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Will second tier bring in new blood?

One of the proposals in the FSA&#39s depolarisation consultation paper 121 which has been met with varying deg-rees of favour around the industry is a second tier of adviser.

This concept of financial adviser has many names and many definitions around the industry such as a generic adviser. Broadly, the response has been a positive one and the industry is keen to find out more details about what the FSA has in mind.

In theory, the concept appears to make sense on two levels. One is extending the provision of advice to people in lower income brackets who cannot afford it or for some other reason do not seek it.

The other is to provide an opportunity for IFAs to bring in new blood to the industry and allow them to give basic advice without all the hang-ups of compliance that fully-fledged advisers have to negotiate.

The potential problems come, as with so much that the FSA is trying to achieve, in the detail. The regulator said in CP121 that it plans to consult further on the secondtier adviser and the industry is looking forward to that debate.

Momentum IFA development director David James says: “We think it is one of the more positive things to come out of CP121. We can bring more people into the industry now. It is an investment we would have to make. It may well be cheaper to bring in people at that level.”

But there are those who wonder what areas of the conduct of business rules could be eliminated or simplified to facilitate the lower level of adviser.

LIA director of public aff-airs John Ellis says: “If the issue is reducing costs for the industry, then what are the costs that can be reduced? I do not see what in the conduct of business rules can be reduced without causing damage. Even with lower-costing products, the question of suitability remains.”

“Saying that, if there is some way to slim down the red tape and paperwork, I think IFAs would be very attracted to the idea.”

There are those who argue that if the fact-find is not included, then how is suitability demonstrated? If key features documents are not essential, then how is consumer understanding reached? If there is no audit trail, then there is a lack of documentation.

The industry says these are all issues that the FSA must deal with.

Another argument being raised with the proposal is if it is to be IFAs introducing the second tier of adv-iser, then presumably they would have to be remuner-ated through the defined-payment system.

Given that the target audience is thought to be those who do not have access to financial advice at the moment because they cannot afford to do so, to be approached by an adviser whose first line is looking to establish a fee arrangement may not be the most appropriate way to enc-ourage a savings culture.

Ellis speculates that if this is the case, the likely result would be that the only ones taking advantage of this new second tier would be multities or direct salesforces.

This leads to another area of industry concern. If highstreet banks and other types of direct salesforces were to embrace second-tier advisers, some fear they could simply become a cheaper distribution channel for them.

IFAs say there must be some form of discipline to enforce the quality of advice given such as Catmarked advice, regeared decision trees or some other measure.

Syndaxi Financial Planning principal Robert Reid says: “The idea that they could be totally deskilled does not hold water. They have to be qualified to a certain level. A good measure would be to look at how much time is spent with individuals.”

Speaking at a conference hosted by employee benefits consultants Towers Perrin in London last week, Consumers&#39 Association senior policy adviser Mick McAteer expressed his encouragement for the idea. He said: “The FSA needs to develop the two tiers of advice in conjunction with safe-haven products.”

Most agree that if the second advice tier is developed properly it is one that has a degree of potential both to tackle financial exclusion and to encourage new entrants to the IFA industry.

But others fear it could prove to be a Trojan horse for the resurgence of direct sales but with a lighter regulatory regime complete with all the associated risks.


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