The ABI, the trade body representing over 90% of the UK
insurance market, was responding to proposals put forward in April
by the Financial Services Authority (FSA) as part of its Retail
Distribution Review.
The FSA's suggested package of reforms included a complete split
between those firms giving advice to consumers and those that
actually sell the products.
Under the FSA model, all financial advisers would have to be
truly independent, basing their recommendations on an analysis of
the whole of the market. Product sales, on the other hand, would be
strictly non-advised.
Stephen Haddrill, the ABI’s Director General, said: "The FSA is
on the right track with its proposals for clearer payment
structures for advisers, and increased professionalism. But it must
rethink its ideas on who will be authorised to provide financial
advice."
"We believe that all suitably professional and transparently
remunerated advisers should be allowed to provide advice and give
product recommendations – not just those who offer products from
the whole market. We must not risk reducing consumer access to high
quality advice by restricting its supply," he said.
"We could be on the verge of a revolution in the delivery of
financial advice and products to consumers," said Haddrill.
"Ultimately, this will benefit everyone, most importantly
consumers. It is crucial that the FSA takes the right decisions
now, to ensure these reforms really work."
Division
The ABI argues in its response paper that the proposed division
between advice and sales fails to take into account the consumer's
point of view.
"Calling one area advice and the other sales does not mean that
consumers will understand what to expect or who to trust," it
says.
It adds: "Consumers do not make a clear distinction between
advice, information and guidance – they do not think they are
mutually exclusive terms. Clearly, then, labelling a service
'advice' from a consumer's perspective is complex, and perhaps most
worryingly for the desire to segment the market, there is no single
easy way to define "advice" that relates to consumer understanding.
The FSA should commit to researching carefully with consumers
before committing to new service labels".
The trade body also takes issue with the FSA's proposal that
financial advice should only be based on an analysis of the whole
of the market, which would exclude firms tied to a single product
provider or to a number of providers from advising customers on a
more limited range of products.
Remuneration model
The ABI, however, gives its full support to proposals for
raising professional standards across the industry and to the FSA's
plan to reform the way in which financial advisers are paid by
moving away from commission-based remuneration.
It would like to see its own payment model, Customer Agreed
Remuneration (CAR), applied to the whole market.
Under the CAR system, the amount charged for advice is agreed
with the customer without any input from the product provider (and
irrespective of the provider chosen). The cost of the product and
the cost of the advice are disclosed separately.
This model, the ABI believes, can be adapted to situations where
the adviser is tied to or employed by the provider. In such cases,
the charge made for advice may not always be negotiable, but it
should be disclosed clearly and separately from the product cost
and the customer kept fully informed before, during and after the
point of sale.
The paper calls on the FSA to confirm how it intends to deal
with remuneration issues in the sale of protection products (such
as life and critical illness cover) and group insurance and
pensions schemes, all of which are currently outside the scope of
the Retail Distribution review.
Financial interests
The ABI has also reacted strongly to the suggestion that the FSA
might consider restricting product providers from holding financial
interests in advisory firms.
"We do not believe that ownership does undermine independence of
action in practice – particularly where many [intermediaries] are
owned within a group structure separated from the insurance
business and disclosed clearly to consumers.
"To effectively remove the availability of provider capital
would undermine the availability of advice across much of the
market".
Commenting on the ABI's response, Bruno Geiringer, a life
insurance specialist at Pinsent Masons, the law firm behind
OUT-LAW.COM, said: "The ABI echoes some of my own concerns about
whether a split between advice and information-giving could ever
actually work in practice."
"Preventing tied and multi-tied agents from giving any sort of
advice strikes me as anti-competitive and something that would
significantly restrict the ways in which customers can obtain
access to financial products," he said.
"I would, however, have liked to see the ABI give stronger
support in its paper to the Money Guidance initiative, which by
providing generic advice to consumers on key financial issues, will
do much to improve consumer understanding and can only benefit the
industry," said Geiringer.
Next steps
The FSA will publish a full feedback statement in late November
outlining its project decisions in light of the responses received
and a timetable for formal consultation on any proposed regulatory
changes.
The original publication date was put back from October to allow
Jon Pain, the FSA's new Managing Director of Retail Markets, a
chance to settle into his new role.
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. See our legal info for Insurance and Reinsurance.
