Ban on commission payments will shrink Scots IFA market

SCOTLAND'S IFA market is set to shrink after the City watchdog confirmed that it would ban advisers from taking commission payments from providers whose products they recommend.

• From the end of 2012, product providers will no longer be able to pay commission to independent financial advisers for recommending their investment and pensions products

The Financial Services Authority (FSA) published the rules on Friday as part of its Retail Distribution Review (RDR), which addresses the way in which financial advice is paid for and provided.

The reforms, coming into force at the end of 2012, are aimed at removing the commission bias blamed for a string of mis-selling scandals.

From the end of 2012, product providers will no longer be able to pay commission to advisers for recommending their investment and pensions products, and advisers will have to demonstrate that their advice is based on impartial analysis of the market, among a range of measures aimed at increasing the transparency of advice and raising standards in the industry.

Achim Bauer, financial services strategy partner at PricewaterhouseCoopers, predicted that the IFA market would contract as a result of the changes.

He said: "As their mainstream business declines, many IFAs will gravitate to the upper end of the market where there will still be strong demand for advice on tax planning and specialist products. However, PwC believes this segment could become increasingly crowded and competitive."

Ernst & Young last year predicted that the number of IFAs in the UK would fall by around 10,000 by the time the new rules come into force, with many advisers reluctant to move to a fee-based business model. There will also be new minimum-qualification requirements for IFAs under the new regime that some will be unwilling to meet, according to Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee.

"Many practising IFAs will retire or quit the industry rather than take on the exams and be forced to adopt the more professional way of working that will prevail post-RDR. Attrition rates among IFAs vary from 10 to 30 per cent."

The move to fees and higher qualifications means those IFAs adjusting their business models accordingly will increasingly target only wealthy clients.

Iain Wishart, owner of Wishart Wealth Management in Edinburgh, said: "High-quality independent financial and planning advice will not be affordable to the masses but will be restricted to wealthier clients. The better-quality qualified IFAs are already being more 'picky' about who they will take on and many are shedding clients."

IFAs are not alone in reviewing their business models as the extent of the RDR reforms becomes clearer, with the life insurers that have traditionally distributed their products through IFAs busy repositioning themselves.

Ratings agency Moody's warned in January that insurers relying on IFA distribution could see their credit ratings affected by the implementation of the RDR.

Scottish life offices have already snapped up several IFA groups in anticipation of the changes as they seek to diversify by developing their own distribution channels. Earlier this month, Standard Life completed its acquisition of financial advisory support business Threesixty, while fellow Edinburgh-based insurer Aegon owns advisory businesses Origen and Positive Solutions.

David Ferguson, chief executive of Edinburgh-based wrap providers Nucleus, said that under the new rules the balance of power would shift further away from traditional providers.

"I was encouraged to see the FSA stand its ground in the face of intense lobbying from product providers," he said.

"The FSA paper said that nearly 50 per cent of investment business is already written on platforms and that will grow, so insurance companies will need to develop wrap platforms. The balance of power is shifting in favour of advisers."