Open letter to David Severn, Head of polarisation review, FSA
Should the proposals outlined in the CP121 come into being, I believe that this will
damage the financial services industry and infrastructure and
confuse consumers by over-complication.
The FSA needs to understand the basics of the industry it is empowered to regulate.
The vast majority of products offered by the financial services industry have to be sold. There is no perceived or identified need for them on behalf of the consumer – unlike the self-employed or those running a business who need the services of an accountant, or anyone buying a house or getting divorced who requires a solicitor.
Financial services products have always been sold and unless legislation is passed forcing consumers to buy them, this will always be the case.
The financial services industry is very dependent on new premium income and should this reduce or cease, many companies will find themselves unable to operate effectively. This new premium income funds the investment markets, which in turn fund the UK economy.
The consumer has financial products at the bottom of their shopping list. The financial services industry raises awareness of the need and priority – resulting in purchases.
This process is not easy, as consumer resistance is high because the products are intangible – £30 spent on life insurance may be at the expense of a night out, a holiday, car or clothes.
The benefit of the product is in the event of a claim, the cash lump sum they receive may pay off the mortgage and feed the children. In most cases, it is better for the consumer to have a financial product of some description rather than none at all.
Polarisation was the first step in improving the quality of the products and the advice available in the financial services industry.
It clearly defined the distribution channels, which in turn made it easier to regulate the quality of products and advice. The maximum commission agreement once underpinned this, negating any prospect of commission bias.
Education of both the providers and the advisers ensured that the quality of advice and product improved. The introduction of reason why/suitability letters along with commission disclosure made the consumer more aware of the products that they were buying and why, and defined complaint procedures meant that consumer and adviser could refer disputes to an independent ombudsman.
The independent market was born where the providers could compete for market share by putting their products to the scrutiny of the independent market. Other providers chose not to enter the independent market and compete for market share with other providers but to establish their own salesforces (Equitable Life and the banks).
CP121 refers to comm-ission as a tool that providers have used to win market share, which may be true in certain circumstances.
However, with the improved education of providers and advisers in addition to disclosure and reason-why letters, this is not a major issue.
Advisers and providers are very aware of their individual accountability to the consumer and the long-term standing of the profession.
The role of the IFA cannot be compared with any other profession as it is unlike any other. If financial products were easy to sell there would be no need for advisers of any description.
However, the products are not easy to sell and never will be, as the consumer has other priorities.
The products are complicated on their own but when you add in the complications of tax law and English/Scottish law, the consumer needs advice. Without advice, the consumer would be disadvantaged and would end up:
not purchasing financial products or
purchasing the wrong financial products.
So how should advisers be remunerated?
There are two parts to the role of an adviser:
Finding a client who requires financial advice and wishes to purchase financial products.
Selling financial products.
The financial adviser has to market for clients before any financial products or services can be sold. This is a very skilled and expensive job and the adviser should be remunerated for this. Advertising firms charge companies millions of pounds to find customers for their products.
Second, the financial adviser is a qualified professional who advises the consumer on their financial affairs, which includes the sale of financial products. The financial adviser should be remunerated for this separately.
Every company rewards its salespeople on the level of new business they bring in. Why should financial advisers be treated differently or are we meant to bear the brunt of the cost for finding the customers as well as providing advice?
Commission is not just the cost of providing the advice. It is also a payment by the provider for finding a customer, which is a cost that the provider has not had to bear.
I, like many of my fellow IFAs, provide hours of free advice, often with no financial reward. Our profession is all about building long-term relationships with our clients, and looking after them through the various stages in their life.
To advise your client properly, you need to really know them, their businesses and their families. Without this level of knowledge, it would be difficult to offer the correct level of guidance. Few other industries have this level of customer relations or trust.
The consumer currently has the choice of how to pay the IFA for services rendered -a fee or disclosed commission on the sale of a financial prod-uct or, as our friends in the legal profession, put it, “no win, no fee”.
I would implore you to take notice of the feeling and reaction to your proposals for change by the industry and the consumer and not try to fix an industry that is not broken but improve the industry for the benefit of everyone.
I have been in this industry for 15 years at the cutting edge, dealing with consumers, and have seen an industry that has gone from strength to strength.
We now have more knowledgeable and better qualified advisers, two clear distribution channels for financial products, a choice of commission or fees, disclosure and reason-why/suitability letters.
There are still some cowboy advisers in the market who are here today gone tomorrow, and providers whose charges are too high and whose products are not good value for money.
Let us have “defined payment agreements” which clearly state what the client will get for their money.
Let us also have clearer, more transparent charges on products with all providers having to put their products to the scrutiny of the independent marketplace and not hide behind their own salesforces.