Watchdogs at war over financial adviser rules

FINANCIAL and pension planning is in disarray after the eruption of a major row between two key watchdogs, the Financial Services Authority and the Treasury Committee.

They have fallen out over the implementation of tough new regulations for advisers, just as a hard-hitting report from Consumer Focus accused the industry of malpractice.

Consumer Focus said customers were being wrongly advised to switch pensions and other investment products so that advisers can earn more commission. In particular, they are being directed to buy new policies they do not need, specifically to provide advisers with trail commissions which guarantee that a "trail" of money will continue flowing in for years.

In the light of these findings, the consumer body has called on the FSA to take a look at the industry and insist on greater transparency. In doing so, it is slightly behind the curve.

This is precisely what the regulator has been doing for the last four years, resulting in a complete shake-up of practices. While its measures are curing many existing ills, there are concerns they will create new ones.

The poison of commission payments has long been a running sore distorting the quality of advice given to those trying to save for their future. These were deals done between the adviser and the company whose products he was selling, but paid for by the customer.

It was almost impossible for the layman to judge the extent to which the advice they were receiving was influenced by the size of the commission paid to the intermediary.

Although commissions were supposed to be disclosed to the investor, this was often done in such a way that clients were left with the impression that they were paying nothing, and the insurance company was somehow footing all the bills.

From the beginning of 2013, the same year incidentally that Consumer Focus is to be abolished, any payments will have to be agreed between the client and his adviser and disclosed in full.

Hargreaves Lansdown's Danny Cox explains: "For example, currently someone might buy an investment bond and be told that it involved 7 per cent commission. But they may also be told 100 per cent of their money is invested from day one. Most are aware that a commission is payable, but they think the insurance company is paying it.

"In future they will have to be told that only 93 per cent of their nest egg will be invested for them, making it clear that they, and not the company, are the ones footing the bill."

Also from 2013, advisers must reach significantly higher standards of financial education and competence. Currently you can begin offering financial advice with a financial planning certificate, which is roughly equivalent to a Higher qualification.

From 2013, you will not be able to offer advice without a minimum financial planning diploma, which is roughly equivalent to a first-year degree course.While many reputable advisers already hold far more qualifications than the basic minimum, some older ones may not have any. It could take them up to three years to qualify if they try to study while working full-time.

These two changes combined are putting advisers under renewed pressure, leading many big companies serving ordinary savers to either reduce their operation substantially or pull out.

For example, Barclays has already stopped offering financial advice to anyone but the wealthy. The Co-op has announced it will follow, as has Norwich & Peterborough Building Society. HSBC has reduced the number of advisers in branches.

But across the industry as many as one in five are expected to throw in the towel rather than upgrade their qualifications or comply with the new disclosure regime.

Before they go, though, there is a growing suspicion that some are persuading clients, who have already paid a large upfront commission, to switch to a different policy which will pay the adviser a trail commission. In other words, the client is churned simply to ensure the adviser has an income coming in for several years yet.

Even advisers who plan to stay in the industry may be tempted into this sort of disreputable behaviour to boost their income before the going gets much tougher under the new regime.

To prevent mounting chaos and provide for a smoother transition, the Treasury Committee called on the FSA to delay the implementation of the regime to 2014, to give advisers more time.

The City watchdog slapped down any such suggestion instantly, which has led to the current row.

Committee chairman Andrew Tyrie subsequently wrote to FSA boss Hector Sants complaining that its refusal was issued within hours of the Committee's request. He said: "We deprecate the Authority's action. It was precipitate, giving the impression that no adequate consideration had been given to the arguments for delay. This is unacceptable."

However, for once most reputable professionals are siding with the FSA and believe that further delay is uncalled for.

Gordon Forbes of Caledonia Asset Management said: "The industry has had several years' warning of what was coming and most well-managed firms have got themselves in order. I have no great sympathy for advisers trying to put off the inevitable.

"I think the new regime will be a good thing, and should be implemented as planned. It's not necessarily bad to weed out some sections of the industry.

"Advisers want to be treated as professionals, like solicitors and accountants, so they have to accept the need to be qualified to a similarly high standard."How to find a financial adviser

1. Speak to friends, solicitors and accountants for recommendations. But be sceptical. Friends are not necessarily good judges, and other professionals may offer mutual referrals.

2. Check out unbiased.co.uk to find firms in your locality. Again be wary, as a small firm may not offer the breadth of service and expertise you require.

3. Compare qualifications. Pick a firm with advanced financial planning qualifications, and advisers with experience but sufficient youth to be up to date.

4. Visit three or four. They will normally give you a brief summary of the service they can offer, and the types of recommendations they are likely to make. Compare their initial suggestions and opt for the one you felt most comfortable with.

5. Avoid anyone offering to solve all your problems at no charge. It can't be done.

6. Decide whether you are prepared to pay a fee or want an adviser who will take a commission.

7. Only with an exclusively fee-based adviser can you be sure of totally impartial advice.

8. Some advisers will charge a fee but offset any applicable commission. But whenever commission is involved, make sure you understand what commission is being paid and who is footing the bill.

9. Be cautious if an adviser says everything you have is wrong and wants to sell it all. At least get a second opinion.

10. Make sure any adviser you use is authorised by the FSA.