In my view there are two ways that our industry can react to any proposed change in regulation. We can fight the changes tooth and nail and end up losing. Alternatively, we can embrace the fact that change is going to happen and try to have the maximum input to the process to make sure that the changes are as practical and equitable as possible. I believe all too often we do the former where the latter would achieve far more.
Telling the Government that stakeholder was unworkable did not stop the Government launching it. It just resulted in the industry having a limited effect on what was imposed. Saying depolarisation is wrong will have the same effect.
Having spent many hours poring over the actual consultative document and supporting material, my initial view is the first failure on the part of the FSA is probably the way that it has managed the message.
CP121 is a substantial endorsement for the concept of independent advice. It is not abolishing it, it is strengthening it.
By removing the allegation of commission bias, IFAs will be in a stronger position than they have been. Being paid for all the work that an IFA does should substantially reduce the need to receive higher levels of income on some business, to offset the lost income on abortive work.
At the same time, the FSA has demonstrated that although people recognise that independent advice is the best way to go, too many still get advice from a tied adviser and buy products from them.
IFAs have been saying for years that tied advice is not giving the consumer sufficient choice, now the FSA is agreeing with them and proposing to change the system.
The proposed FSA approach has many obvious flaws but to be fair they are still at the consultative stage. Clearly, it is important to seek a level playing field but a “just say no” approach to change is likely to win little sympathy from those who matter.
I believe IFAs should embrace the changes while arguing for an environment that will show in stark contrast the inequalities of the multi-tied environment when compared with independent advice.
One approach might be to lobby for a multi-tied adviser having to produce a single-sheet summary of the different amounts of commission they will earn from different product recommendations and in cash terms on a client-specific basis. This would be similar to a current key features document but would have commission and charges for multiple products side by side on a single sheet of paper, preferably in plain English.
To move to the new regime will undoubtedly require change. But if there is one thing that the IFA community has proved itself to be over the last 15 years it is adaptable.
The obligation for IFAs to credit even modest amounts of commission to a client's defined-payment arrangement will mean that IFAs' technology systems will become even more important in their businesses. The need to be able to credit clients with amounts as small as a few pence per month can only be viable if it is carried out electronically in a fully automated way.
Ironically, electronic delivery of commission payments is one of the oldest e-commerce services running in our industry.
Origo published the first version based around the electronic data interchange (EDI) technology that preceded widespread use of the internet and this were last updated in 1999. Origo is conducting a further review, with a view to moving the standards to the XML format that is increasingly the main format for online communications of this type
In the main, however, electronic commission tends to be used by networks and bigger firms. These services are going to need a substantial revamp so they can be easily used by all IFAs.
Far more detailed, electronic commission reconciliation is just one of the ways in which IFAs will have to adapt their businesses. Almost certainly, it will be necessary to account to clients in far greater detail than in many normal cases for time spent overall. Time recording and activity management systems will become essential.
It may be that IFAs want to break down their individual activities in far more detail than before. This could lead to a situation where advisers would charge differential amounts for setting up contracts with different companies based on the ease, or otherwise, of dealing with them.
For advisers who are charging on a time basis it may be that the cost of carrying out the reconciliation of small amounts of commission would be offset by the additional amount the adviser would have to charge the client for doing so. It may be in the clients' interest to waive their right to be credited with small commission accounts rather than incur admin costs.
Moving to a mandatory fee basis has potentially interesting connotations in the use of technology.
One of the main reasons that the industry new business service has not taken off is that, as currently constituted, it offers very little if any benefit to IFA.
In an environment where the client is paying a fee, it could be feasible for an IFA to charge one amount for setting up a paper-based contract for the client but a higher amount if it is done electronically.
This may still be an attractive prospect to the client if the life office has chosen to offer a better product electronically than on paper.
The effect of forcing IFAs to move to a fee basis will, at least in cases where clients are being charged by the hour, move the burden of absorbing the cost of electronic trading from the IFA to the consumer.
I can envisage a situation where IFAs might charge lower rates for establishing or maintaining advice on contracts with some companies than others.
Imagine the reaction of a sales director of a life office who is told by a major IFA “Sorry, we are going to have to charge everyone who wants a contract with you Â£50 more to set it up because your technology services are hard to use.”
Ultimately, it will still be in the interests of the IFA community to help with widespread adoption of technology across the market. This will help cut costs and improve the overall value for money to consumers.
However, these propo-sals are another reason why we need to see greater co-operation between advisers and insurers to help each other achieve savings.
Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft and The Exchange. He can be contacted by email at firstname.lastname@example.org
Tel: 020 7935 2599