11th August 2010

Is Commission an "RDR" dirty word?

“The FSA pays "commission" to its staff, except it refers to it as a "bonus" although how it measures who gets what and why is another matter”.

The debates rage on around RDR, remuneration, disenfranchisement of the masses, professionalism and more.

It is clear that feelings run high in the now split camps of the fee based advocates and those who favour the fee and/or commission model.

Let’s put to one side the qualifications debate for the time being as well as the elements in society who are very happy to pay fees for advice. We need to look at the conundrum of advice being linked to the “buying” of financial services products and executed by the same party that gave the advice.

So we can all be clear, the payment of commission is payment for services rendered or products sold. It is a common way to reward firms or individuals within all areas of commercial activity that involves the distribution of products or services - tangible or intangible.

Payments often will be calculated on the basis of a percentage of the value or volume or both, of the goods sold.

Commissions are intended to create a strong incentive for those involved in the manufacture and distribution of goods or services to invest maximum effort into their work. For the majority of consumers, financial services products have always been sold not purchased. After all, over many years the sales of financial services products have helped millions to save, invest and protect themselves and their families against the bad effects of life changing events.

Industries where commission is commonly paid include just about any industry that relies on individuals to distribute their goods and services and this includes financial services. An unfortunate side effect of commissions is that in some cases, they can induce dishonest and fraudulent business practices in order to increase sales. Even the FSA pays commission to its staff, except it refers to it as a bonus although how it measures who gets what and why is another matter. The average salary of an FSA employee was �£56,473 as at June 2010.

The problem with the RDR is that it has blurred the lines. The recognition of the importance of the easy availability of high quality, independent financial advice is a cornerstone of the RDR.

But it is now becoming clear that the unintended consequence of the “cunning plan” called RDR is that it has the potential to deny the vast majority of the public access to the very advice it is advocating should be easily available because the average “consumer” will just not contemplate the thought of paying for what he does not see as a valued service if it involves the “effecting” of a financial services product alongside advice.

He feels that this should carry a reward from the manufacturer of that product, a commission, to cover the cost.

In 1995, the OFT successfully campaigned for the removal of the maximum commission agreement  (MCA) on the grounds that it stunted competition. This resulted in provider firms then paying pretty much what they wanted to ensure that they maintained their business share expectancy.

The unintended consequence was that in removing a barrier to competition the OFT had created the potential for a miss selling feeding frenzy that thankfully did not happen- a credit to the professionalism of the IFA community.

Since the beginning of 1995, IFAs have been forced to disclose the level of commission they earn from “selling” financial products to their clients. The move was implemented by the then regulator of retail financial services the Personal Investment Authority- PIA. The PIA has since been subsumed within the financial watchdog the Financial Services Authority- FSA.

Commission disclosure was seen as a major step forward in consumer protection.

This disclosure was in all regulated product quotations, illustrations and cooling off notices to ensure that the consumer was fully aware of the “cost of advice ”. Those firms that offered fee based advice could then show the value it offered to the client in return for enhanced benefits due to the rebate of commission to the contract.

For those who offered advice based upon fee and commission rebate against the fee, the client was fully aware of the monetary aspects and consequences. For those firms that only worked on a commission model, the client was fully aware of what the commission was and was happy because in their eyes someone else had paid and not them.

Nobody, it would seem, felt disadvantaged in this world and the availability for consumers getting advice that could be paid for in a way that was mutually acceptable to them and the adviser was ensured.

What was wrong with that?

The former Chelsea manager - Claudio Ranieri was referred to as the “tinkerman”for his constant experimentation - but who was dubbed 'Dead Man Walking' when Roman Abramovich took over Chelsea in 2003.

With recent revelations that the FSA considered scrapping the RDR earlier this year, http://www.panaceaadviser.com/main/st3917/Is+this+any+way+to+run+a+ballroom%3F.htm

and the change of government setting about the formation of a new regulatory body for IFAs - the CPMA, I can see some similarities between Ranieri and the FSA.

Who are the potential winners in the RDR commission debate?

