Andrew Merricks, Simpsons, Brighton
Q: You say that you are keen for the costs of advice to be kept separate from product costs. Particularly for fee-paying clients, is there going to be a similar separation of costs of advice and the costs to the client of compliance (money laundering, reason-why letters, etc)?
A: Our proposals are that firms should be required to unbundle the cost of advice in order that consumers are aware they are buying advice as well as a product and what the cost of that advice is.
Other costs, such as client servicing and compliance, will continue to be disclosed through the current total charges' disclosure regime although here too we are seeking to identify means of presenting information in a more meaningful way through the work we are currently doing within our product disclosure review.
However, compliance costs will come under the microscope in a consultation paper to be produced later in the year examining the feasibility of two-tier advice. Our plan is to examine the proposition that compliance costs themselves could be driving advice from the market.
Q: The Consumers' Association appears to be opposed to the FSA proposals and, to date, every single client with whom we have raised the subject is disturbed by what they see as a threat to the existing relaxed client/adviser relationship. How extensively were “normal” consumers consulted on the proposals? By “normal”, I mean those who are neither superannuated nor members of large corporate bodies who thus generally have more need of the services that an IFA can offer.
A: As the introduction to the companion volumes to CP121, Polarisation: Consumer Research (available on the FSA website) describes, the consumer research was derived from six separate independent research projects. The consumers consulted included a wide spectrum of recent and potential product purchasers and, in particular, groups defined as “less financially sophisticated customers”.
Q: It is widely expected that the powerful distribution opportunities offered by high-street banks and building societies will lead to these organisations being the “winners” in the distribution battle to the detriment of the smaller operator.
Recent research has shown that bank customers cost twice as much to service as existing IFA customers. If more business is transacted through the bank network, won't it simply push up the costs ultimately to the consumer?
A: The intention is to improve the availability of advice and certainly improve its outcome. The responses to the consultation paper will inform that judgement to some extent.
We cannot predict at this stage in accurate, quantified terms what the market might look like. We are required to conduct cost-benefit analysis of all proposals for regulatory change. This will show whether the proposals provide net benefits to consumers.
Q: If, as expected, “independent” financial advisers become harder to find, in the words of a leading solicitor contact of mine, “won't that simply lead to the fewer independents pushing up their fees for those of us who have to use you?”
A: The intent of the proposal to redefine independence would be to sharpen its effectiveness and improve its standing in the eyes of consumers.
We cannot predict at this stage in accurate, quantified terms what the market might look like further down the road but the intention is to improve the availability of advice to consumers and certainly improve its outcome.
Ending polarisation may result in the independent sector contracting as some IFAs move over to being distributors. The redefinition of independence, particularly the defined-payment proposal, might cause some IFAs to choose the multi-tie route, consequently reducing the availability of “independent” advice.
There appears to be a consensus that the upper end of the IFA sector will be unaffected (since it is more accustomed to paying fees now and yields the greatest revenue under any model). It is also more likely to grow as its natural client constituency expands. The arguments therefore apply to IFAs advising the “mass market”.
We do not agree that fewer IFAs will necessarily lead to higher fees. Consumers will only pay what they consider to be fair and reasonable fees and this should act as a natural regulator on fee levels.
Q: Your proposals will simply arm the smooth-talking salesman with the weapon of pseudo-independence. Isn't it time that the qual-ity of advice was regulated rather than the box-ticking style of regulation which led to the explosion in sales of high-commission, “low-risk” with-profits bonds?
A: The aim of these proposals is to make regulation more effective. This would be achieved by ensuring that, on average, consumers would benefit from better choice. Inevitably, this would result in better quality advice in the hands of the consumer.
Q: If your research has shown that there is commission bias, are you suggesting that the fee-based IFAs which, by your own assumptions, would have been the only IFAs to recommend Equitable Life, actually offered better advice to their clients than ones which recommended a commission-paying provider?
A: In the hypothetical situation of an IFA recommending Equitable Life products, they would have been entitled to take the company's financial strength into account in formulating their recommendation.
Whether this led to a recommendation would have been up to the judgement of the adviser. Ultimately, no regulatory system would, or should, protect every investor from every risk.
