Change is Coming

The new Chairman of the Financial Services Authority, Lord Turner of Ecchinswell starts work this week. A new Head of Retail Markets, Jon Pain, started earlier in the month. It’s all change at the top but what does this mean for one of the most important changes being planned by the FSA? The regulator was due to announce controversial new rules to improve financial advice and require much better qualified advisors, but the announcement has now been put off until November, because the new men want to have a look at it.

The financial services industry does not have a good public reputation. Falling confidence in the banks, along with the past misselling of pensions and endowment mortgages, has left consumers disenchanted, and at the heart of it all is a mistrust of the present system of paying advisors and intermediaries by the use of commissions and bonuses linked to sales targets. Where do consumers get advice they can trust?

The FSA has been trying to unravel this for the last two years under its Retail Distribution Review and the industry is now holding its breath about the outcome. The outgoing FSA Chairman, Sir Callum McCarthy, was very clear there was a need for change. In a famous speech at a Gleneagles Conference exactly two years ago this week, he stunned a top level audience by saying, “We have a system which serves neither the producer of the services nor the consumer of the services. It is doubtful whether it serves the intermediary either”. But do Adair Turner and Jon Pain have the courage to sort this problem out or will they see it as all too difficult in the present climate and seek to water down the proposals?

The most dramatic change being considered is to end commission payments to independent financial advisors. Most IFAs receive commission on every product they sell, leading to accusations that they select products that pay them the most. Consumer groups had pressed for, and the FSA had accepted, that advisors who want to call themselves ‘independent’ should only be paid by the consumer, breaking their ‘dependence’ on product providers and ending the potential for bias.

The proposals then went on to say that everyone else, apart from the redefined independent financial advisor, would be a salesperson and that is how they would be described. All too often consumers think the sales spiel is impartial advice, so it is important that they know the status of the person sitting in front of them. So what was being proposed was a clear cut, twin track system of either ‘independent advice’ or ‘sales’.

Ending commission would be the first step towards making independent advisors true professionals. The other important ingredient envisaged by the FSA was a gradual uplift in qualifications, from a rather low baseline.

This would be a radical change to an industry feeling not a little sensitive already but creating a clear distinction between ‘independent advice’ and ‘selling’ is what consumers need. At the moment there is a lack of trust, and what you distrust you tend to keep away from. With public sentiment at an all time low, this could well be the boost the industry requires and, despite the obvious difficulties, I hope the new men at the top of the FSA have the will to make it happen.