The aims of the UK Financial Services Authority’s Retail Distribution Review are sound: to fix some of the problems identified by the regulator that exist in the industry and to establish an environment where standards of professionalism inspire consumer confidence and therefore encourage more people to save.

The aims of the UK Financial Services Authority’s Retail Distribution Review are sound: to fix some of the problems identified by the regulator that exist in the industry and to establish an environment where standards of professionalism inspire consumer confidence and therefore encourage more people to save. However, the discussion paper contains a number of ideas which could be counter-productive to the paper’s aims, and which could further dilute the status of independent advice. One of our concerns – one of the possible unintended consequences - is that if the proposals reach the marketplace unchanged, it could put almost half of current IFAs at risk of being squeezed out of business. Research we carried out through a survey of IFAs, shortly after publication of the paper, suggests this very clearly. The discussion paper talks about creating three different advice types, in addition to the concept of generic advice which is being dealt with separately under the Thoresen Review. The three types proposed are: professional advice, general advice and primary advice. Being classified as a professional advisor would require working exclusively on a fee basis, having appropriate qualifications and very likely – but not necessarily - cover the whole market of products. A general advisor would not need the further qualifications and would be able to accept commissions. If they do, they would not be able to call themselves ‘independent’. Primary advisors would offer the most straightforward advice on the most straightforward of products to the mass market. The primary advice market is likely to be filled by organisations with wide distribution networks, a physical high street presence, and large sales forces. It seems like an obvious space for high street banks to target. It’s also worth pointing out that under the proposals “independent” will mean something different from what it does today. Some of the speculation around the paper has suggested that the FSA seeks to make “independent” mean an advisor must receive fees instead of initial or ongoing commission. Our understanding is that the FSA merely intends to de-couple what a client pays for their advice from the product they buy; to remove the influence of product providers over product price. This means that a client and advisor can agree remuneration to the advisor that looks identical to commission, but will now be called a customer agreed remuneration (CAR). If that doesn’t cloud the picture enough, the paper also seeks to redefine this commission (sorry, CAR) as being a fee. So how are these proposals a risk to almost half of IFAs? In our survey of more than 500 IFAs, 52 per cent of respondents indicated they would seek to become professional advisors and 44 per cent imagine themselves operating in the next tier as general advisors. Very few respondents anticipate working as primary advisors. It’s the 44 per cent of prospective general advisors that could be at risk from going out of business. Unable to call themselves independent, they could get caught in a vice between professional advisors who will attract high net worth clients, and bancassurers offering primary advice. Apart from being a personal blow to thousands of small businesses, this would significantly weaken the advice industry by discarding valuable capacity and, more importantly, experience. This will do nothing to promote consumer confidence. But it should not be all doom and gloom and will not necessarily spell the end for all IFAs. Neither should all IFAs have to go back to school nor have clients opening their wallets as they walk into the office. It’s important to gravitate back to the aims of the discussion paper – to enhance the reputation of the financial services community and simplify matters for consumers. Some of the detail of how things will come about is missing. The result is that some of the suggestions seem muddled. Imagine an IFA today with few paper qualifications. He has years of experience which mean he feels further study and exams would add little to his ability to offer clients the best guidance. He has a loyal client base that is happy paying commission because our IFA explains how commission works to every client and gives them the option of commission or up-front fees. In fact, most of his clients object to paying a cash fee each time they meet with him. Our IFA cannot become a professional advisor because he works on a commission basis with some clients. His challenges will be to convince new clients that his advice is as good as the professional advisor’s and, perhaps more demanding, will be to fight off competition from the banks. One thing to remember though is that this is a discussion paper and a long, long way from happening. The FSA has asked the question and we, as an industry, must now answer it through sensible rational and informed debate. Time and reputation have been invested in the paper so it should be thought of as a strong indication as to what the authors would like to be adopted. Many of the questions that have been raised within the industry since its publication and many of the gaps we have found will be filled during this discussion period. This discussion paper presents an opportunity for advisors to gather their thoughts and shape their industry to their client’s and their own advantage. AIFA and others are seeking IFAs’ views on the paper, so make your opinion known and contribute to the future of the industry.