Aifa director general David Severn believes the FSA has underestimated the average cost of advice, which IFAs will be obliged to disclose to consumers, making many IFAs look uncompetitive and undermining the menu’s effectiveness as a comparative pricing tool. But the FSA has refused to budge, insisting it has taken reasonable steps to calculate the figures and that they have been checked and verified by Deloitte & Touche. The FSA has only made assurances that it will revise market-average figures on an ongoing basis, which is unlikely to fill IFAs with confidence if the figures are not correct in the first place. By way of example, on lump-sum products, the FSA has set a market average of 3.7 per cent for collective investments such as unit trusts and 4.94 per cent for investment bonds. Cheshire Trafford UK managing director Rod Leonard believes the FSA could have underestimated the market average by as much as 30 per cent but freely admits he has not yet worked out his own costs. He complains that the market average makes him look like he is pocketing too much commission when, in fact, he is charging less commission than some providers. Capital Tower principal John Doney backs Aifa’s long-held criticism of the way the menu system requires IFAs to compare the maximum commission they might make against the market average. Doney says: “On a 250,000 investment, we might typically take 1 per cent initial commission plus 0.5 per cent a year. The menu system only allows you to show the maximum possible initial com- mission you could take, which apparently would be in the region of 5.4 per cent. “But that bears no relevance to the commission we might take. The client is left with us trying to explain that we do not take the maximum commission that it says on the official document and that the market average bears no relevance to our costs.” But there is another side to the story, with some IFAs looking comparatively cheap against the market average. Glazers Financial Services director David Higgins believes the menu is unfair and oversimplistic but says it is weighted in his favour. “We had a smile on our face when we saw the market average because we come out favourably,” he says. Despite arguments to the contrary from the FSA, many IFAs claim that the regulator did not consult with typical firms when it made its calculations. FSC Investment Services managing director Frank Cochran complains that the FSA consulted with big discount IFAs, such as Hargreaves Lansdown, which can afford to work on tighter margins, and cottage-industry outfits which run on low overheads. He says this has slashed averages dramatically. Cochran believes that by undervaluing the IFA market, the FSA will drive out professionalism rather than encourage it. He says: “To be able to provide a professional service, you have to look the part, you cannot be operating out of your front room. This menu system means everyone has to work to the lowest common denominator and we become a cottage industry again.” Central Independent Adv- isers principal Mike Ellesmere has completed his initial disclosure document but admits he is confused by the menu system. He points out that, as a chartered engineer, this is not ignorance borne out of stupidity. Ellesmere says: “I do not know what the market average is and I do not know what our maximum costs are. I do not get paid indemnified commission so what do I put as my average? I do not see the relevance of commission when you charge a fee.” The lack of preparedness for the menu system among smaller IFAs makes FSA director of retail policy Dan Water’s recent comments that the June 1 dead- line will pass smoothly seem out of touch. Instead of being alarmed by the level of confusion in the IFA market so close to the deadline, the FSA has dismissed these concerns and ruled out repeated calls to push back the deadline. So Severn’s decision to put the matter in the hands of the OFT may give a small glimmer of hope to IFAs. If the FSA will not listen to IFAs, it will find it more difficult to ignore the OFT. Should the OFT rule in favour of Aifa, the public will not look kindly on the FSA turning a blind eye. Surely the FSA could not be seen to openly flout the interests of the consumer? IFA Defence Union chief Evan Owen says: “If the OFT rules in favour of the FSA, we have a regime which is unworkable. We will have to go for a charge of restraint of trade. The FSA has no right to dictate what an IFA earns.” Reynolds Porter Chamberlain senior solicitor Harriet Quiney doubts how much legal power the OFT has over the FSA but says it would be “extremely difficult for the FSA to push on with the menu if the OFT gets involved”. This would be a hugely embarrassing and unheard of capitulation for the FSA and a victory for IFAs. This is clearly what Severn and many small IFAs around the country will be hoping for.