In the coming months, we will see regulatory and legislative changes designed to improve consumer confidence and help people to save more easily.
As we work to improve consumer perception of our industry, one area that is likely to get increasing attention is the commission system.
Commission exists as a means of remunerating sales in almost all aspects of our lives, from cars to electrical goods, holidays to foreign exchange. In many cases, it is not disclosed to us how much is paid so why should we be so concerned about commission in financial services?
Research commissioned by the FSA from Charles River Associates showed that while there was relatively little evidence of consumer detriment caused by commission, there was some evidence of bias and many consumers looking at our industry from the outside in believe that an IFA remunerated by commission will be motivated to sell and will not act independently.
Existing IFA clients have a deeper appreciation of their adviser's service but this perception makes it harder to attract new customers and does little to create confidence in our industry.
Ron Sandler correctly highlighted other problems associated with the commission system that prevents a properly functioning market.
He goes on to state: “The consumer does not set the price for advice, is broadly unaware of what it is costing and may not even be aware that he is receiving it. Like it or not, whether it applies to your clients specifically or not, this is a statement backed up by research and cannot be a satisfactory experience.”
It would be easy to conclude that if we just abolished commission remuneration, then everything would get better. I mentioned an agenda that is shifting its focus to commission and there may be pressure to do just that but that would be a mistake.
The majority of consumers, while suspicious of commission, are also unlikely to pay fees for financial advice and is a fee combined with nil-commission product terms necessarily better anyway when it has the same financial impact as a front-end-loaded product paying indemnity commission?
Abolishing commission would simply lead to fewer people paying for professional financial advice, with a consequent reduction in the amount and quality of savings among the population as a whole.
So we must work hard at making the alternative work. The alternative is a commission system that is open and transparent, that puts customers in control and acts in and, importantly, is seen to act in their interests.
Fortunately, this does not mean more change to an already busy agenda. Rather, it is the principles behind the new menu disclosure currently under consultation.
I say the principles because the objective and purpose of the menu is sound. As always, the devil will be in the detail. But at a high level, this new document will require a discussion of how much advice costs at the initial meeting with a prospective client. For IFAs, it will show both fee and commission options.
It will explicitly state that commission costs are met from higher product charges. Importantly, commission or commission equivalent disclosure will also be required of tied and multi-tied advisers.
Given Sandler's analysis, it would be impossible to create the right environment if all advisers were not brought under the same regime.
This change alone must go some way to addressing concerns over commission bias. It must address all Sandler's concerns over consumers' current lack of understanding of the value of advice and, over time, we must be prepared for consumers to drive change in the way that we do business.
Actually, we should be actively encouraging it. We should view this as a good thing because until consumers feel in control and feel able to influence outcomes, they will lack confidence in a process that they do not fully understand.
Change will not happen overnight. I see the menu as evolutionary rather than revolutionary. I think its use will help in time to restore consumer confidence over commission. If it does not, then we should develop the menu proposals further until it does.
In terms of the detail, there are still many aspects of the current proposals that require more work but they are a step in the right direction and I urge you to respond to the current consultation. There is a growing need for professional financial advice and we must make sure it remains accessible, affordable and valued.