The FSA will be aware that, in our comments on CP121, we advanced the view that the initial disclosure at the outset of the advice process should contain some generalised paragraphs on the way in which advice, order taking and arranging is paid for.
Subsequently, of course, Aifa and product providers developed the concept which lies behind the current menu proposals.
Our general view about the menu proposed in CP 04/3 is that it is too complex and that it is unlikely to engage the consumer's attention unless some more work is done to demonstrate its relevance to the stage in the advisory discussion when the information is presented. The spread of information in the proposed menu across a range of product groups which may or may not be relevant to a particular set of advice is not commercially realistic.
There are two questions we believe must be answered:
How can the consumer be made more aware of the cost of advice?
How can the cost be signalled at a “natural” point in the advice/arranging process, so that it has the consumer's full attention?
Content and timing of disclosure
For those who are charging fees, it would seem to us sufficient to include their fee-charging basis in the terms of business letter.
We believe, further, that, at a stage when a report is produced for a client, an estimate of the overall cost of implementing the plan set out in the report should be given.
Beyond this, the fee option is an arrangement between adviser and client which should require no further regulatory intervention. If, at a later stage, a client believes he or she has not received value for money, that should be a matter for complaint or legal action.
The problem area is, of course, commission. There are so many factors involved in the decision to pay a given level of commission with a particular “shape” to an adviser that a generalised table such as that presented is unlikely to produce much beyond confusion. The complexity of the “equivalence” table is witness to this.
We would suggest that the disclosure of commission level should be left to the time when a decision to proceed with arranging a portfolio is made, when the adviser could quote the terms which the adviser has with product providers who have been identified as possible suppliers. There might be a range of three choices (where available) at differing levels of cost; any relevant implications of lower cost options (for example, a lower standard of service) should be detailed.
By approaching the disclosure in the way set out above, presumably the one-off cost of £39.75m and the further £22m per annum arising from the “equivalence” table in the menu could be significantly reduced.
It is by no means clear that the production of a table of “average” commission levels would not influence market behaviour in a way which is anti-competitive. The OFT has made some generalised comments on its possible reaction to the menu. We do not believe that the approach set out above in this letter would incur similar problems.
Would it be possible to move the entire advisory sector (independent and non-independent) to a new charging basis?
If we were able to draw up a fee-charging “template” incorporating and separately identifying the elements of advice, order taking, arranging and ongoing service, this could be used by all advisers to create a fee menu to be given to consumers with the choice that the appropriate amount to cover the adviser's costs could be paid either directly to the adviser or costed into the product.
In the latter case, in sending the documentation forward to a product provider, the adviser would add on to the cost of the product a separate element in respect of advice and other services supplied by the adviser. These “fees” would be taken from the fee menu given to the consumer. Such an approach would, of course, imply that products were quoted net of the adviser element.
The merit of this approach would be that, once and for all, we would be able to get away from the suspicion that commission incentivisation biases recommendations. We believe this is an idea which would repay further study.
We hope the above thoughts may be of some assistance in carrying forward the current debate. Our impression is that the decision on the menu has already been taken. But it is of course open to the FSA to stop at this point and evaluate some new alternatives. Otherwise we run the risk of incurring a considerable new cost with little practical benefit. At worst, charges of adding to bureaucracy and red tape could arise.
John Ellis is director of public affairs at the LIA