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Count the cost of turning back the clock

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&#39s 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

investing provider.

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

entire marketplace.

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

sales targets.

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&#39 own financial ends. It has nothing to do with the best

interests of the consumer. It is hardly surprising that the

Consumers&#39 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&#39 inefficiency will be seen in the consumer&#39s 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&#39s 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



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