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Return of the bogeyman: Why Osborne shouldn’t dismiss bringing back commission

Tom Selby White

Bogeyman(noun)

A person or thing that is widely regarded as an object of fear

The word ‘commission’ is synonymous with everything that was wrong with the advice market prior to the Retail Distribution Review. It conjures images of slick salesmen in shiny suits flogging dodgy products to unwary retirees.

And, particularly in the case of the banks, it was at the fulcrum of numerous misselling scandals.

So when Money Marketing editor Natalie Holt and I settled on the headline ‘Rewriting the RDR: Advice review eyes lower qualifications and return to commission’ for our cover story last week, we knew it would spark debate, both among advisers and across the wider sector. That was the point.

The reaction, particularly among consumer advocates, was predictable (and summed up well in Paul Lewis’ piece in MM this week).

But let me explain why it might not be such a bad thing.

While Lewis, with some justification, argues that commission was “the cancer at the heart of the financial services industry”, there are crucial differences between what existed pre-RDR and what is being looked at through the Financial Advice Market Review.

Pre-RDR, commission rates were unfettered. This meant advisers were incentivised to recommend products that paid the highest rate, rather than those that most suited their clients’ needs. Many didn’t, of course, but the system clearly encouraged poor practice.

The idea being discussed as part of FAMR is commission in that it involves payment from provider to adviser contingent on the sale of a product. But it would be a completely different beast.

Commission would only be payable on certain very basic products – not yet defined but likely to be Isas and simple pensions.

And crucially, charges would be standardised across the industry. The standard rate could be set at, say, 1 per cent of the money invested, capped at £500 – returning an element of cross-subsidy without the risk that advisers will be tempted to flog clients off to the highest bidder.

Finally, transparency would be strictly imposed so clients are fully aware at outset that a payment is being made from provider to adviser on sale of the product. Anyone caught claiming the advice they offered was “free” would face the full weight of the regulator.

So simple, kitemarked products, standardised fees and enforced-transparency. That, to me, feels like a framework within which commission could be paid without savers being ripped off left, right and centre.

The problem is, in the black and white world of the consumer press, commission has been defined as inherently bad. Understandable given the behaviour of the past, but ignorant of the fact it also allowed advisers to subsidise advice to poorer clients with higher fees from richer clients.

I’m not suggesting commission can solve the advice gap on its own. But a reformed charging model that protects consumers while encouraging advisers to service the mass market should not be dismissed out of hand.

Some commentators will inevitably continue to froth at the mouth at the prospect of rewriting the RDR, and that will make it politically difficult for policymakers to think the unthinkable when it comes to commission.

The FCA and, more importantly, the Treasury must look beyond the ‘c’ word and create an advice framework that works for consumers.

Tom Selby is head of news at Money Marketing

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Younger readers may not be aware that in 1988 there was the Maximum Commission Agreement which did have a cap on commission rates. The OFT stated in 1989 that it was anti-competitive, and it would also be against EU rules. So you can’t go back to the bad old days of commission for a variety of reasons, including the fact that “commission hungry” sales people employed by the banks will yet again rip off the public.

  2. I’m afraid you are singing from an obsolete hymn book.

    Commission is:

    1. Anti competitive as it imposes a standard rate for the job.
    2. Makes the adviser the agent of the provider.
    3. Commission diminishes the product.
    4. No matter what the Regulator does – some will no doubt find ways of making the charge opaque.

    To plagiarise Samuel Johnson “Commission is the last refuge of a scoundrel”.

  3. They absolutely can reintroduce it and probably will and furthermore, it will be in whatever form suits them; our say will be limited to any input we have made into the FAMR!!!

    Just telling it as it is!!

  4. And there’s me thinking that all of the reports pre RDR actually said that there was no evidence of commission bias.

    But as the FSA et al decided to ignore the industry, and their own research, and plough on with it anyway do we really want to go back there?

  5. Even if commission is the same for all products it still biases advisers in favour of selling those products rather than commission free products such as NS&I, cash savings or indeed doing nothing. If commission is a percentage it also encourages advisers recommending putting in enough money to reach the cap. So it still creates a conflict of interest between the adviser trying to earn maximum commission and the customer. And of course the customer pays the commission as surely as they would pay a fee. They just wouldn’t know about it.

    • Thanks for your comment Paul. The client would have to be told clearly if a commission payment is being made, just like they have to be told about an adviser charge. Take your point on product bias – it’s a question of balance of risks. At the moment advisers (in general) won’t take on low-value business, and many non-advised savers either don’t engage or make terrible financial decisions without thinking about the consequences. If they took advice, they’d probably make a better decision. I don’t necessarily think commission is a perfect solution but in the absence of perfection, it should be considered.

  6. Tim tim@pagerussell.co.uk 15th January 2016 at 4:57 pm

    Hiding* the cost of advice by reintroducing commission misses the key point: That a large proportion of the population are not prepared to pay the fees necessary to deliver our service because they do not sufficiently value it.

    Value = Benefit / Cost.

    So we have to increase the perceived Benefit and/or reduce the Cost (if we want to serve these clients).

