FSA proposes strict commission rules for financial advisers

Published 26th Jun 2009

City watchdog says review is aimed at regaining consumer trust in the investment market

Financial advisers will no longer be able to cash in on commission from sales of investments, pensions and insurance products , under new rules proposed today by the Financial Services Authority.

The change is one of a number of proposals designed to reform the way in which independent financial advice is provided and paid for, and comes out of the watchdog's Retail Distribution Review, launched in June 2006.

The review focused on so-called commission bias, in which an adviser is incentivised with the promise of a big payment by an insurance or investment company to sell its products. The proposed reforms aim to remove commission bias, and ensure independent advice is truly independent. The new rules will come into effect by the end of 2012.

Most financial advisers are funded by commission, paid as a percentage of funds invested, rather than by fees per hour or per project, although they are required by law to offer customers the option of paying a fee.

On top of this, advisers are paid "trail commission" – which is ongoing – for as long as the client retains the investment, even if the adviser has not been called on to give any further advice.

Under the proposals, these and other hidden commissions would be replaced by upfront fees, either paid directly by the client or taken from his or her investment.

Other proposals call for an increase in the qualifications required by advisers and an improvement in the information supplied to clients.

Jon Pain, managing director of retail markets at the FSA, said: "The review is about regaining consumer trust and confidence in the retail investment market, building a more sustainable sector and making it easier for people to find their way around and get the help they need. This is more important now than ever before.

"We have today set out the specific changes we propose to make to implement our far-reaching package of measures. This is a call to action for the industry. All investment advisers need to consider how they will respond and implement these wide-ranging and challenging improvements by the 2012 deadline."

Adam Phillips, acting chairman of the Financial Services Consumer Panel, said: "The FSA has taken a big step today towards creating a financial advice system which the consumer can trust. The proposal to remove commission bias will help people to get independent investment advice that reflects their needs and is not influenced by the product provider.

"We have encouraged the FSA throughout the process of the Retail Distribution Review to take radical steps which will give consumers greater confidence in financial advice and help them to engage with the industry.

"It is only by being open with consumers about the cost of advice and any financial relationship between the adviser and the product provider that the industry can hope to improve its credibility."

Source: ' Guardian '

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