End of the road for commission

A financial adviser

Financial advisers who are paid commission are set become a thing of the past following proposals for a radical shake-up of the investment sector.
In a consultation paper, the Financial Services Authority (FSA) calls for greater transparency in the selling of all investment products - with commission-based advice set to be banned and the industry reverting to a fee-based service. It says this will ensure "independent advice is truly independent and reflects investors' needs".

The regulator plans to ban financial providers from paying advisers commission and adviser firms from recommending products that automatically pay commission. At the same time, advisers will have to agree payments - known as ‘adviser charges’ - with their clients up front. These will be deducted from the value of their investments.
There will also be a clear distinction between independent advisers, who can recommend the full spectrum of products available, and ‘restricted advisers’  - such as staff working in bank branches.
The FSA says the changes will "improve outcomes for savers and investors by enhancing the quality of advice they receive".
At present, product providers, including unit trust groups and insurers, build commission into their products to encourage advisers to recommend them to clients. Under the new proposals, both initial commission and trail commission would no longer feature in products such as investment bonds and unit trusts.
All investment advisers will also be qualified to a new, higher level, regarded as equivalent to the first year of a degree.
The outcome was heralded as a "big step towards creating a financial advice system which the consumer can trust", by the Financial Services Consumer Panel.

Adam Phillips, acting chairman of the Panel, says: "The proposal to remove commission bias will help people to get independent investment advice that reflects their needs and is not influenced by the product provider."
Those sentiments were echoed by the Association of Independent Financial Advisers, with director general Chris Cummings calling it "a positive and considered response that will benefit consumers".

But there are concerns that hitting people such as savers with a one-off charge could put them off seeking independent advice.

Maggie Craig, director of life and savings at the Association of British Insurers, says: “For most consumers, looking to make smaller regular savings, a one-off payment for advice could put them off seeking it.

"The FSA’s solution - that consumers will have flexible ways to pay for advice through regular contributions without provider influence - will be difficult to implement."

The changes are due to come into force from the end of 2012.

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