In doing so it may be seeking to repair some of the damage done to the public perception of financial advisers by a succession of widely-publicised mis-selling reviews, which have tarred the entire advice sector as actual or potential delinquents.
Professionalism is the key to the rehabilitation of the financial adviser, but it is doubtful whether the introduction of a new term for what everyone both inside and outside the industry has for long referred to as an independent financial adviser would be helpful. Equally unhelpful are other aspects of the proposal, notably the knock-on effect on the classification of other advisers and the criteria of professional status.
The classifications arising out of de-polarisation are widely regarded as unsatisfactory because they are contrived and over-complicated. What is needed now is clarity; and what does the FSA propose? Yet more new classifications and even greater scope for confusion.
The thinking seems to be that if a select minority of IFAs are to be elevated to professional status, then the rest must be demoted to a lower rank. But since they will after all continue to be IFAs, it is the definition of the word “independent” which must take the strain. Hence, apparently, the preposterous suggestion that the pretence should be created that independent might include tied. What a travesty!
The one thing that is understood by the consumer is the concept of independence. One of the few positive outcomes of de-polarisation was the requirement that independents should offer their clients a fee option, and the most natural and sensible progression from this point would to be require that in future they should be remunerated on a basis agreed with the client, however this might be funded, and that any commission received should be surrendered to the client. This is the basis on which Law Society rules have always required solicitor financial advisers to operate, and it has now also been enshrined in the FSA’s new COBS rulebook, which provides at 6.2.16 that all advisers who charge on a fee basis must ensure that “the value of the commission is transferred to the client”.
But the simplicity of this solution appears to have eluded the FSA, who have instead based their definition of professionalism on the attainment of the ultimate financial planning qualifications. Not only is this unrealistic, it also overlooks the fact that qualifications are only part of what makes a professional.
One can understand the FSA’s wish to elevate the top tier of financial advisers to similar technical status to solicitors and accountants, but the big difference is that in the case of the latter the major general qualifications come at the beginning of their careers, and most then go on to specialise. To require IFAs, as a pre-condition of being permitted to continue in their chosen careers, to go through this grounding in subjects which may in many cases be of little relevance because they have already elected to specialise, is more than unreasonable; it is quite probably a breach of human rights. The sensible alternative would have been for the FSA to pursue the path on which it has already embarked, of requiring advanced specialist qualifications for specialist areas of work.
As regards the missing ingredient in what makes a professional, this is of course the ethical dimension; the commitment to putting the interests of the client above all other considerations. The FSA demonstrates its lack of understanding of professionalism when it asks in the RDR whether incentives should be provided to encourage financial advisers to take the professional route. The reality is that professionals are instinctively professional, and need no incentive to adopt an ethical stance. It goes against the grain for them to offer their clients anything less than they would offer themselves, namely access to all the available options. Professionalism is a matter of pride and principle.
Another flaw in the FSA’s thinking is to relate professionalism to the individual rather than the firm. This would permit a well-qualified self-employed person working out of his back bedroom to claim a higher professional status than a well resourced firm which combines complementary specialist skills. It also flies in the face of the FSA’s efforts to encourage the evolution of retail financial services from a cottage industry into more meaningful business units which are in a position to shoulder the responsibilities of TCF and the FSA handbook in a structured manner.
If solicitors and accountants are to be regarded as a template of professionalism, then the FSA could be worse than note that they operate as firms not as individuals, and it is the firm which imposes the culture and status which is recognised by their clients. These firms have developed strong brand identities, which provide reassurance and continuity to their regulators and to clients.
To propose, as the FSA proposes, that independent advisers should be permitted to continue working cheek by jowl with tied salespeople or even to put on tied sales hats themselves from one client meeting to the next displays a disconcerting lack of awareness that independent advice and tied sales activity are polar opposites. The aim of independents is to serve the interests of their clients and to distance themselves from any payments or other influence which might undermine that single-minded commitment. The tied or multi-tied salesperson works for one or more product providers, selling their products on a commission basis and only gets paid if they succeed in making a sale. This is the only distinction which matters.
The FSA talks in the context of TCF of the importance of the cultural environment of financial advisers, but seems in the RDR to have overlooked its own message. It also seems to have forgotten that one of its primary objectives is to provide clarity and simplicity to clients.
Ian Muirhead, SIFA managing director