1. The FSA - for another change for change sake exercise costing millions.
2. Fee based RDR ready firms who see a major opportunity.
3. Product Providers who can see that they can have their wares distributed by an IFA channel that it does not have to pay for doing so.

Who are the potential losers in the RDR commission debate?

1. Consumers who have only the Banks to turn to for advice that does not involve fees.
2. The FSA by the rule of unintended consequences - removing the right of consumers to decide how they would wish to “pay” for advice given by IFAs.
3. The IFAs who have changed to a fee based model only to find that the end of the rainbow has no pot of gold due to public apathy toward paying fees
4. Fee based RDR ready firms who do not see the opportunity materialize after investing millions in becoming the new model adviser
5. Those IFAs who throw in the towel because this is a change for change sake too far
6. Product Providers who see that all of a sudden their vast distribution channel has been destroyed and replaced by a small yet very powerful distribution channel who operate via Wraps and Platforms over which they have little influence

IFA Julian Stevens recently observed - “Why is the FSA so intent on interfering with the way in which small IFA's operate instead of tackling the really big problems, which it so often seems to fail to get round to until much of the damage has already been done”?

Ultimately the issue is really about advice, who gets access to it, who pays for it and how.

If the quality of the advice is deemed to be good and from an appropriately qualified, experienced and regulated firm, how someone is rewarded for it should be agreed between the parties involved and not a regulator.

If commission should not form part of the RDR grand plan, it may be that for RDR to work in a way that it was perhaps intended, those who are providing the fee based advice should not be allowed to execute any product transaction that is part of that advice process, this being left to another party to effect, like an Architect designing the grand plan, then having it executed by a suitability qualified builder. A “Para-arranger” who is paid a commission?

An added bonus being that the blame for bad advice when it goes wrong can be clearly placed at the right door with no room for ambiguity.

Why are the great and the good of the industry not being listened to? *

Otto Thoresen - CEO Aegon: "The RDR is only helping wealthy customers"

AXA April 2009: "We will lobby the FSA to make sure the RDR does not mean less are able to access advice"

David Cox - Suuqea March 2009: "Two million clients could be left without an IFA after RDR - 40% could leave the industry"

Institute of Financial Services: "RDR will impair financial advice before improving it” Alasdair Buchanan Scottish Life November 2009: "Sales advice is a real cop out and extremely confusing to investors"

Stephen Gay - Aviva June 2009: "The regulator has failed to consider the danger of adviser charging limiting access to advice for those on lower incomes"

Lord Lipsey: "Consumers in the middle (not high net worth or money guidance fodder) to be sold products by banks under the contradiction that is sales advice"

Paul Selly HBOS: "Bancassurers set to benefit"

Richard Howells Director Zurich Life June 2009: "The big question mark is still around what benefit it will have for the ultimate consumer. I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can really hang my hat on."

Martin Lewis Money Saving Expert June 2009: "There's a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I'm wrong. I'm not convinced most people will want to pay for advice. The commission route has the advantage that you don't pay a fee each and every time you want information; you can go without the worry of laying out cash. What I find most galling though is that bank-based advisers - those primarily responsible for PPI miss-selling, endowment miss-selling, investment miss-selling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales."

Janet Walford OBE, Editor Money Management Sept 2009: "I am not paranoid enough to believe that the FSA has a hidden agenda to do away with small IFAs, but the law of unintended consequences may well mean that this will be the result. This is especially the case when set alongside the myriad of other proposals that are costing some �£430 million to set up, with ongoing fees of �£40 million pa thereafter, a mind boggling amount of cash.

Robert Kerr, head of retail distribution development at Scottish Widows says: The RDR could have the unintended consequence of "disenfranchising" the majority of consumers from financial advice. "Our key concern is the RDR proposals will act to drive advice up market, with financial advice becoming the preserve of the wealthy leaving mass-market consumers un-served,"

Richard Hobbs Director Lansons Regulatory Consulting 16/07/10: "I have to say, it (RDR) only just survived an executive committee meeting in March 2010 at the FSA. The FSA are not particularly proud of the RDR but it is a question of losing face, so I think they will carry on."

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