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Initial scepticism over plan to ban up-front payment

With the spectre of misselling still dogging the industry – last year alone saw Allied Dunbar, Berkeley Jacobs, Deloitte & Touche, Chase de Vere, St James&#39s Place, Lloyds TSB, Lincoln Assurance and Scottish Amicable hit with fines from the FSA – it is not surprising that IFAs are looking at ways to reduce the dangers they face.

Firms are strengthening their compliance regimes and many are avoiding areas of advice considered to be high-risk but few have gone to the lengths of Bestinvest which has laid out a series of proposals to reduce misselling.

The investment IFA is calling for a ban on initial comm-ission for investments, suggesting it should be replaced with a system where the adviser receives ongoing commission or fees linked to the value of the investment, which the consumer can transfer at any time to another adviser.

Bestinvest accepts that most advisers will oppose its plan as it would mean a fall in short-term income but bel-ieves it would be the simplest and quickest route for the FSA to restore consumer confid-ence and stop misselling.

Bestinvest gave up initial commission in 1999 and says although it was a tough decision, over 90 per cent of its revenues are recurring and linked to invest-ment values “which is superb in terms of our ability to make long-term plans and retain staff”.

Need An Adviser.com director Joanne Roberts does not support the proposal. She thinks there is still a place for initial commission as some consumers do not want to pay fees for advice. However, she is concerned that consumers can be ripped off over a lump-sum investment, saying the work done on an investment of £500,000 is almost the same as on one of £20,000 but the difference in commission levels does not reflect this.

She says: “I think initial commission should stay but it should be justified to the client and agreed up front. This way, commission-hungry sharks will be ousted from the industry.”

LIA director of public affairs John Ellis, whose recent submission to the FSA&#39s consultation paper on the payment menu asked if it would be possible to move the entire advisory sector to a new fee-charging basis, removing any suspicion that advisers are biased by commission, believes Bestinvest has put its finger on the problem.

He says: “Initial commission is a problem because it leads to allegations of misselling and it would be nice to move to a different system but the problem is cashflow.”

Bestinvest suggests that any IFA with a viable business plan should be able to finance an initial cashflow deficit with venture capital. But Ellis is unsure that venture capitalists would be interested in investing in the future of financial advisers. Instead, he suggests that product providers could put together a package to sustain IFAs.

Ellis is concerned that a number of IFAs are already under-capitalised and fears that many could go under if they were forced to give up initial commission. He says: “A lot more work needs to be done on this but it could in principle be self-sustaining once people get over the hump of initial commission. But it would need to be done right.”

The Abacus independent business consultant Philip Martin does not see a need for banning initial commission as he thinks that, ultimately, the market is going to end up regulating itself. He says: “As the world moves towards a more service-driven proposition rather than a selling model, initial commission will fade away. This is allied to the changes that the wrap proposition is bringing to the market.”

Bestinvest is also calling for the retention of the better than best rule, which prohibits IFAs from selling the products of providers owning a stake of 10 per cent or more in them. The FSA is set to abolish the rule but Bestinvest says this would be a backward step and would jeopardise the concept of independent advice.

Managing director John Spiers says: “No matter how deep-seated your honesty, you will have an underlying preference for maximising the number of transactions and favouring products with the highest commission.

“No amount of policing can ever cope with this fundamental conflict and, until it is forcibly removed, misselling scandals will recur regularly.”

Ellis is unconvinced on this point as he does not believe the better than best rule works. He says: “There is no point in bringing this up again. At the moment there is a stark distinction between IFAs and tied agents but it is going to be a completely different marketplace in a few years.”

Roberts says calling for the better than best rule to be maintained will have no effect as the FSA has already made up its mind. She does make the point, however, that if IFAs want a clean image, then the consumer has to know what is going on.

Bestinvest&#39s other proposal to reduce misselling is the introduction of a tougher training regime for advisers. It says it has serious concerns over the speed with which a novice can become a financial adviser and be let loose on the public with very little practical knowledge or experience.

Spiers says: “I think there should be an absolute minimum employment period of two years as a trainee before anyone should be set loose on clients and the current minimum qualifications should only allow advice in limited circumstances.”

Roberts considers the FPC is a joke and believes that all advisers should have the AFPC. She sees a great need for professionalism to be increased.

The Consumers&#39 Association is wholly behind Bestinvest&#39s proposals. Which?principal researcher Teresa Fritz says: “If more IFAs felt this way, then consumer confidence would be restored.I would love to see IFAs take this up. The proposals are great but whether anything will come of them remains to be seen.”

•Commentary, p32

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