The FSA's interim paper, published on Tuesday, suggests a complete split between advice and sales. All financial advisers would be truly independent, basing their recommendations on an analysis of the whole of the market, whereas product sales would be strictly non-advised.
Those most affected would include tied or multi-tied firms who advise on only a limited range of products and so would fail to meet the requirement for independence. Over 20% of new long-term insurance business was generated by this type of adviser in 2007, according to statistics from the Association of British Insurers.
Banks and building societies whose sales processes currently include an element of advice would also have to change their business practices if these proposals come into effect in their current form.
The Retail Distribution Review, launched in June 2006, aims to address the root causes of recurrent problems in the retail investment market.
Low standards and poor quality advice have led to low levels of consumer trust, often exacerbated by overly-complicated charging structures that make it difficult to understand how much products actually cost. There are also major concerns about the influence product providers have over what advisers earn and the conflicts of interest that can result.
The interim report sets out the FSA's current thinking and takes into account feedback received from the industry, including 888 responses to the FSA's June 2007discussion paper.
The suggested model would result in a market made up of three simple components: advice, sales and 'Money Guidance', the proposed national information guidance service aimed at helping consumers understand more about money, savings and investments.
In addition to providing "whole of the market" advice, financial advisers would be required to meet higher professional standards, which the FSA hopes can be agreed industry-wide.
Under the proposals, advisers would agree how they were to be paid with the customer, without input or influence from product providers. This, the FSA hopes, will reduce the potential for sales-driven advice.
In advance of any regulatory changes, however, the report urges product providers to address the remuneration issue: "We challenge all product provider firms to bring forward practices that will end their role in setting advisory remuneration and so no longer use remuneration to incentivise advisers to recommend their products …
"How the industry responds to this challenge could influence whether and how we make new rules in this area".
The FSA might go even further: "In considering the step-change conditions for advice" the report states, "we need to think about whether this means we should seek to restrict product providers from taking financial interests in advisory firms".
The FSA appears to have rejected an earlier suggestion to introduce a 15-year time limit on claims for negligent advice where the error comes to light some years later. The Financial Ombudsman service estimated that the measure would bar around 2000 of its cases a year.
The interim paper also confirms that there is no current intention for any reforms to be carried over into the mortgage or general insurance markets: "We have an open mind about where the review goes…but if the feedback and our own analysis suggests the wider application then that is something we will of course consider and discuss openly with the market".
There is still a great deal of further work for FSA to do before it makes any final decisions. Not least it will need to consider the economic impact these changes would have on the retail investment market. A full feedback statement is planned for October 2008, which will set out in more detail the regulatory implications and timetable for change.
Mike Evans, Director of Life Insurance at Pinsent Masons, the law firm behind OUT-LAW.COM, said he welcomed the clarity and simplicity of the suggested division between advice and sales. But Evans also sees potential problems.
"My concerns at this stage would be twofold," he said. "Firstly, whether the industry is capable of rising to the challenge of devising a sales model which meets the needs of customers without providing advice; and secondly, whether the FSA can hold its desired position and not allow its ideas to become diluted so the end result becomes as opaque as the current model."