End of the road for commission
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.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.