Some of the phrases used to describe the original proposals would not have cheered the regulator. “It has flaws.” “It’s a whitewash.” “A sledgehammer response.”
It would appear that the FSA has taken many of the issues on board for its interim report. It was not that long ago that there were just two categories of adviser and it could be that way again soon.
Today, anyone looking for a financial adviser has to pick their way through independent financial advisers, whole-of-market advisers, multi-tied advisers and sales representatives of product providers such as banks and building societies. Some are paid by commission, others are paid by fees. In short, it is not at all clear who does what.
The original RDR proposals appeared just as confusing as the existing format and not too dissimilar. They laid down plans for professional financial planners, general financial advisers (for a limited time only perhaps), primary advisers and generic advisers. Some would take commission, some would not.
Ultimately, however, it is about consumers and their interests. This is why the latest proposals to have just two types of adviser should be applauded – one type that gives advice and one that merely sells products.
This should help clear up consumer confusion. If they go to an adviser, they will know that they are talking to someone who is independent, recommends products from across the whole market and is paid by fees or commission.
This will undoubtedly hit advisers who fall short in regulatory terms in certain areas as they will not want to be reclassified as salespeople. The FSA also acknowledges that some firms operate advisory services in legal terms but would not be allowed to describe their services as advice. It has already rebuffed the option of the sales with persuasion tag, despite this having a certain charm to it.
The proposals will cause resentment among many factions but the FSA should resist attempts to soften its proposals. A major overhaul of the advice system is needed and the consensus agrees that it must be simplified.
No doubt, many IFAs will question the need for yet more change and feel that they are unfairly made the scapegoats. Certainly, figures from the Financial Ombudsman Service suggest that IFAs are not to blame for many past misdemeanours. In terms of uphold rates for complaints, those for IFAs tend to be lower than other financial services sectors at around 30 per cent. Only around 15 per cent of complaints about precipice bonds were made against IFAs.
Advisers are the obvious targets but the FSA’s assertions that product providers have a role to play is equally important, in my mind.
Former FSA managing director Clive Briault once said consumers were faced with “poorly designed and unnecessarily complicated products” and that “commission creates a risk of product bias, provider bias and churn”‘.
He was right. After all, providers invented the precipice bond and were responsible for split-capital investment trusts. They are the ones to dangle the commission carrot in front of advisers to boost sales.
This needs to stop to help curb product bias and churn. Again, I hope the FSA follows through with the challenge it has laid down to providers to “change their business models so they do not determine how advisers are paid”. It could rid the product bias stigma attached to many product recommendations.
The RDR debate continues until the consultation ends in October. Most organisations have made the obligatory noises that they welcome the FSA’s latest proposals but we can expect more critical responses to the interim report over the summer.
The regulator admits that “simpler may not be simple”. It has a point but the distinction between advice and selling needs to be made and we need to get this one right for once and for all.
Paul Farrow is personal finance editor at the Telegraph Media Group
50 Poland Street, London W1F 7AX