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Peter Hamilton: Could the FCA handle a return of the tied salesforce?

Peter Hamilton

According to the FCA and the Treasury, the express purpose of the Financial Advice Market Review is “…to look at how financial advice could work better for consumers. The Review has a wide scope and aims to look across the financial services market to improve the availability of advice to people, particularly those who do not have significant wealth or income”.

In a recent Money Marketing, Malcolm Murray made the valid point it was inevitable that some of the changes made by the RDR would have to be reversed to improve the availability of advice to people without significant wealth or income. He suggested it was “fundamental to reform to encourage the re-establishment of the tied salesforce”, which in turn would require a commission-based system of remuneration.

There is much merit in that suggestion but its implications and limitations need to be clearly understood, as Murray also made clear.

He correctly emphasised that such a move would require a return to the polarisation of advisers into those fully able to offer independent, unbiased advice based on the whole of the relevant market and those representing one or more product providers, who would essentially be selling the products of those providers for commission (representative).

Thus the latter would not be able to describe himself as an adviser at all. IFAs could continue to offer to advise in relation to the whole market, or only a specific segment, and would therefore describe themselves as independent but restricted to that specific market.

The legal differences between those two classes of advisers are important. In simple terms, an IFA (whether or not restricted to a specific market):

  • Has a contract with his client, which defines what his job is for that client.
  • Is the agent of the client. He is in a fiduciary relationship with the client and owes that client an unqualified duty of loyalty. This means acting in good faith, not making a profit out of the relationship, not allowing his interests to conflict with his duties to the client, and not acting for his own benefit or that of a third party unless the client is told the full facts in advance and consents.
  • Has to advise the client, using due skill, care and diligence. Any recommendation to invest must have regard to the whole of the relevant market, be suitable for the client and be free of bias.
  • Has to agree his remuneration with the client in advance of the transaction and is paid by, or on behalf of, the client.

A representative, on the other hand:

  • Has a contract with his principal, the product provider, which defines the terms on which he acts for, and represents, the principal.
  • Is paid his remuneration by the principal, not the client. The client has no say in how that remuneration is defined or calculated. Therefore, it can be commission-based, as it usually was in the days of large tied sales forces. In law, there is no need to disclose to the client what that remuneration is.
  • Is the agent of his principal and not the client’s.
  • Has to carry out, on behalf of the principal, the latter’s duties to the client. Generally, these are to present information about the principal’s products fairly, clearly and not misleadingly; to formulate recommendations with due skill, care and diligence; and any recommendation to invest must be suitable for the client, but is restricted to the products available from the principal.

One of the positive reforms of the RDR was the abolition of commission. That abolition should continue to apply to IFAs. It would be difficult to devise a commission-based system of remuneration for IFAs that removed the bias that is an inevitable consequence of every product provider offering its own rates to IFAs. It would be very difficult, if not impossible, for the FCA to police uniform commission rates per product. Thus the rule would have to remain that IFAs need to charge their clients for advice and that charge must be agreed with the client beforehand.

The point about Murray’s suggestion is that tied sales forces are very effective at selling cheap products, which are the kinds of products those without great wealth or income need and can afford. Although the risks relating to suitability and affordability are present today, those risks would increase under the pressure of commission-based remuneration. There would need to be a very clear, cigarette packet-type, disclosure that representatives are not independent and are remunerated by commission. But the product providers would be responsible for the acts and omissions of their representatives and would have the means to pay compensation.

The FCA would have to increase substantially the extent of its supervision and enforcement to regulate the return to polarisation effectively. Would it be up to the job?

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. A lot of people will say, if an article begins with a question, then said question can be answered with a no !

    In this case, I think it can be answered with a yes, but do the FCA want too ?

    Senior staff had already stated, “there will be no relaxing of regulation”, “we do not and will not return to the regulation de-regulation cycle”

    Its not the dinosaurs in financial services that need to be frog marched to extinction, its the ones at the FCA

    To transact the simplest of financial plans one must first swim a full size swimming pool filled with 3 day old porridge…. and then arrive at the other end squeaky clean…

  2. No is the short answer. They cannot effectively handle the system we currently have in order to make “make markets work well” or promote competition. What chance have they got of making a return of the DSF’s work? 2-letter-1-word answers on a postage stamp will suffice

  3. Douglas Baillie 9th March 2016 at 2:30 pm

    The main problem is that the FCA do not fundamentally understand the nature of the relationships that exist between an adviser and the client.
    Clients want simplicity, and frequently make the same statement “I don’t want to answer all of these questions (fact find) – Just tell me what to do”.
    Now we all know that the FCA and the FOS will not tolerate that kind of response under any circumstances.
    So much for the problems associated with delivering complaint advice to the ‘client’ where the adviser is the agent of the ‘client’ and is responsible for compliance.
    On the other hand, a ‘salesman’ who sells financial products, and is an agent of the provider, and does not have clients.Instead, they have ‘customers’ who buy a financial product, and the provider includes an element of additional cost into that product that pays the salesman – this is called commission. In such cases, the provider is responsible for ensuring that the salesman complys with the Regulations.
    There therefore needs to be two distinct sets of very clear and unambiguous Regulations: one for advisers (agent of the client), and another for salesmane (the agents of providers).
    They are NOT the same, and trying to regulate both using the same rules will not work.
    so back to basics and ‘the laws of agency’ as a sensible place to start.

  4. Indeed Julian. I thought this was an odd question too. I always understood that SJP were a tied sales force – with lipstick to make them appear better. They seem to get away with murder – so the regulator doesn’t appear to be really handling them now. Let alone speculating on how they would manage more of them.

  5. If there were a clear distinction as Peter Hamilton outlines, then this could be appropriate, BUT, lets not rush, lets see the FCA put together a plan for supervision and have a real expert panel asses it for suitability and NOT the usual hangers on.

  6. You are right, Philip, representatives need very different supervision from that appropriate for IFAs. That is why, when regulation began in the late 80s, representatives were subject to LAUTRO and IFAs were regulated by FIMBRA.

  7. The question is whether the vast majority of clients would ever really understand the distinction between fee paid and commission paid. I suspect the latter would come to be seen as the cheaper and better option if for no other reason than simplicity and convenience. This, of course, will play into the hands of the insurers and banks.

    “There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea we are now afloat. And we must take the current when it serves, or lose our ventures.”

  8. Return? We already have an almost unreformed SJP and a rush by others towards ‘vertical integration’ – the 21st Century version of the tied salesforce.

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