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Progress is stalled at a T junction

It would be interesting to observe the FSA offices secretly as industry responses to CP121 are sorted into two piles labelled “reactionary and confrontational” and “realistic and constructive”. We hope Fidelity&#39s response falls into the latter category.

Our realism is grounded in our resignation to the inevitability of change. Despite some deep reservations, there are CP121 proposals we welcome. Extending consumer choice through broadening product and provider representation in tied channels is difficult to fault and we suspect that IFAs have less to fear from this than many might think.

In a similar vein, we welcome proposals to create an entry-level advice tier. This may not yet be a popular viewpoint but evidence suggests that this may ultimately benefit IFAs. Many customers are not well served by existing distribution channels so growing the market for financial products by introducing new consumer points of entry will increase the demand for high-quality advice in the future.

This is clearly demonstrated in the US, where financial planners and advisers are long-term beneficiaries of similar deregulation and are the fastest growing distribution channel for investment funds. This is because new investors graduate away from entry-level channels as their needs become more sophisticated and migrate to traditional advice firms. This will take time to achieve in the UK and will be beneficial for advisers.

A further benefit is that entry-level channels recruit and train new advisers, similar to an industry apprenticeship scheme. This addresses a key challenge for IFA businesses today – the difficulty and cost of attracting and training new advisers.

However, Fidelity has concentrated its CP121 response around an area where we have considerable reservations. We believe a proposal to force existing IFAs to choose between remaining independent (according to the new definition) or becoming an authorised financial adviser is misguided. This will cause a major upheaval in the market for little consumer benefit but significant potential detriment.

Existing IFAs have effectively been presented with a T junction and told to go one way or the other – fee-based IFA or commission-based AFA. It disallows a choice of payment methods on a case-by-case basis as many advisers offer and, therefore, diminishes client choice.

Beyond the obvious potential for confusion, we are concerned that there is an added danger that there will develop in consumers&#39 minds a qualitative distinction between these different sources of advice although, in reality, only the payment mechanism might be different. We do not believe these proposals support the FSA&#39s objectives of making advice more transparent and better trusted by consumers.

The proposals create a less flexible option for consumers than the one they have today. It would, therefore, be ironic if the biggest impact of CP121 was an own goal in the IFA sector when the consultation is, by the FSA&#39s own admission, principally about the tied sector.

So what are the constructive aspects of Fidelity&#39s response? We have proposed an alternative in which IFAs should be able to continue to use the description “independent” if they formally and transparently offer clients a choice between defined-payment fees or commission-based advice.

The key difference between this approach and the CP121 proposal is the degree of compulsion. Adviser firms will not have to work solely on one basis. If, as the FSA believes, consumers prefer defined payments in order to assure themselves of absolute product impartiality, IFA businesses will continue to evolve towards a higher fee-based component.

The FSA can claim the victory it desires but the real winners will be consumers who will still have access to high quality impartial advice, however they choose to pay for it.

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