Letter to David Severn at the FSA
I am writing as a director & compliance officer of a firm of IFAs with 37 advisers dealing largely with medium to highnet-worth clients at or in retirement.
We do little regular-premium business and routinely discount initial commission on single-premium investments and complex pensions.
The majority of our new clients invest between £30,000 and £500,000 over a period of a year.
I would like to make a number of comments on CP121.
In my view, the FSA will better achieve its stated objectives (1.3) and resolve the principal market failings (1.9) by drawing a clear line between an adviser who represents the client and a “product promoter” beholden to and representing providers.
The FSA should recognise the conflict between the role of an adviser and a product promoter by bringing forward and varying the proposals in 5.17 by applying them to all “advisers” paid by commission to differentiate between a true adviser and a product promoter.
This is addressed further under Conclusion at the end of this letter.
Defined-payment agreements and conditional fees
The statement in 4.35 that fees “must not be conditional on whether a product is arranged” and also that an IFA “need not pursue a client who does not proceed” is contradictory and conflicts with the FSA's stated aim of increasing consumer choice and access to “advice” by “shopping around”(1.9 & 5.14-5.16).
Fee agreements have to be agreed in writing and in advance. Where a potential client is unwilling to commit to a fee until seeing the advice the adviser has to be free to agree to waive part, or all, of the fee should the advice be rejected. Otherwise, the potential client will not instruct the adviser and competition will be reduced.If the adviser is not instructed, the question of whether to pursue a client who does not proceed will not arise.
To regulate against a conditional fee might well be viewed by the courts as an unreasonable r estriction of the client's rights and also as a restriction of trade.
In any event, the FSA should not seek to regulate the details of a defined-payment agreement between an adviser and his or her client.
4.31 quotes examples of fee-charging, such as hourly rates, a fixed fee for the job, a percentage of funds under discretionary management, etc. While a percentage of the value of funds advised on is not mentioned, this would appear to be a reasonable interpretation as it would recognise the proportional risk assumed by the adviser.
Consequently, for singlepremium or large regular-premium business, the difference between fees and commission will be a matter of style rather than substance and will reflect the negotiations that we currently hold with a growing number of clients.
4.33 states that independent advisers will not be able to undertake direct-offer promotions. There are two problems with this statement.
i: This would have the effect of barring IFAs from servicing their clients. For example, writing to all clients in an underperforming fund to recommend that they transfer to an alternative is currently defined as a direct-offer advertisement. Most would regard this as good practice and to be encouraged, if not part of an IFA's responsibilities.
ii: General mailshots of a packaged investment currently include commission disclosure, often in the covering letter.If my argument holds that conditional fees cannot be barred, then current commission disclosure can readily be amended to turn the commission into a fee.
In any event, IFAs will continue to issue direct-offer promotions, as those using them to generate new business will register a separate company with a similar name.
Providers financing IFAs
An independent adviser acts as the agent of the client. Defined-payment agreements are intended to underline this.
However, the proposals in 4.41 to allow providers to take equity stakes or provide finance to IFAs are likely to perpetuate the incentive to sell packaged products.
The proposal in 4.44 and 4.45 to abolish the “better than best” rule fails to recognise that the IFA will, in practice, be under a commercial pressure to sell the products of its financiers and commercial partners.
Rather than defined fees encouraging truly independent advice and reducing the pressure to sell packaged products, 4.41 to 4.46 will encourage the sale of commission-orientated products even where a non-packaged solution might be better. Commission offsetting will lead to clients colluding in this.
More fundamentally, IFAs with provider finance will be misleading clients by purporting to be independent when they are incentivised both to sell products and a particular provider's products.
Disclosure of the provider relationship will not reduce this distortion but will add to public confusion.
What would be the difference between an IFA supported by a provider and a multi-tie?
Increasing savings among lower-income groups
CP 121 recognises that the regulatory regime can impede the promotion of savings and protection among the lower to middle-income groups and can discourage competition by discouraging “shopping around” by the public.
The combination of commission and the onerous compliance regime required to police commission-driven salesforces that purport to offer the client personal advice will mean that salesforces will continue to focus on the more lucrative mid to higher-income clients.
While the consultation document appears to recognise the problem by including proposals to create a new, part qualified, “adviser” to promote Cat standard and similar products, the proposals do not go far enough.
The profusion of different types of advisers proposed will cause confusion and where there is confusion there is potential for abuse.
Many advisers will purport to be independent when they are not, for example, IFAs financed by providers and “Multi-ties independent of particular any provider” [4.71].
It may even prove impossible to stop a multi-tie contracted to a limited range of providers from claiming that as an “independent (-ly owned) firm of advisers we have chosen to represent the best”.
The only way to avoid confusion and the consequent opportunity for abuse is to ensure that all advisers act for and are agents of the client, agreeing fees and offsetting any commission to the client.
Advisers should be required to undertake a detailed fact-find and to set out all possible means of meeting a clients objectives, including non-packaged, before making any specific recommendation. This should minimise all forms of commission bias.
Any financing of advisers by providers above commission should be at arm's length.
Loans should be on normal commercial terms, possibly via a central body similar to Pass.
This would still allow providers to fund IFAs' transfer to fees in a structured manner over three to four years.
Equity investments should only be made by the provider's policyholder funds, where the investment must meet normal investment criteria and be disclosed to policyholders.
Anyone remunerated by commission should be clearly identified as acting for and the agent of the commission payer(s) and be identified as “product promoters” or “representatives”, however many providers they represent.
Rather than presenting themselves as giving advice, they should be barred from advising and freed from the need to conduct detailed fact-finds to emphasise that they are promoting products that will meet the clients expressed needs established by a short questionnaire [5.17].
Clearly, the providers can enter into any financial arrangement with a representative, providing it is disclosed to the public.
This approach will free representatives to sell the need to save.
It will also encourage the public to “shop around” as the hurdle of repeating a detailed fact-find is removed.
Representatives are likely to focus on the middle to lower-income groups but will also deal with some high-net-worth clients who want to decide their own strategy.
Advisers would be truly independent and would continue to deal with the middle to upper-income groups but also with many in the lower income bracket at major life events such as marriage or retirement.
An additional benefit of this approach may well be a reduction in the “distribution war” which is expected between providers seeking to secure distribution, a reduction in costs to providers and consequently a reduction in the risk of upward pressure on product charges.
Director & compliance officer,
Young Ridgway & Associates,