Model for retail investment distribution needs a rethink, says ABI

The ABI, the trade body representing over 90% of the UK insurance market, was responding to proposals put forward in April by the Financial Services Authority (FSA) as part of its Retail Distribution Review.

The FSA's suggested package of reforms included a complete split between those firms giving advice to consumers and those that actually sell the products.

Under the FSA model, all financial advisers would have to be truly independent, basing their recommendations on an analysis of the whole of the market. Product sales, on the other hand, would be strictly non-advised.

Stephen Haddrill, the ABI’s Director General, said: "The FSA is on the right track with its proposals for clearer payment structures for advisers, and increased professionalism. But it must rethink its ideas on who will be authorised to provide financial advice."

"We believe that all suitably professional and transparently remunerated advisers should be allowed to provide advice and give product recommendations – not just those who offer products from the whole market. We must not risk reducing consumer access to high quality advice by restricting its supply," he said.

"We could be on the verge of a revolution in the delivery of financial advice and products to consumers," said Haddrill. "Ultimately, this will benefit everyone, most importantly consumers. It is crucial that the FSA takes the right decisions now, to ensure these reforms really work."

Division

The ABI argues in its response paper that the proposed division between advice and sales fails to take into account the consumer's point of view.

"Calling one area advice and the other sales does not mean that consumers will understand what to expect or who to trust," it says.

It adds: "Consumers do not make a clear distinction between advice, information and guidance – they do not think they are mutually exclusive terms. Clearly, then, labelling a service 'advice' from a consumer's perspective is complex, and perhaps most worryingly for the desire to segment the market, there is no single easy way to define "advice" that relates to consumer understanding. The FSA should commit to researching carefully with consumers before committing to new service labels".

The trade body also takes issue with the FSA's proposal that financial advice should only be based on an analysis of the whole of the market, which would exclude firms tied to a single product provider or to a number of providers from advising customers on a more limited range of products.

Remuneration model

The ABI, however, gives its full support to proposals for raising professional standards across the industry and to the FSA's plan to reform the way in which financial advisers are paid by moving away from commission-based remuneration. 

It would like to see its own payment model, Customer Agreed Remuneration (CAR), applied to the whole market.

Under the CAR system, the amount charged for advice is agreed with the customer without any input from the product provider (and irrespective of the provider chosen). The cost of the product and the cost of the advice are disclosed separately.

This model, the ABI believes, can be adapted to situations where the adviser is tied to or employed by the provider. In such cases, the charge made for advice may not always be negotiable, but it should be disclosed clearly and separately from the product cost and the customer kept fully informed before, during and after the point of sale.

The paper calls on the FSA to confirm how it intends to deal with remuneration issues in the sale of protection products (such as life and critical illness cover) and group insurance and pensions schemes, all of which are currently outside the scope of the Retail Distribution review.

Financial interests

The ABI has also reacted strongly to the suggestion that the FSA might consider restricting product providers from holding financial interests in advisory firms.

"We do not believe that ownership does undermine independence of action in practice – particularly where many [intermediaries] are owned within a group structure separated from the insurance business and disclosed clearly to consumers.

"To effectively remove the availability of provider capital would undermine the availability of advice across much of the market". 

Commenting on the ABI's response, Bruno Geiringer, a life insurance specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said: "The ABI echoes some of my own concerns about whether a split between advice and information-giving could ever actually work in practice."

"Preventing tied and multi-tied agents from giving any sort of advice strikes me as anti-competitive and something that would significantly restrict the ways in which customers can obtain access to financial products," he said.

"I would, however, have liked to see the ABI give stronger support in its paper to the Money Guidance initiative, which by providing generic advice to consumers on key financial issues, will do much to improve consumer understanding and can only benefit the industry," said Geiringer.

Next steps

The FSA will publish a full feedback statement in late November outlining its project decisions in light of the responses received and a timetable for formal consultation on any proposed regulatory changes.

The original publication date was put back from October to allow Jon Pain, the FSA's new Managing Director of Retail Markets, a chance to settle into his new role.