The Financial Conduct Authority has kicked off the New Year with a bang.
First, it ditched a review into banking culture and incentives to sell products, supporting suggestions that the regulator is moving away from an era of bank-bashing that followed the financial crisis.
Now the City watchdog would appear to be mulling the reintroduction of commission payments, a mere three years after kicking them into touch in favour of a fee structure following a string of high-profile mis-selling scandals.
Earlier this month the FCA’s acting chief executive Tracey McDermott revealed on Radio 4’s Money Box radio programme that the City watchdog is reconsidering its stance on commission on certain retail products.
She said: “We do not want to go back to a world where we had the problems of the pre-Retail Distribution Review. What we do want to look at is actually what is the best way of delivering advice and guidance across the market. I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the Retail Distribution Review.”
The announcement has attracted strong views at opposite ends of the spectrum.
Critics have warned that the sentiment could lead to the return of the ‘dark days’ when a financial adviser and a sales representative were indistinguishable.
Our columnist Tony Hazell writes against the idea on page 25 of this edition of FA.
Richard Lloyd, executive director of consumer group Which?, said: “The FCA appears to be sending conflicting signals. It has acknowledged the damaging role commission in financial advice has played in the past, and yet won’t rule out allowing its return. No one wishing to restore trust in financial services should want a return to the days when commission was hidden and incentivised mis-selling.”
On the other hand, supporters would welcome the return of commission as a way of plugging the advice gap – one of the unintended consequences of the RDR.
A toxic cocktail of the absence of commission payments and the spiralling operational costs for financial advice – widely attributed to hikes in FSCS and FCA levies, as well as PI cover – has priced out thousands of UK citizens from accessing professional advice, according to Anna Sofat, managing director of London-based Addidi Wealth.
Prior to the implementation of the RDR, Ms Sofat questioned whether the changes to adviser charges and the minimum level of qualification would inhibit access to affordable advice.
She said: “Commission has worked really well in the mortgage market. Mortgages are relatively simple products, so allowing providers to facilitate the charge makes sense. I can see how commission could work for annuities.
“I think that if you are going back to where advisers receive commission payments from providers, the adviser must be completely transparent to their clients. I do not want to see a return of the days where providers used commission to push sales.”
The RDR was conceived to bring greater transparency to the adviser market, with the ban on commission and the introduction of adviser charges forming the cornerstone of the policy drawn up and implemented by the FCA’s predecessor, the FSA.
It has been widely approved as a positive step forward for the industry, which has been plagued by the actions of advisers driven by the size of commission cheques to the detriment of the suitability of advice.
On the debit side, the number of the then FSA-authorised financial advisers fell from 25,616 to 20,453 in the 12 months leading up to the RDR.
Patrick Connolly, certified financial planner at Chase de Vere, said that the squeeze in cash flow experienced by many advisers following the commission ban, in tandem with raised qualification requirements, resulted in an exodus of professionals from the sector.
Since the RDR took effect in December 2012, however, adviser headcount has remained fairly stable. The latest FCA figures show that the number of financial advisers has risen by 5 per cent in a year to 22,557, from 21,496 in October 2014.
Mr Connolly said: “The increase in adviser numbers means that more people are viewing financial advice as a good, respectable profession.”
The revocation of the commission-based model also forced product providers to develop new strategies to control distribution.
Historically, providers have sought to control distribution by buying into networks, but this too has come under intense regulatory pressure. In 2012, the FSA sent ‘Dear CEO’ letters to 24 providers and advisers warning them against making distribution payments in an attempt to work around the commission ban.
Ultimately, many providers acknowledged the fact that owning a network does not necessarily confer control over distribution. In addition, liability risk and rising PI costs have made networks less desirable from a commercial standpoint.
Recent times have also seen the re-emergence of direct sales forces. In January 2012 Prudential, famed for its former ‘Man from the Pru’ marketing campaign, resurrected its direct sales team, which currently boasts more than 200 advisers. More recently, Santander announced its return to the adviser market with a team of 225 advisers staffing branches across the country.
Mr Connolly said: “The return of commission is likely to attract not only banks but also insurance companies back into the market. We are wary of any advice offered by companies that are doing so to sell their own products because there is always going to be a conflict of interest.”
A move back to the commission model would see the return of unscrupulous, sales-driven advisers, Mr Connolly said, adding: “The industry has come a long way and we have succeeded in driving up standards. We do not want to see a backward step with commission.”
Gill Davidson, group regulatory director at Tenet, said: “The return of commission could help address the advice gap for the mass market and encourage new talent into the advice sector. There are suggestions that a ‘twin track’ adviser career path may develop, and we are keen to better understand what this may look like.”
‘Twin-track’ advice could mean the development of a stripped-back, affordable advice process – by means of robo-advice or simplified advice – to co-exist alongside traditional, fully-fledged financial advice.
Ms Davidson added: “We are assuming that simple, lower-value products may attract a different advice regime, although this is unlikely to attract many existing independent financial advisers whose business models have developed in recent years.”
Chris Hannant, director general of Apfa, said that commission payments could be suitable for simple financial products such as investment Isas and annuities for individuals with small pots.
He added: “While I can see how the reintroduction of commission payments can help some people to access financial advice, the broader challenge is getting these individuals to engage in the financial process. Pension Wise is free, but take-up of the service has been quite low. A lot of people find financial planning a turn-off.”
Ultimately, the commission question highlights some of the tensions at the heart of advisers’ business.
Ms Sofat said: “I would like to understand the regulator’s reasoning. I think that they have identified the challenge of providing affordable advice, but I think that they need to look at the cost of operating as an adviser, and why there are fewer advisers.”
Myron Jobson is a features writer of Financial Adviser
Key points
■ The City watchdog would appear to be mulling the reintroduction of commission payments.
■ Many providers acknowledge the fact that ownership of a network does not necessarily confer control over distribution.
■ A return to commission could help address the advice gap for the mass market.
