needed is better-quality financial advice available on an
ongoing basis to the widest possible audience. It needs to be
available at a cost which the public is happy to pay and chargeable
in a manner which the public finds acceptable.
Advice needs to come from people who are qualified to provide that
advice. It needs to come from people who are dedicated to providing
honest service to their clients. The service needs to be affordable
and seen to be affordable by consumers.
The terms of that remuneration need to be negotiated between the
adviser and the client on an individual basis and the basis of
remuneration should be the same for all types of adviser regardless
of their status.
The advice available has to be of a high standard to all clients.
Half-baked advice by a half-capable adviser is not acceptable and
inevitably creates a problem which has to be addressed about who pays
compensation when the half-baked advice is only half right).
All advisers/product salespeople, call them what you like, should
have to work under the same compliance, remuneration regime and
qualification programme whether they are multi-tied, independent or
The FSA's proposals will result in reduced independent financial
advice, public confusion about advice and increased costs of that
The public says it prefers the principle of independent financial
advice. It is just unfortunate they have been led to believe that the
banks will supply it. A programme of education by the PIA would have
addressed that issue.
The public prefers to pay for advice through the policy charge. IFAs
are less product sales-orientated and far more advice and long-term
business relationship-orientated than their tied salesforce
counterparts. Tied and, indeed, proposed multi-tied salesforces will
inevitably be sales target-orientated and this could create more
How will a multi-tied salesperson be able to advise on all existing
policies which a client may have if no agencies exist? What
administrative, control or regulation system will be designed to deal
with product distribution bias by multi-ties on account of the
multi-tied adviser providing advice to buy based on commission or
sales incentive bias, especially as product providers will now start
a headlong rush to control distribution channels?
That financial investment and control is not going to be for the
health of the public. The bottom line will count and that means every
conceivable type of bribe for bias to the sale of the products of the
Of course, in a perverse way, competition among the few big firms
will be increased – as will misselling and costs. There will be a
concentration of the industry into the hands of a few product
providers with the biggest purses to control distribution.
On top of this will come the marginalisation of independent financial
advice, which will become the preserve of the wealthy few.
In fact, the present independent financial advice system offers
near-perfect competition. The reason being that IFAs can and do offer
the most appropriate investment or policy for a client from the
Because that system avoids the worst type of market abuse of all,
namely vertical integration between provider and distribution,
competition is savage, with all the providers competing to persuade
IFAs to offer their products.
So what about the commission bias? What evidence is there of this
bias against the public interest? None has been quantified and
published so why should we believe this claim? Yes, we all know that
with-profits bonds give more initial commission thanIsas but we can
deal with that in a different way.
Do we really want to go back to the free-for-all mess of pre-1988
with all the misselling that took place?
There is a simple answer to this vexed and largely imaginary issue of
commission bias. All provision of advice and provision of financial
products should be executed on the basis that the remuneration should
be negotiated between client and adviser regardless of the status of
the adviser. It could be paid as part initial and part ongoing
remuneration which could be paid to the adviser on the agreed menu of
terms by the product provider.
At a stroke, the entire issue of commission bias by all advisers
independent or tied, will be swept away. The only way ahead is to
separate completely the advice charge from the product itself. This
should apply to all advice regardless of adviser status.
What is the real motive behind the changes? Not the contrived and
feeble arguments about competition and commission bias. It is about
the fact that the banks have failed to make inroads into the
industry. Their direct salesforces have not only failed to deliver
the quality products to the consumer they have failed to make inroads
into the market. So they have had to find a sympathetic ear able to
enforce a new regime which will in turn enable them to achieve their
The present proposals will reduce true competition, increase
distribution charges, assist high-cost distribution channels, deny
independent advice to all but the rich and encourage a regime which
will be besmirched with every conceivable secret bribe, incentive and
distribution control mechanism to corner and control the market for
providers' own financial ends. It has nothing to do with the best
interests of the consumer. It is hardly surprising that the
Consumers' Association has expressed concern. After all, it is the
only unbiased organisation with no axe to grind. Every consumerist
financial adviser has to fight this absurd decision to put the clock
back to before 1988.
If fees are the route to take, then let no one underestimate the
audit and time-based trail problems. The implications of product
providers' inefficiency will be seen in the consumer's final bill.
How many advisers will jump at the opportunity to invoice a lower
bill for advice in return for a cash discount, thereby reducing the
VAT bill for the consumer in addition to the income tax bill for the
adviser? Commission or an arrangement paid for by the provider
creates its own audit trail.
If there were an argument for any change, it would be to make all
advice truly independent and for all remuneration to be paid to an
agreed tariff negotiated between client and adviser, from a sensible
industrywide agreed menu of combined initial and trail commission.
That remuneration should also be paid by the product provider and the
agreed terms should be written as part of the product application.
This will not address all the issues but it goes a long way towards
There will clearly be many cases where advice only is provided with
no product. In this case, fees are necessary. I believe this is the
best way ahead for the consumer and the adviser who places his client
It has been suggested that advice and supply should be totally
separated but as ongoing advice on a product must be available and
paid for, such total separation is not practical.
The Treasury and FSA have to have a secret agenda in all the
proposals. The banks have failed to achieve their targets and have
successfully lobbied for a new playing field.
Remember that the FSA's reason for change refers to the fact that
despite IFAs being responsible for the majority of premium volume,
the tied sector is responsible for most of the policies/investments
It is a fact that the average premium size is greater in the IFA
sector. There was never anything stopping the banks from being IFAs.
They could have promoted independent financial advice to the total
exclusion of their own products. One guess as to why they did not –
and it certainly was not for the financial health oftheir customers.
I believe that in the long run, good IFAs will flourish and earn very
good money out of fees at a similar level charged by solicitors of,
say, £150 an hour plus VAT.
The rich will be well looked after. Sadly, the masses will suffer.
The targets to increase mass savings will move further away than ever.
What a pity that a little more vision could not have been given to
widening the scope and availability of independent advice by reducing
regulation and costs and separating the advice charge from the
product to give total remuneration transparency and client/adviser
The FSA has failed to identify properly what is wrong with the