The FSA's interim paper, published on Tuesday, suggests a
complete split between advice and sales. All financial advisers
would be truly independent, basing their recommendations on an
analysis of the whole of the market, whereas product sales would be
strictly non-advised.
Those most affected would include tied or multi-tied firms who
advise on only a limited range of products and so would fail to
meet the requirement for independence. Over 20% of new long-term
insurance business was generated by this type of adviser in 2007,
according to statistics from the Association of British
Insurers.
Banks and building societies whose sales processes currently
include an element of advice would also have to change their
business practices if these proposals come into effect in their
current form.
The Retail Distribution Review, launched in June 2006, aims to
address the root causes of recurrent problems in the retail
investment market.
Low standards and poor quality advice have led to low levels of
consumer trust, often exacerbated by overly-complicated charging
structures that make it difficult to understand how much products
actually cost. There are also major concerns about the influence
product providers have over what advisers earn and the conflicts of
interest that can result.
The interim report sets out the FSA's current thinking and takes
into account feedback received from the industry, including 888
responses to the FSA's June 2007discussion paper.
The suggested model would result in a market made up of three
simple components: advice, sales and 'Money Guidance', the proposed
national information guidance service aimed at helping consumers
understand more about money, savings and investments.
In addition to providing "whole of the market" advice, financial
advisers would be required to meet higher professional standards,
which the FSA hopes can be agreed industry-wide.
Under the proposals, advisers would agree how they were to be
paid with the customer, without input or influence from product
providers. This, the FSA hopes, will reduce the potential for
sales-driven advice.
In advance of any regulatory changes, however, the report urges
product providers to address the remuneration issue: "We challenge
all product provider firms to bring forward practices that will end
their role in setting advisory remuneration and so no longer use
remuneration to incentivise advisers to recommend their products
…
"How the industry responds to this challenge could influence
whether and how we make new rules in this area".
The FSA might go even further: "In considering the step-change
conditions for advice" the report states, "we need to think about
whether this means we should seek to restrict product providers
from taking financial interests in advisory firms".
The FSA appears to have rejected an earlier suggestion to
introduce a 15-year time limit on claims for negligent advice where
the error comes to light some years later. The Financial Ombudsman
service estimated that the measure would bar around 2000 of its
cases a year.
The interim paper also confirms that there is no current
intention for any reforms to be carried over into the mortgage or
general insurance markets: "We have an open mind about where the
review goes…but if the feedback and our own analysis suggests the
wider application then that is something we will of course consider
and discuss openly with the market".
There is still a great deal of further work for FSA to do before
it makes any final decisions. Not least it will need to consider
the economic impact these changes would have on the retail
investment market. A full feedback statement is planned for October
2008, which will set out in more detail the regulatory implications
and timetable for change.
Mike Evans, Director of Life Insurance at Pinsent Masons, the
law firm behind OUT-LAW.COM, said he welcomed the clarity and
simplicity of the suggested division between advice and sales. But
Evans also sees potential problems.
"My concerns at this stage would be twofold," he
said. "Firstly, whether the industry is capable of rising to
the challenge of devising a sales model which meets the needs of
customers without providing advice; and secondly, whether the FSA
can hold its desired position and not allow its ideas to become
diluted so the end result becomes as opaque as the current
model."
Want more content like this? This story was written by the insurance and reinsurance legal experts at Pinsent Masons, the law firm behind OUT-LAW.COM. We've recently launched a new section, legal info for Insurance and Reinsurance, giving free legal information to anyone working in that sector.
