Independent advice is the key says financial watchdog

Published on Tuesday 25 November 2008 20:31

A FUNDAMENTAL overhaul of the way customers pay for financial advice was promised by the financial services watchdog yesterday.

Under the proposals, independent financial advisers (IFAs) will have to agree the exact cost of advice with their clients in advance, allowing customers to distinguish between advice and product costs.

The aim of the plans, unveiled by the Financial Services Authority (FSA) yesterday, is to eliminate "commission bias" – where the commission offered by product providers potentially influences the advice given.

And the plans, which it is hoped will bolster consumer confidence and trust in the industry, will make it easier for people to understand the true cost of advice.

The changes were set out by the FSA as it published its Retail Distribution Review.

Stephen Haddrill, director general of the Association of British Insurers, welcomed the move. He said: "This means that consumers can have absolute confidence that the products recommended to them are best for them, not their IFA. Transparency is key throughout the advice process – of cost, level of service and expectations."

The review also recommended making a distinction between independent advice – covering the entire market – and sales advice, covering a limited range of products.

But those offering only sales-based advice would still have to demonstrate the same professional standards as independent advisers.

This part of the proposal is aimed at deterring advisers unwilling to adopt the new standards from re-labelling themselves as non-independent to avoid making the changes.

But Chris Cummings, director of the Association of Independent Financial Advisers, said the use of the "sales adviser" label instead served to muddy the waters further.

"We need to rebuild trust in the financial services industry. To help do so the FSA should have taken this opportunity to clearly differentiate advice from sales.

"It has not done this clearly and we are still left with the confusing middle ground where sales people, who the FSA say are 'obliged' to sell a product, can hold themselves as 'advisers'."

The third major proposal is for all advisers offering full advice to customers to take advanced qualifications, which the vast majority of advisers do not have at present.

The proposals are long overdue, said Andrew Fisher, chief executive of private and corporate wealth managers Towry Law. He added: "For the first time, the cost of commission-based advice will be explicit."

The proposals will be under consultation until mid-2009, with the final implementation slated for late 2012.