FSA reforms bring mixed fortunes but Edinburgh set to cash in

THE implications of banning advisers from accepting commission from providers for recommending their investment and pensions products can now be studied in earnest.

The Financial Services Authority (FSA) finally confirmed last Friday that the commission ban will be part of reforms coming into force at the end of 2012 under its retail distribution review (RDR).

This will also feature new qualification requirements and a host of other measures that will shape the way in which advisers and providers operate.

It's already largely clear who the winners and losers will be. The former category includes investment trusts, platform providers and highly-qualified independent financial advisers (IFAs) already working on a fee basis. On the debit side, however, many IFAs will decide it isn't worth the effort switching from commission to fees and satisfying the FSA's new qualification requirements and will instead retire or sell their businesses.

As a result, we'll be left with an IFA industry that focuses even more than it does already on serving only wealthy clients, leaving a sizeable advice gap for non-independent advisers and salesman to target.

The outcome might be misselling, which is exactly what the FSA is trying to address by removing commission. The RDR risks limiting independent advice even further, rather than encouraging the wider take-up of advice.

Those who are only able to afford independent advice because of commission arrangements will be served instead by high street banks and other so-called multi-tied operations (including other high street retail brands) without a remit to advise on the whole market.

The same banks are responsible for the bulk of the mis-selling that has occurred in recent years, driven by sales targets and cross-selling objectives to flog customers products they don't need, such as payment protection insurance.

The most recent Financial Ombudsman Services figures show that it upheld less than a third of complaints against IFAs and nearly half of those against banks, which were responsible for the vast majority of complaints.

That's not to say the FSA is wrong to address commission bias. Sadly, there is far too much evidence of unscrupulous IFAs allowing commission payments to dictate recommendations, rather than the needs of their clients. Endowments and precipice bonds are classic examples of adviser mis-selling and both were characterised by generous commission arrangements.

But what are the odds that, within a few years of the new rules coming into force, some form of adviser commission is revived to address a growing advice gap?

For those advisers who remain truly independent, however, the RDR may prove a watershed. Commission is at the root of the poor perception of IFAs, with many people still viewing them more as salesman than professionals akin to accountants and solicitors. Without it, the sector can continue its move to greater professionalism and respect.

The announcement was also good news for investment trusts. The removal of commission bias will give these trusts, which do not pay commission, a more even playing field on which to compete with unit trusts. Under the RDR reforms, advisers will have to make it clearer to investors why they recommend certain products and any investment advice will have to consider investment trusts.

Furthermore, the reforms will accelerate the addition of investment trusts to the fund platforms that account for a rapidly growing share of investment business. One platform, Cofunds, is adding investment trusts next year and the remainder will follow by the end of 2012. That illustrates the increasing influence of investment platforms, which are set to benefit massively from the reforms.

David Ferguson, founder of the Edinburgh-based platform Nucleus, believes the reforms will move the balance of power even further away from traditional providers, a shift that is already under way. As providers lose their influence and investment costs fall, more advisers will use platforms to manage their clients' investments.

Edinburgh's life offices have long been aware of the need to develop investment platforms and open up new distribution routes, but only Standard Life is ahead of the curve. The reforms may be more than two years away, but their impact on financial services will perhaps be most clearly evident in the capital.