THE quality of financial advice in the UK is compromised by a system producing results that are unattractive to reputable providers and their customers and whose benefits to advisers are questionable.
That was the view in September 2006 of Sir Callum McCarthy, chairman of the Financial Services Authority (FSA). The comments were made shortly after the FSA launched its retail distribution review (RDR), aimed at addressing the recurring problems fac
ed by consumers when they buy financial products such as pensions and investments.
Nearly two years after the review began and following detailed consultation with the industry, the FSA last week released an interim report on the RDR. It raised several interesting points, most notably advocating a clear differentiation between "advice" and "sales". It proposes that advice must be truly independent, delivered by advisers with a higher minimum qualification than is currently the case and with a method of remuneration that is not influenced by product providers. This would mean many firms currently calling themselves financial advisers would either have to change their business models or describe themselves as salespeople so that consumers would be more clear as to whether they were receiving advice (focused on their needs and objectives) or simply being sold a product.
At the core of the debate is the means by which people pay for advice, with the FSA insisting that advice should operate in a way that limits any conflicts of interest that might otherwise inhibit them from acting in the consumer's best interests.
The vast majority of financial advisers are currently paid by commissions they receive from product providers, while others charge time-based fees.
The concern is that the commission system encourages advisers to sell products in order to generate commissions rather than make recommendations based on the best interests of their clients.
To address this, the interim report argues that the level of adviser remuneration should be agreed by the adviser and their client and not be dictated by product providers. It even suggests the FSA could consider prohibiting payments from product providers to intermediaries, but steps back from this by saying that "this is not practicable at the present time".
The inference, however, is that the days of commission-based advice could be numbered and that the FSA is determined that consumers can fully understand and agree the charges they are paying. With many people unaware that most financial advisers are paid by the providers of the products they recommend – and so are under the impression that "advice" is effectively free – these proposed changes should greatly increase consumer awareness and confidence.
To improve that confidence further, the report proposes that the qualification benchmark for advisers is significantly increased. The current benchmark is incredibly low, especially when compared with other professions such as lawyers, accountants, doctors and dentists, and can be attained with relatively little study and absolutely no practical experience.
The majority of advisers do not have qualifications beyond this basic benchmark. The new proposed benchmark – equivalent to the Chartered Insurance Institute's diploma standard – is to be welcomed, but it is hoped that advisers will strive for chartered status by achieving the Institute's Chartered Financial Planner qualification.
In summary, the FSA currently has reservations whether the advice consumers receive is always impartial and unbiased. The interim report is a giant step forward in addressing these concerns and the next RDR report, due in October, is likely to include prospective dates for the implementation of proposals. If the end result is more highly qualified advisers offering truly independent and fee based financial advice then the big winners will be their customers.
? Andrew Fisher is chief executive of private and corporate wealth advisers Towry Law.
The full article contains 623 words and appears in The Scotsman newspaper.
