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Is the end nigh for defined payment?

It appears that the FSA may finally be paying attention to the industry&#39s collective criticism of its defined-payment system for IFAs outlined in CP121.

At the recent annual LIA conference, FSA managing director John Tiner referred to the big number of alternative proposals put forward by the industry in its responses to CP121.

He said that while the FSA had put forward the DP concept as a means of tackling commission bias, it was examining it to see if it was practical to implement as well as conducting a cost-benefit analysis of the proposals.

Tiner said: “We are looking at this whole area very seriously and taking into account the many ideas that have been put forward.”

Those who heard Tiner&#39s conference speech say this is about as close as anyone in the FSA hierarchy has come to confirming in public that it is actively reviewing the DP system.

Industry sources have rev-ealed that in recent private conversations with head of the polarisation review David Severn, they were told that the DP system only had a 50/50 chance of survival and the distinct impression from Canary Wharf is that the FSA is backtracking on the proposal.

As one of the key ideas put forward in CP121 for reforming the distribution regime, the DP system has been greeted with a resounding chorus of disapproval. So negative has the response been to the idea that one would be hard pressed to find anyone willing to say something positive about it, in public at least.

The most recent body to shout down the DP system has been the Financial Services Consumer Panel, which published its long-awaited resp-onse to CP121 last week.

The panel said: “We believe that the proposal to restrict use of the description &#39independent&#39 to firms who are remunerated on a fee or defined-payment basis is flawed…there is really no logic to the proposal requiring independent financial advi-sers to enter into a defined-payment agreement while allowing tied agents and distributor firms to charge commission.”

It goes on: “Most consumers (especially first-time users) will not want to pay a relatively large up-front fee, they would prefer to continue to pay commission through the life of the product, even if this would be more expensive for them in the longer run.”

Many in the industry credit the panel with convincing the FSA to drop its idea to depolarise Catmarked Isas at the same time as stakeholder and direct-offer promotions in the first round of change last year, so it is not insignificant that it has come out against DP.

If the FSA heeds the calls of the panel and the many others who have argued against the implementation of the DP system, then most IFAs say CP121 would be almost bearable for them.

Aifa director general Paul Smee says: “One of the biggest obstacles to a sensible market structure would be overcome if the FSA reconsidered the defined-payment system.”

IFA Wentworth Rose managing director Philip Rose says: “It would certainly help substantially. It would take away half the potential sting in terms of how an IFA would see it. Consumers would still be confused as to the difference bet-ween a multi-tied agent and an IFA but that can be explained.”

It is important to keep in mind what the “sting”, as Rose calls it, actually is. The sting, according to the panel, is that consumers will be scared away from seeking out IFAs if the first thing they are told when they walk through the door is they have to pay a fee.

IFAs point out that commission does not attract VAT but fees do, which effectively means that the FSA is suggesting consumers should pay an additional tax when they get independent advice though the actual status of defined payment would depend on the Revenue.

Those who are critical of the DP system agree that advisers will leave the independent sector in droves because of client unwillingness to pay fees, meaning that numbers will be reduced significantly and the overall cost of advice to consumers will balloon as a result.

If the FSA really is reviewing the proposal, as it appears to be hinting, and decides to scrap the DP system, how could it go about doing it and perhaps more important, what would it replace it with?

It seems unlikely that the FSA will allow IFAs to continue to exist in their current form with no alterations as it has made too much of the need for change.

LIA director of public affairs John Ellis says: “It would be a climbdown but if they have the unanimous opinion of the industry facing them, they really do not have much choice. If I were them, I would bury the reversal in the middle of something else.”

Scottish Equitable head of industry development Peter Williams says: “Politically, the FSA has nailed themselves to the mast on the DP system. They will not abandon it, they will redefine what it means. The best way to do that is to offer consumers the choice of how they pay for advice.”

There are many ideas as to how the regulator could proceed, most of which involve, as Williams says, more choice being given to the consumer.

He says that is the great gap in the FSA&#39s thinking. There is nothing for consumers who want independent advice and who want that advice to be paid through commission.

Smee believes that by strengthening disclosure, consumers can be made aware of not only how they are paying for the advice but they can also see exactly how their adviser has selected the product recommended.

He suggests that an IFA could include a declaration in their key features documents that they will not take commission above a certain amount, thereby alleviating any concern of commission bias.

Tiner says that when the FSA finally makes its feelings known on the subject in September or October, there will be likely be some degree of ref-orm for IFAs. After all, when CP121 was published in January, Severn said it would take a nuclear bomb to shift the regulator&#39s thinking.

Maybe he is hoping that people will forget that comment as the bombers start to make their descent.


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