Commission bias

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The UK regulator , the FSA, has announced a radical overhaul of the rules governing investment advisors. The FSA announced that payments from fund managers and life assurers to advisers would be outlawed in three years.

The FSA said it intended to drive “commission bias” out of the system and ensure “recommendations made by advisers are not influenced by product providers”. No comparable moves have been announced in the United States.

Watchdog will end commission bias Source: BBC News, June 27, 2009

The city regulator will end commission payments to advisers who sell pensions and investments under plans to begin in 2012.

Instead all independent advisers will have to charge their clients a fee, though that could be paid for over the life of the investment.

Some advisers say that will stop many people getting the advice they need.

And the Financial Services Authority admits one in five advisers may stop being independent.

Putting people off?

Speaking to BBC Radio 4's Money Box programme Denis Armitt, an independent financial adviser, warned "Those in greatest need may be the most disinclined to pay fees or may not be able to afford them.

"Just at the time when more people need to be encouraged to invest more in pensions."

“ This is the end of commission as we know it and the removal of commission bias ” Jon Pain, managing director of retail markets at the FSA But Jon Pain, the director at the Financial Services Authority in charge of the retail distribution review that will introduce the changes, does not accept that fewer people will get advice.

"I don't think so - it will still give choice to consumers.

"They might pay for their fees spread over a long time - but this is the end of commission as we know it and the removal of commission bias."

The customers' interest

Although commission is to be banned for independents a new category of "restricted financial adviser" will be created.

“ I can't see how the costs can be absorbed without being passed on to the consumer" ” Denis Armitt, an independent financial adviser Most will work for banks selling the banks' own products.

And Jon Pain admitted these advisers may still be paid more if they sell more.

"We will be seeking to ensure that all advisers act in the customers' interest.

"We will be consulting on a code of practice on remuneration and consider whether we extend that code to advisers as well."

Mr Armitt was also concerned that customers who did get advice would have to pay more for it.

"I can't see how the costs can be absorbed without being passed on to the consumer."

Price increases

“ Market competition and how consumers behave will address these issues ” Jon Pain, managing director of retail markets at the FSA The FSA says the change will cost £430m initially and then £40m a year after that.

Mr Armitt warned that insurance companies might use the change as an excuse to put up prices.

"The FSA is going to have to monitor closely the charges to ensure they reflect only the cost of the abolition of commission."

But Jon Pain, managing director of retail markets at the Financial Services Authority, said he would not be monitoring prices.

"We've never been about price.

"Market competition and how consumers behave will address these issues."

References

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