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