Money Marketing hopes all this debate about commission has been a storm in an ABI teacup but that is probably not going to be the case.
Advisers probably remember that the menu was an alternative to defined payment. This might find its way back in a more potent form.
It remains unclear how much freedom of action the regulator has. Many commentators believe the menu and initial disclosure document are being replaced because the European Commission insists that it wants a Europe-wide level of disclosure and did not believe that the menu’s gold-plating brought anything to the party.
The FSA, while promoting the menu, did not love it, particularly as it was embarrassed over getting its sums wrong on commission averages. It must also be embarrassed that endless trips to Brussels, where it campaigned to keep the menu and IDD, ended in failure.
But the danger is that it still wants some excuse to get rid of commission. Whether it has the levers to do so remains to be seen.
It cannot use treating customers fairly as a regulatory weapon unless it is prepared to review cases where high-charging recommendations have been made by advisers remunerated by commission. Such action is at the far end of the spectrum from principle-based regulation.
So it must be feared that the FSA may prefer some overarching grand principle or rule which would force the market’s hand. Could it get this past Europe? It might.
The threat of such action would appear to be at the heart of the developing row between Aifa and the FSA. The FSA says the menu has failed to do several things such as increase the number of advisers charging fees. Aifa says it was designed to do no such thing but to increase transparency. Perhaps the menu is to be treated to a new form of retrospection by Canary Wharf in which it retrospectively changes its own motives.
If it can, what sort of intervention might we expect? We might see the return of defined payment which should probably allow a continuance of trail commission but more difficulty in justifying up-front commission, particularly excessive amounts.
But the FSA no longer has the threat of advisers losing their independent tag to hold over their heads. Many whole of market advisers have conceded that tag already. A lot of businesses already have a little bit of a multi-tie although the multi-tied bits of any practices are difficult to come by.
It is difficult to see exactly where an intervention against commission would strike. Perhaps IFAs would have to be fully fee-based. Whole of market advisers might be ushered into tightly run multi-ties or perhaps the whole of the advice market might have to move to defined payment and commission will be kiboshed.
This should be where the FSA faces several difficult questions and the risk of a further fall in savings. The first question is whether it is seriously considering a commission ban and, if so, whether it believes that commission is the root of all evil in financial services.
Might some new channel be allowed to preserve commission – one with fewer choices? But can the regulator demonstrate that this channel would not or could not missell? Product or provider bias might be finally nailed but what of inappropriate sales and advice?
Once again, the FSA thumps into the question of how bad is commission? Is it not better to have a channel using commission, such as IFAs, whole of market and multi-ties, where there is a legacy of compliance and an increasing degree of professionalism rather than a direct sales channel?
Across the whole market, is it better to have commission-incentivised sales to get people saving and, if so, why should some section of the market use it and another section not?
What system do the banks use now? One would assume that banks’ advisers are on bonuses dependent on sales. Is this OK because these advisers may be working off a best of breed panel, so they have no opportunity to switch or to churn, whether or not it is in the clients’ interests?
What if the whole panel is commission-biased because of deals based on volume sales from which the bank or building society benefits regardless? Can a whole distribution firm be commission-biased in this way?
The final question the FSA should ask is why it is so obsessed with its broken model theory. Several things Sir Callum McCarthy said, drawing on Ned Cazalet’s analysis of how money was moving round the industry, were correct but much was wrong.
McCarthy was overly concerned with churn. Some switching must be justified in the current climate where the trend is from with-profits to unit-linked and open architecture and where some pensions have been simplified. Some switches are mostly harmless. Clearly, some advisers are moving clients for minimal benefit and their motives should be questioned unless there is clear justification such as concerns about future fund performance. Such behaviour hardly justifies a massive intervention.
Finally, some advisers are churning and cynically damaging clients’ investments. They should be thrown out of the industry but current rules should actually allow them to be stopped without some new tortuous hurdles being erected for how advisers are paid.
McCarthy also suggested that the adviser bit of the model was not working. That is not true either.
What was not working were Berkeley Berry Birch, RJ Temple, Millfield and InterAlliance. They had their costings wrong. Their models were broken partly because they had to grow too quickly.
When one quite big firm hit the buffers, the reaction was often to merge into a bigger one. But the people who fired the starting gun on such growth strategies were the FSA and the Treasury with whatever stitch-up they put together on depolarisation.
If the FSA starts trampling all over the IFA model, isn’t it in danger of fretting over the visible adviser bit and ignoring the less visible areas of the market?
The regulator should be careful it does not cure something that is already fixing itself. Some life offices have taken action on the issue.
Some advisers are moving away from big up-front commission and indemnity. We hear that there are many new type of advisers out there although we suspect that many are more a mixture of old and new model. Wrap may change everything anyway.
Finally, doesn’t the FSA have the power already to enforce best advice? It surely could weed out the worst advisers with the powers it already has. Why do we need something new?
Of course, the FSA may not be planning the next stage in its revolution. It might prefer its regulations to evolve.
These questions for the FSA may therefore be redundant. But with Aifa and IFAP concerned about the menu’s replacement, unfortunately advisers probably have good reason to be worried all over again.
John Lappin is editor of Money Marketing.