Richard Bryant,Marshall Bryant,Croydon
Q: If our firm is to become fee-charging (and we currently offer both options), how do we make the transition without going broke and, if we stay on a commission basis, how do we continue to do a thorough job, for instance, on old pol-icies that clients have and on which we may no longer be authorised to advise and how do we continue to do business with clients introduced by accountants and solicitors?
A: The financial strain of the transition to a “fee” basis of remuneration was one of the factors leading us to advance the more flexible “defined-payment system”.
Old business can be remunerated on the old basis (with the payment basis and amount agreed up front) but ceasing to deal with a product provider can exist under the current regime. Business introduced by accountants and solicitors would have to be remunerated by a share of the defined payment.
Phil Moore,Pensions & Investment Management, Letchworth, Hertfordshire
Q: Will there be a maximum number of companies to which we can multi-tie?
Q: If not, why not? Other-wise, the distinction bet-ween an independent commission-based adviser and a maximum multi-tied (to whole market) adviser is paper-thin and therefore confusing.
A: We have no reason to limit the number of ties that an individual firm may have. Indeed, firms wishing to be paid by commission and advise on products available from the whole market could continue to do so and this will no doubt be the preference for some firms.
In some cases, therefore, the only difference between two firms may be that one is remunerated by commission, a distributor firm, and the other under a defined-payment agreement, an independent firm.
We recognise the challenge to ensure that our disclosure status requirements are such in a depolarised world that consumers have a complete understanding of the different types of advice that are available and the one they have selected.
Q: Why can't a commission-based IFA be called independent in the new regime? The differentiation is fees vs commission, not independent vs not independent.
A: Our consumer research clearly shows that consumers find a conflict of interest is created when advisers are remunerated by commission and for it to be incompatible with true independence.
The fact that an IFA is responsible for acting on behalf of the consumer and representing the consumer's interests, yet is paid by the provider of the product being bought, is an anomaly.
We propose, therefore, that firms who wish to use the “independent” description should be remunerated only by fee or on the basis of a “defined-payment agreement” with the customer.
Q: Do you really believe that increasing the number of definitions of an adviser will clarify the position for the general public? Surely, a reduction of variations leads to simplification, doesn't it?
A: Our proposals for reform are essentially about increasing consumer choice. If, in order to achieve this, we have to introduce a third type of adviser working within distributor firms, alongside “representatives” working for product providers and financial advisers working in the defined-payment independent sector this would be an appropriate price to pay.
We are, however, mindful of the need to ensure, as far as is practicable, through a consumer education programme and enhanced status disclosure, that consumers are aware of the three types of adviser available and of the different service available from each of them.
Ray Jackson,Jackson Financial Planning,Crowborough,East Sussex
Q: In a pension case, if an IFA rebates commission and the client uses such rebate to offset a fee, would this fall foul of the Inland Revenue regulation which I believe exists and which prohibits the client from receiving a benefit from the pension prior to retirement?
I have always understood that the Revenue could withdraw tax relief in respect of the contributions if commission was rebated in cash? I always thought that the only way to proceed with rebated commission on a pension scheme was to reinvest such rebate into the fund so benefit would not be received before retirement.
A: Agreed but the defined-payment system is intended to deal with the point so far as pensions are concerned.
Ian Brewer,First Independent Direct, Cardiff
Q: Our company is called First Independent Direct and we have spent a lot of time and money in the promotion of the brand. Our research has shown that our name conveys choice but, more important, gains the customer trust in placing the business with us. If we do not adopt the proposed defined-payment system but are allowed to multi-tie to everybody, will we have to change our company name?
Q: Under the defined-payment system, to remain truly independent, as I understand it, the proposals are to agree with the customer by either charging a fee or giving the alternative of a commission rebate. Our unique selling point is that we give advice and automatically give back 50 per cent of our commission to our customers regardless of the level of advice given and have been doing so since 1998.
How would this fit into your definition of a defined-payment system as we are already rebating a substantial amount of our commission back to the customer and it pre-agreed before the point of sale?
A: The detail has not been worked out yet but you will probably have to change.