Until now, the Treasury select committee has focused its attention on product providers. Split caps, endowments and personal pensions have all been analysed by chairman John McFall's committee. But now attention has turned to IFAs, sending out shockwaves through the industry.
It has to be said that the select committee's handling of the hearing attended by Aifa director general Paul Smee, deputy chairman Roger Sanders and Charcol Holden Meehan director Amanda Davidson has come in for a fair amount of criticism, with some commentators describing it as “theatre, not politics” but that is the nature of what to expect.
One of the biggest criticisms of the financial services industry is the lack of clarity with which it operates. The select committee suggested that if things are not clear to consumers, how can they place any confidence in advisers? IFAs were accused of not making their clients fully aware of the costs of their services so they often end up paying more commission than expected.
This led to a discussion of fee-based advice versus the commission model. According to LibDem committee member Norman Lamb, the average fee for an hour of advice from an IFA is £150 and many politicians argue that this makes advice inaccessible to people with middle to low-end incomes. In rebuttal, Smee said: “If people want the service, they will have to pay for it.”
I would expect the select committee to focus on these comments and ensure that the Treasury and FSA look into how more high-quality affordable advice can be made available to those on low incomes. The thought is that if IFAs cannot or will not act, the Government might. Watch this space.
Labour committee member Angela Eagle raised the question of whether IFAs have acted ethically in recent times, suggesting that hidden or unobvious fees have caught consumers off guard. Aifa strongly refuted the claims that fees are in any way disguised to mislead the buyer. But perhaps now the concept of a code of ethics for the IFA sector will find itself on the agenda.
The persistency rate for products sold by IFAs is around 60 per cent but many feel this should be a good bit higher. Labour committee member James Plaskitt swooped in armed with this statistic. Smee made the point that this figure is hugely distorted due to sales of stakeholder pensions. Something for the select committee to consider, perhaps?
One of the more basic criticisms is simply that IFAs have been advising the wrong people to buy the wrong products. Precipice bonds have cost 250,000 people, mostly aged over 60, around £2bn. Smee admitted that 80 per cent of these were sold by IFAs.
There is a huge danger that the select committee will take the view that there is a lack of responsibility being taken by IFAs and this in itself diminishes a huge amount of consumer trust and confidence. Many think it is time that consumers got the service they want.
What of the future for IFAs and financial advice in general terms following this inquiry?
First, the select committee has no direct power to make any changes through the current inquiry. Instead, the final report, which is due out in June, will seek to make more of an impact by grabbing the headlines. The “theatre, not politics” approach is an effective method in seeking to achieve this and, make no mistake, McFall is entirely aware of this.
In the recent past, the select committee looked to achieve significant change with its damning report on endowment misselling and will be seeking to make even more of an impact with this final report.
A more serious threat could be an OFT investigation into the cross-subsidisation of fees between IFAs and providers to the Financial Ombudsman Service and FSA. However, the threat of such action is likely to have greater impact than the investigation itself, due mainly to the headlines that such a threat will generate in coming months. This is a key area of attack for the select committee, which is set to call for an OFT investigation in its final report.
Smee has said the extinction of IFAs has been predicted many times in the past, for example, over the issue of pension misselling. However, he says IFAs are “entrepreneurial, skilled and adaptable” and success will depend on drawing on support services in areas such as technology compliance and research.
Chancellor Gordon Brown will soon be forced to cut public spending or raise taxes based on comments laid out by the OECD, which said the UK's GDP will grow by 3.1 per cent this year before returning to a trend growth rate of 2.7 per cent next year, a view also supported by the IMF. Will IFAs take the opportunity to give the advice in this developing atmosphere to restore confidence in both themselves and long-term savings? We will wait and see.