Financial adviser mis-selling targeted by FSA
In the latest stage of its Retail Distribution Review (RDR), the FSA outlined how it will target mis-selling by forcing a clearer distinction between sales people and financial advisers.
The latest proposals from the FSA are intended to help consumers distinguish between independent financial advice and sales advice, the intention being to increase confidence and trust in the retail investment market. There are also plans to raise the standard of financial advice generally. Much of the mis-selling that has occurred in the past has been due to people selling financial products under the guise of giving financial advice. The FSA recognize that consumers need greater clarity about the service being offered than is currently the case. It’s intended that advice will therefor be categorized as either independent or sales advice.
The FSA proposes that independent advice will consist of recommendations that are “unrestricted and unbiased and consider all investments and providers from across the market to ensure they meet a customer’s needs”. The cost of the advice is to be agreed at the start and the cost of all advice will be made clear to consumers. It’s hoped that the change in the way advice is paid for will remove the possibility of bias which can occur when advisers are paid commissions for selling products. This often led to unscrupulous advisers recommending products which pay the most commissions rather than those which best suit their clients. During a recent speech John Pain was clear that independent advice “targets the best outcome for each customer, based on a comprehensive and fair analysis of relevant markets“. It’s intended that independent advisers will adhere to significantly higher professional standards.
The FSA considers that sales advice will involve recommending the products of one or a limited range of providers and that this should be made clear to customers. Sales advisers will have to clearly show the cost of their advice and meet the same professional standards as independent adviser. The FSA will also help firms develop a simplified sales service for a limited range of products, the intention being to improve consumer access to investments. This is seen as a “guided sales processes for consumers with more straightforward needs”. There will be consultation on removing the current rules for Basic Advice as part of this process. The FSA will offer firms greater clarity about how their rules apply and greater certainty on potential liability.
While a clearer, more distinct separation between independent and sales advice should benefit consumers, the Association of Independent Financial Advisers (AIFA) feel the proposals don’t achieve this. By allowing sales people to call themselves advisers, AIFA believes many consumers will be confused about type of service being offered. Chris Cummings, Director General of AIFA, said “These reforms don’t make it clearer for consumers, the sales advice term is ambiguous and it will further confuse consumers about who they are dealing with”. He believes the shortcomings are due to the FSA having “bowed to pressure from the banking and insurer lobby to allow their sales people to still call themselves advisers“.
The FSA proposals also aim to raise the professional standards of all advisers. They plan to achieve this by setting minimum qualifications for different types of advice and by establishing a Professional Standards Board with similar powers to standards boards in other professions. It’s hoped this will boost consumers’ confidence in the industry.
The proposed reforms will not come into force until 2012, however John Pain of the FSA feels the RDR proposals provide an opportunity for individuals and firms in in the retail investment market to “modernise practices, raise standards, and treat their customers fairly”.
Consumers certainly need the current financial advice system fixed although the AIFA criticisms suggest these proposals don’t go far enough. While the the well known mis-selling scandals may have begun some years ago, a new survey found interest only mortgage customers were recently the victim of poor financial advice. Changes need to made sooner rather than later.
