Council urged to avoid a commission-only 'tender trap' on financial advice to workers

Published on Friday 16 October 2009 20:48

ILL-CONCEIVED contracts between employers and financial advisers are putting thousands of staff at risk and undermining the quality of the financial advice they receive.

The issue came to light in a North Lanarkshire Council document, seen by The Scotsman, inviting firms to tender for the right to provide independent financial advice to its 18,000 staff.

North Lanarkshire Council said the successful firm should work on a commission-only basis and not charge a fee to either staff receiving the advice or the council for granting the right to provide independent advice to its employees.

However, the tender raises a number of concerns. In the first instance, the Financial Services Authority (FSA), which regulates the financial markets, says advice can only be classed as independent if customers are given a choice as to how they pay.

FSA spokesman Adam Richards-Gray explained: "The current rules require that if an adviser holds himself out to be independent, he must offer a fee option. He does not have to be paid by fee – he can be paid by commission – but he must offer the option."

Therefore, contrary to the council's tender document, the advice their employees receive will not be independent if given on a commission-only basis.

In the second instance, commission-only advice is being phased out by the FSA and is increasingly seen as an inappropriate way for advisers to earn their income.

Which? policy adviser Dominic Lindley said: "Our position on commission is that it can introduce a conflict of interest and also a perception of bias in the consumers' minds. We would definitely not like to see anyone, especially a council, tendering for people to provide financial advice, saying the adviser has to be paid by commission."

The North Lanarkshire Council document stipulated that the successful firm should provide services "on request, out of hours at their home or at their place of work, run seminars and financial clinics at the request of North Lanarkshire Council, (and] provide free promotional literature in the form of leaflets, posters etc. for distribution to employees".

David Davison, director at the actuarial and pension consultancy firm Spence & Partners, questions the type of advisers who would want to take up the offer, given the commission-only criterion and the amount of work the contract would entail.

"I would be surprised if quality advisers would rise to this," he says. "I suspect the quality of financial advice they get will not be great if they are going to adopt this structure."

Jason Hemmings, director at financial planners Albannach Financial Management, believes North Lanarkshire Council has gone about things the wrong way.

However, he stressed: "I think it is very valuable what they are doing; putting in place the offer of a service to employees to access good quality advice from firms the council is vetting."

However, he thinks a rethink is needed. "In this climate, with the proposed changes to commission, I think they have got to look forward and consider the choice of the individual as to whether fee-based or commission-based advice is appropriate and by doing so it means that their employees are more likely to get a better deal, rather than just going down the commission-based route," he said.

Unbiased.co.uk chief executive Karen Barrett said no matter where an individual worked or the arrangements their employers had made, seeking out the appropriate type of financial advice for their own personal situation was imperative.

"We would recommend researching a range of different advisers before selecting one, as there is no 'one size fits all' approach to financial advice," she said. "A consumer should be free to choose a firm they trust and are happy to discuss their financial situation in depth with, as well as find an adviser who specialises in the area they are seeking advice on, with the relevant qualifications."

Responding to the concerns raised, Iris Wylie, head of human resources at North Lanarkshire Council, said its contract for independent financial advice to employees pointed out that individuals did not pay for the advice provided by the company.

"The payment arrangements – should an employee decide to take up a specific product – will be a matter between the employee and the successful tenderer."

She added: "The council has no responsibility for the payment arrangements, nor will the council act as agents for the successful tenderer."

Wylie said the council had invited expressions of interest for financial advice for its employees, with companies asked to complete a pre-qualification questionnaire. "These questionnaires will be reviewed and the short-listed companies will be invited to submit a formal tender. We are aware of the Financial Services Authority guidance and are considering the details of this to inform the tendering process."

Whatever the outcome, staff at the council and other firms and organisations generally are advised to check that the advice they are getting is as good as they are being told, and suits their individual needs.