FSA stays firm on deadline to ban adviser commission
The Financial Services Authority says it is committed to implementing the retail distribution review in January 2013, despite a Treasury report recommending it be delayed by 12 months.
The RDR will ban independent financial advisers from taking commission from companies when recommending their investment products to clients.
After mis-selling scandals such as personal pensions and endowment policies, the FSA believes the RDR will help eliminate mis-selling, protect consumers and restore trust in the retail investment market. The review will also require IFAs to have more qualifications.
The Treasury Select Committee published a report on the RDR on Saturday that recognised the importance of a stronger professional ethos among financial advisers and supported the aim of improving financial advice.
However, it also called for the FSA to extend the deadline for the new requirements for financial advice by one year to allow providers and advisers additional time to prepare and comply.
The FSA welcomes the scrutiny by the Treasury as it says the RDR is "a significant structural change for the industry". But the City watchdog adds: "[We] note the report's recommendation on timing but remain committed to implementation from January 2013.
"The RDR is already a long-running initiative with the first consultation paper published in June 2007. There is clear evidence that the industry is well advanced in its preparations, with 49% of IFAs already qualified and at least 82% expecting to remain as retail investment."
Kay Blair, vice chair of the Consumer Panel, which advises the FSA on the interests of consumers, strongly agrees that the FSA should stick to its deadline. "While we acknowledge the cost in terms of time and fees that some advisers will incur in achieving the minimum qualification level, there can be no justification for the FSA to back away from this important requirement at this late stage.
"MPs would be rightly outraged if their constituents were treated by doctors with A-level qualifications or advised by poorly qualified lawyers. There should not be a double standard when it comes to financial advice," she says.
According to Blair, further delay would only risk harm to consumers as "the effects of poor financial advice - and the burden of opaque fees and costs - can last a lifetime".
Adam Price, founder of IFA comparison site VouchedFor.co.uk, also believes the FSA should implement the new rules in 18 months time. "The RDR - and its drive toward professionalism - is a great thing for consumers. The move to fee-based advice reduces any product biases, and aligns the adviser's interests with the client's.'
Ahead of the RDR Price recommends people looking for an IFA choose one that is fee-based rather than commission-based and is already qualified to a 'level four' standard to eliminate the risk of them leaving the industry. "As the FSA's statistics show, 18% of IFAs simply intend to leave the industry. The FSA has already issued a warning about advisers potentially churning investments to maximise their commissions ahead of RDR."
The process of churning refers to advisers recommending clients move their money into another product for no other reason than for the adviser to receive extra commission.
This article was written for Money Observer.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.