The rules are the product of the Retail Distribution Review (RDR), which was launched by the Financial Services Authority (FSA) in 2006 to address recurring problems of mis-selling and low levels of consumer trust in the retail investment market.
The main provisions include abolishing commission-based sales and the introduction of adviser charging, where the adviser's fee is agreed in advance with the client. Advice will be made up of "independent" or "restricted" advice services and the rules will raise the minimum qualifications required to give retail investment advice from Level 3 (equivalent to A-level standard) to Level 4 (equivalent to the first year of a degree).
The new regime is due to come into force on 1st January 2013. But in November last year, a Treasury Select Committee began an investigation into whether the RDR would achieve its intended outcomes of a transparent and fairer charging system, a better qualification framework and greater clarity around the type of advice being offered.
In a report published on 16th July, the Committee concluded that, while it supported many of the reforms, implementation of the RDR rules should be delayed. Chair of the Committee, Andrew Tyrie MP, said:
"The FSA is right to reform the financial advice market. Given the past problems of mis-selling we welcome the banning of commission and the introduction of a clear market price for advice.
"However, the current timetable for reform risks putting large numbers of experienced financial advisers out of business. In the interests of consumers we are calling on the FSA to delay the RDR by a year to give advisers more time to take the qualifications and comply with the rules."
But Bruno Geiringer, a retail investment specialist lawyer at Pinsent Masons, the law firm behind OUT-LAW.COM, agrees with the FSA that there should not be any last minute delay.
"The FSA made it very clear a long time ago that a step-change would be required. Many businesses, both providers and advisers, are well on their way to implementing the changes to their business models and upgrading the professional qualification of their advisers." Geiringer said.
"A delay to give IFAs more time to attain the qualification would not send out the right message and would not do justice to those who are “doing the right thing” by getting on with the changes and have plans in place to be ready in 18 months time.”
The Committee concluded form its inquiry that, although there was merit in raising the level of qualification, the evidence provided by the FSA on the need to move to Level 4 was "weak".
It also criticised the "cliff edge" nature of the reform, in that from 1st January 2013, financial advisers without a Level 4 qualification will be unable to give retail investment advice, no matter how experienced they are.
MPs' main concern was the number of IFAs likely to leave the market as a result of these new requirements and the resulting reduction in available advice for consumers. An adviser fall-out figure of 20% has been accepted by the FSA, but independent surveys have placed it higher, at between 20-50%.
"We are concerned at any potential loss of competent and experienced advisers from the market," the report states. "Any restriction of any trade must be carried out with due consideration for the livelihoods of those affected."
The Committee concludes:
"In an effort to achieve the legitimate aim of maintaining competition and choice in the advice market, we recommend that the FSA consider instituting a process whereby it provides for flexibility for advisers on a case-by-case basis.
"We recommend that the FSA temper the 'cliff-edge' nature of the current reforms. A system of proper supervision, along with the additional year, would provide some leeway, while maintaining the Level 4 requirement."
The Committee welcomed the introduction of remuneration agreed in advance with the consumer but noted the impact this was likely to have on the advice market.
"Customers of financial advisers have tended to see financial advice as 'free' under a commission-based system," the report states. "The RDR will mean that customers will clearly see what they are being charged for advice. This is a healthy development but will involve a significant change in culture for the industry."
MPs, however, asked for urgent clarification on when VAT would be payable for advice under the RDR and why it has not been payable in the past. The committee called on the FSA to report on whether VAT would have an impact on the provision of advice and whether it would create an unfair tax advantage between different advice models.
The report also recommends that the Treasury in its response states whether the RDR is in line with the objectives of the new Financial Conduct Authority, which will be taking over conduct regulation from the FSA under the Government's reforms of financial regulation.
Meanwhile, the committee is to instigate an inquiry into whether the accountability mechanisms proposed under the new regulatory system are adequate.