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