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October 16, 2009 7:28 pm
After years of misselling scandals linked to commission-based financial advice, the UK regulator is finally taking action.
Earlier this year, the Financial Services Authority confirmed that the practice of paying commission for giving advice would be banned from 2012.
This is set to radically change the way in which investors are given advice on their investments.
Commission payments are made by providers of products to financial advisers when their products are sold. But the practice has come under criticism for encouraging financial advisers to recommend products to clients purely because they pay high levels of commission.
Under the new rules, commission will be banned and investors will be able to agree a fee upfront with their financial advisers.
“It will give people much more control over what they pay for their advice,” says John Lawson, head of pensions policy at Standard Life.
High commissions have been held responsible for a number of misselling scandals, including precipice bonds and mortgage endowments where poor advice caused investors to lose hundreds of millions of pounds. They are also blamed for the practice of “churning”, where an adviser encourages a customer to sell one product and buy a very similar product because it pays a higher rate of commission. Life assurance companies expect a substantial reduction in churning from 2013.
Advisers will be separated into two main categories: independent and restricted. Independent advisers will have to advise over the whole spectrum of investment and pension products – meaning that many will have to expand their current remit – while advisers that focus on a particular area will be giving “restricted” advice.
Both types of adviser will have to take stringent new qualifications more akin to university-level study than A-levels. This is expected to raise the reputation of financial advisers, who are frequently dismissed as dodgy salesmen.
However, the cost of financial advice could go up for wealthier consumers, as many advisers will struggle to survive under the new regime.
A report published in September by Ernst & Young predicted that of the existing 35,000 independent financial advisers in the UK, just 10,000 would remain in three years’ time. A further 10,000 will switch to giving restricted advice.
Lawson predicts that this could lead to the remaining advisers at the high end increasing the price for their advice.
There is also currently a big difference between what investors expect to pay for their advice and what advisers are going to charge them.
A recent report from Legal & General, the life insurer, found that investors thought independent advice was worth an average of £67 an hour, while advisers said their advice was worth £170 an hour.
“You’ll see a big difference in the level of fees being charged,” warns Danny Wynn, a director at Legal & General.
“It has no doubt been the case that because advice has traditionally been given away for ‘free’, it has been largely undervalued.”
The new order could prevent some people from taking any advice at all. The L&G report found that 17 per cent of people who currently have an adviser said they would buy products directly rather than pay for advice.
Wynn said that people who were more confident in their own investment decisions, and had previously gone to commission-based advisers just to confirm their opinion without then buying a product, were unlikely to pay for advice in the future.
Others fear that because financial advisers will raise their fees from 2013, much of the population will only be able to afford restricted advice.
However, more financial advice will be available to lower income consumers. The government is trialling a free money guidance service that is set to be rolled out next spring. The service will cover relatively simple topics such as using redundancy payments to reduce debts and budgeting on a reduced income, as well as how to maximise income in retirement by shopping around for an annuity.
Efforts are being made to make the population more financially aware at a younger age as well – personal finance is now taught in schools, and there are plans to make this a mandatory part of the curriculum.
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