I recently watched Paul Smee being interviewed by Angela Rippon on Simply Money. He came over as a very pleasant and experienced professional the industry can be proud of to defend the role of the IFA.
Ms Rippon asked him how he would convince a member of the public that an IFA would not make recommendations based on commission rather than the best product for the consumer, Gordon Brown having just sanctioned the review of the retail financial services industry.
His response was that any member of the public who felt that this was the case should refer to the research carried out by the London School of Economics last year, which confirmed there was no evidence of commission bias in the IFA market.
Ms Rippon, used to dealing with evasive politicians, kept throwing the question back at him because she did not view this as an answer. I would have thought there was a most obvious answer to this question.
The most perfect system for ensuring that there was absolutely no commission bias within the IFA market, the maximum commission agreement, was scrapped on the advice of the then head of the DTI Sir Gordon Borrie because he said that this agreement was nothing short of a cartel and there was no place for it in a free market. This influenced the power brokers within the regulatory system and it was scrapped.
I have since been told that the MCA was walking a very thin line legally and would have probably been challenged in the courts at some point.As I am not a lawyer, I cannot really comment.
However, what is more important, the legalities of the trading activities of the life market or the confidence that the consumer has in the life market?
Bearing in mind that the scrapping of the MCA happened quite a long time before pension misselling, one can only wonder what effect the scrapping of the MCA had on personal pension sales by allowing life offices to pay much higher commission to secure business in an extremely competitive market.
This indeed begs the question, did this action indirectly encourage pensions misselling? If it did, then one has to look very closely at the reasons why the MCA was scrapped and on whose advice because this decision was definitely not made in the best interest of the consumer.
The point with the MCA is that it was a perfect system for giving almost 100 per cent confidence to the consumer that the IFA was not biased in his advice. The public is well aware of the fact that we earn commission. What they really want to know is are you getting more commission from the life office being recommended than the market normally pays?
Commission disclosure is all well and good but this does not inform the consumer whether this amount is below average, higher than average or the normal amount of commission for the product recommended.
The MCA meant that an IFA always received the same commission irrespective of the life office he recommended. If an IFA recommended a company that paid commission outside the MCA agreement, then this fact would have to be documented to the consumer and on the file.
To any person with an ounce of common sense, this would beg the question why are you recommending a product paying more commission?
This system was perfect, as it brought everything out into the open and it was enormously helpful when dealing with the consumer in being able to reassure them that there was no bias towards any company.
I would say one thing to the journalists and regulators who are supposed to act in the best interest of the public. On the evidence of the last 13 years, if you feel that the consumer is not getting a fair deal on commission then this is not because of the IFA, it is because of those who are more concerned about making a name for themselves and leaving their mark on the industry than on doing what is best for the consumer.
It is all too easy to point the finger at the IFA but the regulations – shaped by influential politicians, consumer bodies and the media and enforced by the regulators – are there for an IFA to comply with. We do not make the rules we obey them!
Principal, Kingswood Mortgage & Investment Services, Shrewsbury