Change on the horizon

From next year the financial services industry will be transformed by new regulations as Peter Jackson reports.

Investment decisions are among the most important a person has to make.

Recent scandals around issues such as the misselling of endowments and payment protection insurance raised concerns that the advice people were receiving was not always of the highest quality.

In some cases it was felt that advisers were simply not sufficiently qualified to fully understand the products they were advocating. In others, that they did not necessarily have the best interests of the investor at heart but had more of an eye on the commissions they were paid by the product providers.

All this, however, is about to change. From January of next year the Retail Distribution Review, RDR, will transform the way people receive financial advice.

Under RDR, financial advisers who want to be able to describe themselves as "independent" will be required to have a higher qualification.

At the moment, an investor seeking a financial adviser has to grasp the complexities of independent financial advisers, multi-tied advisers, whole-of-market advisers, and sales representatives of product providers such as banks and building societies.

Some of these advisers are paid commission, others receive fees instead, while some receive both.

But, from the end of next year there will be just two main types of adviser – an independent adviser who offers products from the entire market, and a sales adviser, whose main function is to sell a product from one or more providers.

Most important, advisers will no longer be able to be paid commission by product providers.

RDR also lays down that firms must ensure a consistent approach to advising clients.

A senior North East IFA tells BQ he believes the reforms will be a good thing for the investor.

He says: “It will be extremely good for the person who wants advice because what they will get is a position where they can quite clearly see the cost of that which they are receiving.

“The commission work disappears, it is possible for advisors to be remunerated through products in the same vein, however, it needs to be done on the basis of a fee. It’s removing commission, it’s making the remuneration stream more transparent. The only people who are going to benefit are the customers. If they don’t agree with the charge, they don’t pay.’’

He does, however, point to a danger with the reforms. Because fees will now be fully transparent to the investor there is a danger that they will feel they can no longer afford them. When the adviser’s commission was concealed in the overall cost of the product it was not noticed, whereas now an advice fee of perhaps several hundred pounds could deter some investors from seeking advice.

But, says the IFA, this should not be the case. Under the new rules it is still possible for the investor to agree to the fee coming out of, for example, their pension contract over the first 12 months. The FSA says the provider has to facilitate that happening. But the investing public needs to be told this.

“There could be a perception that people can’t afford advice but that’s not necessarily the case,’’ he says. “It needs more education, it’s incumbent upon the FSA to educate the public to say just because the rules are changing it’s not going to preclude you from getting some advice.’’

He does foresee changes in the sector as a result of RDR with a reduction in the number of advisers.

He says: “There will be attrition in the industry. As with any educational deadline there will be people who can’t or won’t step up to the plate and will disappear out of the industry. It’s an ageing industry. If you’re 62 you’ll think beggar that and retire.’’