As of 2012, commission for retail financial advisers will effectively be abolished – forcing them to set a price for their advice, rather than selecting products for their clients based on which providers pay them the greatest kickback. And about time too.
The one glaring omission from the RDR, however, was the inclusion of a similar set of proposals for the corporate advice market – an area where commission is also still too often abused.
Although the FSA report did acknowledge that consumer groups had asked it to look at the corporate market, it went on to list a number of excuses as to why a similar plan for this sector might be difficult to implement. Top of this list was its concern that it “could inadvertently incentivise firms to stop offering advice to employees at all”, if its new so-called “adviser charging” system was applied to the GPP market.
This, in my opinion, is a lot of nonsense. As it stands, many members of GPPs already receive no face-to-face advice at all – in spite of the fact that they are often forced to pay for it via higher management fees. Furthermore, any advice that they do receive tends to be limited and generic – with individual investment advice all but unheard of.
This problem is just as common within companies where the pension advisers receive commission, as it is in the firms whose advisers only receive fees. The reasons that employees tend not to receive good pension advice are many – but to my mind they don’t have anything to do with commission.
If the regulator wants to ensure that more employees are given access to advice in the workplace, it will need to take a number of additional measures to make it happen. Although it may not sit comfortably with the light-touch world of principles-based regulation, one solution would be to simply stipulate that all advisers must ensure that telephone or face to face contact is made with all GPP customers. Advisers should also be forced to provide better resources to help employees make their investment decisions. Obviously, lengthy one-on-one advice sessions for every GPP member would not necessarily be economically viable. But for employees who wanted more in-depth and personalised advice, this cost could be agreed in advance, and deducted over a pre-determined period from their pension pot (essentially the same theory as the ‘adviser charging’ system being proposed for the retail market).
This would be infinitely better than the status quo, which sees many GPP customers inadvertently paying for advice that they never receive.
As for commission, there is no reason why the FSA should not push ahead with its abolition in the GPP market straight away. Thankfully, a handful of providers have already pulled away from this model, but there are still a number of big name insurers who insist on offering commission-based GPPs.
Granted, a wholesale switch away from commission may prove financially difficult for some advisers. But a few providers, such as Standard Life, have shown that they are willing to invest in advisory businesses to help them finance a shift to a fee-based model. Although providers taking stakes in businesses may sound like a perverse thing to advocate in the battle against bias, life insurers are not allowed to use stake-building as a way to drum up more business from a firm of advisers, and there’s little evidence yet to show that this has been happening.
Regulation is moving in the right direction. But the FSA would be foolish to ignore the corporate advice market as it moves the RDR to the next stage.
James Daley is personal finance editor of The Independent