Are the FSA changes to financial advice good or bad for consumers? Depends who you ask...
We’re all for progressivity here at Bitterwallet. We applauded the bit in the Opening Ceremony where the grass was ripped up by Isambard Kingdom Brunel and we even let a girl write for Bitterwallet. So long as she’s good.
However, the latest move by the Financial Services Authority (FSA) to improve the provision of financial advice is now being hailed as bad for consumers, rather than offering them increased protection and better service.
The Retail Distribution Review (RDR) is “central to the FSA’s agenda of customer protection” and comes into force on 31 December 2012. One of the main changes under the RDR is to prevent financial advice being provided on a commission-only basis, aiming to eradicate the scurrilous advisers who might, possibly, recommend a product not based on its suitability for the customer, but on the amount of commission generated for their own pockets. A laudable aim.
However, the flip-side of this change is that consumers will soon have to pay agreed fees for financial advice. And apparently, we are none too keen on that arrangement.
A new YouGov survey commissioned by Deloitte found that
84% of people are unaware of RDR and that consumers will pay a fee for advice when RDR is implemented on 31 December 2012;
More than half of all consumers (54%) would refuse financial advice if charged a fee;
47% would be likely to reduce the number of times they use financial advisers if charged a fee of between £400-£600 or 3% of invested assets;
Only 3% of people with no savings would be prepared to pay a fee for advice; 14% of people with savings above £50,000 would be prepared to pay a fee.
Bank customers are five times as likely (60%) as IFAs’ (12%) customers to reject paying fees for advice
Deloitte are warning that the change will lead to an “advice gap – the shortfall between the amount of advice required and that provided” that “is likely to increase as advisers leave the industry or focus on wealthier customers.” And they may have a point- after all, who wouldn’t rather pay for advice in commission they’d never actually see in their own hands, rather than forking out hard-earned, and pre-taxed cash from their own pocket.
But we suspect there is a touch of scaremongering going on too. The FSA are keen to highlight the benefits and increased consumer protection of the RDR, and although the price of services must be agreed upfront, there is no requirement to actually pay upfront. For example, if advisers are no longer accepting commission as payment for their services, they are required to ask the insurance company to reinvest the commission they would have paid out into the customer’s investment. What was possible before the RDR, and will still be possible afterwards, is that the commission may be used to partially or fully offset the fee charged instead of becoming an additional investment. So there may be no need for actual pocket rummaging after all.
Deloitte have actually been using this fee-offset-by-commission system for many years, so it is unusual that they are shouting about a problem for which there is already a solution. Unless of course, they think they are the only ones to do this. They aren’t.
But still, you are probably much more likely to use Deloitte as your financial advisers now they have alerted you to this huge problem aren’t you?