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MM leader: The huge costs of last week’s big news

Two big announcements last week are likely to have a huge impact on elements of the advice sector. 

One had been clearly flagged by the FSA as an area of concern over the last couple of years. In the other case, the regulator had led adviser firms to believe they had little to worry about.

The FCA’s clampdown on inducements, which has seen two firms referred to enforcement, and the Office of Fair Trading’s recommendation that auto-enrolment schemes are stripped of “built in” commissions will both hit certain firms’ bottom lines hard. 

Aviva says the commission ban is likely to have a retrospective effect on all qualifying schemes and could cost the advice sector £150m with 1,000 adviser job losses. Ernst & Young suggests big distributors could have received £30m in provider payments for 2013, with experts estimating that up to half of this could be banned in future. 

A hard-line approach from the FCA on inducements was expected and completely justified. It was inconceivable that the regulator could introduce such a dramatic reform of the way the advice profession can charge for its services and then allow larger firms to circumvent these rules at will. 

Allowing huge payments to pass between providers and large distributors to secure product sales or permitting certain joint ventures that would open the door to biased advice would have made a mockery of the RDR. 

Over the coming months these large advice firms need to articulate clearly to their advisers how they will deal with the FCA’s new inducement rules and ensure they have a sustainable business model that can be relied upon. Given the fallout for advisers and their clients from the well publicised failing in the sector in recent years, some tough questions need to be asked and answered. 

On auto-enrolment commission, the FSA was clear throughout the progress of the RDR that group schemes written before the start of January would be allowed to continue to pay commission. The political mood has hardened and it was perhaps inevitable that this issue would be revisited. 

Although certain group schemes provide large levels of commission that are hard to justify, other arrangements offer a good deal for the employee and employee and tearing them up for the sake of jumping through a few regulatory hoops is likely to be a costly exercise for everyone involved.

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