Commission ban may not create trusted advice

Investors are being warned that a ban on commission will not necessarily lead to financial advice they can trust.

Plans from the Financial Services Authority (FSA) to stop financial advisers taking commission and to require them to sit examinations to become more professional are aimed at ending a string of mis-
selling scandals that have cost consumers tens of millions of pounds in lost savings. High-profile cases, including mortgage endowments, precipice bonds and personal pensions, have involved financial advisers selling products to consumers that paid them a high level of commission that came directly out of the investors’ holdings.

The Retail Distribution Review (RDR) has been on the drawing board since 2006 and will not come into force until 2013.

But concerns have been raised that commission-based advisers could seek to sell as many products as possible before the ban comes into effect.

Figures from Defaqto show there was an increase in the proportion of advisers taking commission in 2010 – contrary to expectations. Last year, 15 per cent of advisers it surveyed took commission, up from 12 per cent the previous year. “The only rationale for this is that advisers are perhaps doing what they’re able to do now while they still can,” said a source who did not wish to be named.

The Financial Ombudsman says it has not seen a rise in complaints about overselling of products related to commission.

However, a spokesman pointed out that it would be too early for such complaints to come in, as usually there is a time lag of a couple of years between the product sale and the complaint.

Fears have also surfaced that fee-based advisers could buy and sell products too frequently for their clients to justify the cost of advice.

A report from Ernst & Young predicts that the hourly rate for financial advice will be £200 from 2013. Even though this will replace commission at a similar rate, customers are more likely to view a fee as a big hit as it will be charged upfront.

The FSA says it is concerned about the possibility of commission-based advisers overselling – known as churning. It now plans to monitor fee-based advisers , as well.

“We’ll be watching for a lot of churn, then speaking to the firms and checking whether they can justify moving clients from one product to another,” a spokesperson warned.

There have also been complaints that the required qualifications for financial advisers do not go far enough. Advisers will have to become qualified up to QCF Level 4 – which is only equivalent to the first year of a university degree. Some think they should have to be qualified at least to Level 6, equivalent to a degree.

“When people get Level 4 they’ll be misleading the public into saying they’re qualified,” argues John Blackmore, a commission-based adviser at Long View.

“If you only had Level 4 and wanted to talk to me about capital gains tax or inheritance tax, I would run a mile.”

Banks and advisers are also trying to come up
with a cheaper option for the mass market to get financial advice, as the high fees set by advisers are expected to create an “advice gap”.

The FSA is hoping to introduce some regulation later this year on how simplified advice could work.

But Malcolm Kerr at Ernst & Young points out that fee-based advice will be cheaper for those with medium-sized portfolios. “You can probably deliver good investment advice for £1,500 for someone with £100,000,” he predicts.