    There is a growing realization that major problem our sector faces is the cost of acquiring a client.

    (The cost of delivery including regulation is less of an issue. Look at the slow take up of robo-advice for proof. “Build it and they will come” does not work – just ask Nutmeg).

    The reason the costs of client acquisition are so high is that the general population do not trust us. (We still carry the sins of miss-selling on our shoulders and are lumped in with the banks). This is why most of us still get most of our clients form referrals.

    A return to commission would actually drive UP the cost of advice. Why? Because it would reduce trust still further and make client acquisition harder.

    *Even if it is properly disclosed commission is less salient to a custom and so is a way of hiding the cost.

  7. Paul lewis, Tim, I agree with both of you. Spot ob.

  8. Trevor Harrington 15th January 2016 at 7:54 pm

    The simplest solution to the entire discussion is, as is always the case, the simplest remedy.

    1) Maximum “commission” agreement (MCA – I suggest 3% initial plus 0.5% trail) – allowing for any excess charge or fee, which is required by the adviser firm, being charged directly to the client.

    1) Hard disclosure of the initial charge (commission), and the ongoing charge (Trail), including any excess adviser charge over and above the MCA (above), being clearly declared on the front page of all compulsory illustrations, where the ongoing and the initial fee or “commission” is sourced from the product.

    2) Absolutely NO indemnity terms, which impact on the clients investment (allowing for commercial third party payment terms if desired by the adviser firm).

    3) Compulsory pay down (sharing), at a set % rate, of the trail or the renewal (ongoing adviser fee) directly to the specific adviser who is dealing with the client, and a compulsory client ability to stop, start or redirect that payment if he/she so desires.

    4) Compulsory annual statements (in arrears), from the adviser firm, directly to the client showing ALL revenue received by the adviser firm from the clients’ investments, INCLUDING fees that have been charged directly.

    Sorted …

  9. I have no objection to a fee, an agreed maximum percentage or cost set in stone, but please do not call it commission. A fee implies a value, commission implies a sale of a produced, based on history and the past failures.

    This is simple and yet again like the RDR the advisers whilst objecting, due to the horrendous journey we have had to enjoyer and the cost of implementing the RDR, we are suggesting and recommend the best solution. Pre RDR advisers strongly recommended a commission cap, a set cost, it was poo poohed by the regulator as commission was seen as the root of all evil. So they pushed their policy through regardless. The outcome has been as predicted by the advisers and the regulator is now under pressure due to a so called advice gap. Has anyone actually found anyone that could not get advice? I don’t understand why anyone who can afford to save, invest, cannot pay for advice IF needed, there are issues that need to be addressed for the small monthly savings, not lump sum investment.

    If the cost needs to be spread than call it a deferred fee, with the cost spread over a set time period. However, the consumer should be liable for the cost of the advice (so a value is seen), payable even if they do not continue payment of the product. The provider has to pick up the cost of implementation, which should be kept separate, but also should be recoverable. I do not agree that the rules of the regulators master plan to clean up financial services (RDR) should be reversed.

    My concern is that consumers will be suckered in, yet again believing they are not paying for advice, that the service is provided FREE of charge, as they never read the paperwork. It also opens the doors to abuse, as I don’t care what anyone says, any payment not shown as a fiscal deduction from the savings, in pounds and pence gives the consumer a false impression.

    Anything less then these suggestion, humbly but freely given, must be seen as support of the banks and there profit driven, poor culture and a return of the good old days by both the regulator, HMRC and the Government. Frankly it would be shameful, but we have all become used to this, they have no shame.

  10. “clients are fully aware at outset that a payment is being made from provider to adviser on sale of the product”

    …and how is this going to be ensured? We had commission disclosure on illustrations before but the unscrupulous advisers probably just didn’t hand them across to the client – or tore off the back page where the commission figure was ‘disclosed’

  11. Trevor Harrington 18th January 2016 at 7:31 pm

    Martin, Ivor and Marty ….

    I say again (as above) –

    Trevor Harrington 15th January 2016 at 7:54 pm
    The simplest solution to the entire discussion is, as is always the case, the simplest remedy.

    1) Maximum “commission” agreement (MCA – I suggest 3% initial plus 0.5% trail) – allowing for any excess charge or fee, which is required by the adviser firm, being charged directly to the client.

    1) Hard disclosure of the initial charge (commission), and the ongoing charge (Trail), including any excess adviser charge over and above the MCA (above), being clearly declared on the front page of all compulsory illustrations, where the ongoing and the initial fee or “commission” is sourced from the product.

    2) Absolutely NO indemnity terms, which impact on the clients investment (allowing for commercial third party payment terms if desired by the adviser firm).

    3) Compulsory pay down (sharing), at a set % rate, of the trail or the renewal (ongoing adviser fee) directly to the specific adviser who is dealing with the client, and a compulsory client ability to stop, start or redirect that payment if he/she so desires.

    4) Compulsory annual statements (in arrears), from the adviser firm, directly to the client showing ALL revenue received by the adviser firm from the clients’ investments, INCLUDING fees that have been charged directly.

    Sorted …

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