Since the Retail Distribution Review was first mooted, voices in the industry have been pointing out its primary flaw; the effect of the regulation is to put advice on financial matters out of the reach of the majority of the population, who could not possibly afford the advice they needed.
Of course commission is effectively paid for by the same people but for most individuals it is much easier to pay it on the drip over the lifetime of the policy than to have to pay it upfront.
So when the FSA realised the truth of this, rather than accept that their programme was flawed, they began to search for ways around it: simplified advice and basic advice. They failed to realise that people who are looking for advice want the benefit of all the experience of the expert they are consulting – not some cut-down version that may or may not fit their needs. All these attempts came to nothing, primarily because the concept of simplified advice is fundamentally flawed - (see earlier blog - The Conundrum of Simplified Advice).
Now the wheel has turned full circle and it appears that the FSA are coming under pressure from a group of industry experts, including the Association of British Insurers (ABI) and the Association of Mortgage Intermediaries (AMI) to backtrack on the RDR project. They have released a report which seeks to reinstate commission for cash and equity ISAs, stakeholder pensions and annuity purchases, fearing that the fee-only RDR regime would lead to these products being purchased without any advice.
This is yet another sticky plaster to fix a problem, which has come about because the whole RDR project has not been clearly thought through and this solution could end up causing more problems than it solves. For example, what happens if the IFA realises that the best advice he can give the individual is to buy a more complex product that should be under the fee regime? Does he or she keep going and recommend one of the ‘commission’ products or does he tell the individual that they need to buy the more complex product and then hit them with the full fee for the advice?
Once again people are attempting to prop up the crumbling structure rather than stand back and review it to see if it is truly built on solid foundations. If the FSA accept this approach, it will make the new system even more complex and completely unmanageable.
It is clear that financial advice should be unbiased and the only way to do that is to make it fee only. High quality financial advice costs money and there is no demand for a yellow-pack version. Having gone this far, the FSA needs to keep going and implement the new regime. Once it is up and running, we can see where the advice gaps are and devise new ways of giving those excluded access to it.
Knee jerk reactions will only make things worse. The FSA took a very high-handed approach from the start and refused to listen to the industry. They will just have to take the consequences of their own actions and try to learn from it.
What do you think? Should the FSA consider bringing back commission for certain products? Let us know in the comments below!