The cross-party Treasury committee says in a long-awaited report on long-term saving that “the persistence of this practice is a clear sign that the market for financial advice is not working in the best interests of consumers”.
The committee also called for a clearer system for telling savers how much they are paying for sales and advice and the relative costs of paying by a fee rather than commission.
It says that a “menu” system being introduced by the Financial Services Authority, which will show the commission payable to an IFA on a number of products and offer the alternative of a fee, does not go far enough down the route of full transparency.
The menu will not give an explicit comparison between the total cost of paying by fee or by commission over the likely lifetime of the product.
Much as the committee dislikes commission, though, it stops short of calling for a wholesale switch to fees even though several witnesses to its inquiry said this was the only way to make sure savers are given impartial advice.
The MPs accept that any move away from commission will have to be gradual. It heeded comments from the FSA that it is “difficult to make changes very quickly”.
After fulminating on the inadequacies of the commission system, the report rather lamely asks the industry and the FSA to monitor the cost of buying products on a fee or commission basis and the proportions of savers opting to pay via fees or commission.
This suits IFAs, most of whom, according to the Association of Independent Financial Advisers (AIFA), intend to switch to charging fees, but in an evolutionary rather than revolutionary way.
Fay Goddard of the AIFA says most IFAs now offer the option of paying a fee, ahead of a regulatory requirement to do so, and 10 to 15 per cent are wholly fee-based. She adds that the AIFA is “trying desperately to move on from the idea that financial advice is about selling products”, though she acknowledges that a good proportion of IFAs are still product-focused.
Providers just want to get their products to market, but some are keen to see a change to the commission system. The Association of Investment Trust Companies (AITC) says the most effective way to raise standards of advice for investors would be to unbundle the cost of advice from the cost of the product.
“This change would make it essential for advisers to demonstrate that their advice adds value and is worth paying for,” the AITC says. Most life companies and investment fund managers are highly dependent on IFAs to sell their products. They have tended to compete for their business, often through commission deals, rather than compete for customers by offering lower prices.
The committee's broad conclusion was that people are not saving enough because they are not being treated fairly by the financial services industry. Their confidence has been damaged by a catalogue of problems, including the estimated £2.2bn of capital losses by savers in precipice bonds, the collective mortgage endowment shortfall approaching £40bn and the £160bn of savers' money locked up in closed with-profits funds.
The MPs say the industry needs to rethink the products it sells, how it sells them and the after-sales service it provides. It wants the industry to provide better information about its products, particularly about how risky they are and the costs involved.
The report was welcomed by consumer groups and hailed as “constructive” by the industry, but some commentators were disappointed that it focused on products rather than on financial planning, and had little to say about the role of government policy.
Ros Altmann, an independent pensions expert and governor of the London School of Economics, says the committee has fallen into the same trap as the industry. The trap is to see the problem in terms of the way products are manufactured and sold, rather than looking at the bigger picture.
“Confidence in long-term savings does require change on the part of the financial services providers and advisers, but in the context of current government policy, pension savings have been undermined,” she says.
The failure of occupational pension schemes, the move towards defined contribution schemes, with the associated transfer of investment and longevity risk from employers to employees, and the penalties imposed by the means test on pension savings have all contributed to the loss of consumer confidence. “It is impossible to see how confidence can be restored without a change in the state pension system and fairer savings incentives,” says Altmann.
Other glaring omissions include the failure to consider the potential role of National Savings & Investments products, some of which are “ideal for medium term savings” in Altmann's view; the lack of emphasis on financial planning help; no mention of child trust funds; and no discussion of the annuity market or the needs of people after retirement.
AIFA was also concerned at the committee's focus on products, and says it is difficult to see how some of the MPs' recommendations will do much to rebuild confidence.
Goddard says: “Understanding risk and encouraging people to save are not purely about products.”
The report calls for a standardised summary box for products, detailing what a product is linked to, if there is a capital guarantee, how risky the product is and what the charges are. The box should also contain a standardised risk indicator.
Risk is one of the committee's main concerns. It says that “repeated mistakes, misunderstandings and misrepresentations” about product risk “have severely damaged consumer confidence in the long-term savings industry”.
It adds that some providers and financial advisers often have a poor understanding of the underlying risks inherent in long-term savings products.