The end of commission-bias?
The Financial Services Authority (FSA) has confirmed its pledge to ban commission on investment products by the end of 2012.
In a retail distribution review discussion paper published on 26 March, the City watchdog said it will ban financial advisers from taking commission from providers when recommending products.
Instead, advisors will have to be upfront about how much they charge for their services and give recommendations based on a comprehensive and unbiased analysis of the market.
"These new rules are designed to boost confidence and trust in the retail investment market by removing commission bias, actual or perceived, and exploding the myth that investment advice is free," says Sheila Nicoll, director of the FSA.
When the review rolls into action in 2012, investors will be given the choice of paying an upfront fee or they can bundle the cost of advice with the cost of the product and spread out the payments.
It is unclear how exactly the bundling of advice and product fees will operate.
The Investment Management Association says it looks forward to engaging with the FSA this summer to determine how the adviser-charging regime will work with the fund management industry.
Consumer groups and providers of commission-free products welcomed the FSA’s announcement.
According to Adam Phillips, chairman of the Financial Services Consumer Panel, the FSA has "really acted to protect consumers".
But he adds: "There is still more work to come from this project and the monitoring of compliance with the new rules."
Meanwhile, Maggie Craig, director of life and savings at the Association of British Insurers, says the plans will help investors understand how they are charged and whether the advice they receive is fully independent or not.
However, she warns that more needs to be done to help people who cannot afford to pay for full financial advice: "It is clear that the changes will mean that full advice services will move further up market, meaning that even more consumers will need an alternative advice option.
"To meet this need, the ABI has developed proposals for a new advice service know as simplified advice designed to provide consumers with a suitable recommendation based on a limited assessment of their financial needs."
The move may also encourage financial advisers to take a broader look at investment products for their clients' portfolios - such as exchange traded funds (ETFs).
Manooj Mistry, head of ETF provider db x-trackers, says: "The changes will remove the influence of commissions on advisers’ recommendations. As a result, ETFs such as db x-trackers that do not provide commissions may become a larger and more important part of retail investment portfolios."
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.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
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.