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Special agents

Controversy caused by the retail distribution review interim report over who should be entitled or, indeed, required to give advice has stirred old memories.

In about 1987, when the self-regulatory regimes under the Financial Services Act 1986 were being designed, one of the difficult questions was commission disclosure.

The disclosure of commission by IFAs was not difficult to monitor and regulate because it was a payment by the product provider to a separate and distinct entity. This was complicated somewhat by the soft commission and other benefits then being provided to IFAs.

On the other hand, it would have been difficult to disclose commission paid to a provider’s appointed representatives and company representatives because each provider had its own way of remunerating its salesforce. Not only were there direct payments of commission but there were also matters such as free training, free office accommodation and free sales conventions taking place in exotic places like Paris, Rome, the Seychelles and the West Indies. How were they to be valued?

In the end, the answer was provided by the law – in this case, by some basic rules of the law of agency. IFAs were the agent of the client and acted for the client. All the duties of an IFA were owed to the client and it was a fundamental rule of law that an agent must act exclusively in the interests of the client and not allow his interests to come in conflict with those of the client.

In most situations that involve agents, the principal remunerates the agent directly. It would be wrong for the agent to accept payment from the third party with which he was dealing on behalf of the principal, unless he told the principal of the payment and got their consent. Hence the need for commission disclosure.

Appointed representatives and company representatives were the agents of the product provider in the same way in which directly employed salespeople were the agents of their employer.

No one has ever suggested that product providers should have to disclose what they pay their employees. Remuneration is a private matter between employer and employee. If the employer pays too much, that will be reflected in the employer’s overheads and in the price of the products.

It could reasonably be argued that just as employee remuneration does not need to be disclosed to a customer, so the remuneration of a product provider’s appointed representatives and company representatives should not have to be disclosed.

As far as the outside world was concerned, there was no real difference between the role of a fully employed salespeople of a product provider and an appointed representative or company representatives of the same provider. That argument won the day in 1987 and there was no commission or remuneration disclosure of those representing a product provider.

Today, the roles of IFAs and those representing product providers remain essentially the same as in the 1980s. What are those roles or jobs?

Let us look first at those who represent product providers. For present purposes, let us call them representatives. They are the agents of the product provider and their job is essentially to sell the products of the provider which they represent. All the rules in Cobs and the FSA’s principles aim to ensure that those sales are suitable and fairly made.

The representative will take a detailed fact-find and establish the customer’s financial objectives and attitude to risk, work out from the products offered by the provider which one is suitable for the customer and make an appropriate recommendation to buy that product.

That recommendation may well be based on an expert and skilled analysis of, say, the customer’s inheritance tax position and how it might be mitigated but, in the end, the representative is trying to sell the products of his or her principal – the provider.

No matter how much skill and expertise they put into the recommendation, it remains a recommendation to buy. It is wrong to call that recommendation advice.

In this context, advice means objective and disinterested counsel. For it to be truly objective and disinterested, it needs to be given by a person whose main and overriding duty is to act in the best interests of the person receiving the advice – the client. In other words, the adviser needs to be independent of all ties and influences which might affect what he or she says to the client. That is the position of an IFA.

The IFA is the agent of the client in the eyes of the law. Ideally, the IFA should be paid for what he or she does for the client and not on the outcome of the advice. In other words, the IFA should be paid a fee for the advice.

If the client buys a financial product as a result of the advice, any commission paid by the product provider should be rebated against the fee. The IFA must not take commission without disclosing it to the client, getting the client’s consent and using it to reduce the cost of the advice.

It can be seen, therefore, that the proposals of the RDR flow logically and cleanly from the basic principles underlying the law of agency.

Only an IFA can properly give true advice. True advice is therefore advice to a client by someone who is duty-bound to put the best interests of the client first, who is bound to avoid all conflicts of interests or, as a minimum, if the conflict of interest cannot be avoided, to get the client’s consent to the IFA acting in that way.

The representative is just that – the representative of the product provider. No matter how skilled and expert the representative, he or she remains the agent of the provider whose products and interests he or she is bound to promote. It is idle to pretend otherwise.

What that representative says to the customer cannot amount to more than a recommendation. It is not objective and disinterested advice. The point of the representative’s dealings with the customer is to sell.

The point of the IFA’s relationship with the client is to provide good, objective and disinterested advice in the client’s best interests.

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