The Treasury Select Committee's report into the long-term savings so far to suggest the very existence of IFAs may hinder rather than help improve consumer confidence in long-term products.
As well as bashing the Association of IFAs for its lack of member code of ethics, the TSC questions what assistance IFAs may actually provide to solving the long-term savings crisis, and broadly called for tough new measures to impose transparency on the earnings of IFAs and their businesses.
The problem starts, the Committee says, with the very existence of IFAs, who act as barrier to relationships between providers and end clients, while the existence of independent advisers does nothing to solve the “advice gap” between those at the top end of earnings – served by IFAs – and those at the bottom end – served by Citizen’s Advice Bureaux.
“The gap that is apparent between the major companies and their ultimate clients is unhelpful when it comes to rebuilding consumer confidence in the industry, given that better communication with savers is likely to be an important part of the rebuilding process,” the report says
"The current reliance on IFAs as a means of selling financial services and advising potential savers nevertheless risks leaving a large segment of the population without effective access either to financial advice or to long-tern savings products. This reflects the general focus of IFAs, for sound commercial reasons, on the more affluent members of the community."
Providing a menu has been touted as one solution to broadening access to advice at prices people may be willing to pay, however, here too the Committee has harsh words.
It states that the menu approach as explained by the FSA “falls short” of the goal of ensuring “full and open disclosure of fees and commissions in a manner that is readily comprehensible to savers.”
“It should be a basic requirement that each client should be given an explicit comparison of the total cost, in cash terms, of buying a product on a fee basis and the total cost on a commission basis over the likely life of the product.”
Because of the “failings” identified in the proposed menu approach , the Committee says it wants the FSA to publish data on a regular basis covering on the costs involved in buying “major products” on both a fees and commission basis.
It also calls for the publication of data showing the percentage of savers opting to pay by fees or commissions.
However, raising transparency also leads to questions over what to do about previously agreed trail payments, particularly where consumers ended up paying trail to IFAs with whom they no longer continued to do business.
Here the Committee is unequivocal in its condemnation and criticises any attempts by the industry to retain trail commission.
“For IFAs to receive trail commission whether or not they are providing any real ongoing advice to the client is unacceptable. The persistence of this practice is a clear sign that the market for financial advice is not working in the best interests of consumers.”
”The Committee urges the major product providers, IFAs and the regulator to limit urgently the basis on which trail commissions are paid in the financial services industry, and to ensure that such payments only occur when the client is actually receiving the annual advice that such commissions are supposed to fund.”
Staying on the theme of ethical behaviour, the Committee reserves its harshest judgement for he evidence given by AIFA on the issue of codes of conduct.
The Association and providers alike pointed to the role of the FSA in determining ethical conduct by virtue of the regulations over which it presides.
This argument cut no ice with the Committee, however, which says it “deplores the fact that a major trade body such as the AIFA has no code of ethics, particularly given the key role IFAs play in terms of the experience most consumers have of the long-term savings industry.”
”Across the Industry there is a danger that companies and trade bodies are abrogating their responsibilities in relying so heavily on the FSA to police and deliver good standards of behaviour.”
”External regulation by a body such as the FSA should not be seen as a substitute for effective self-regulation within the industry via codes which react quickly and flexibly to problems as they arise. All the major trade bodies in the long-term savings industry should have clear codes of practice which take the standards of behaviour laid down by the FSA as a minimum but aim to improve on the FSA’s requirements in those areas where the industry feels that the better standards will do most to help its customer base.”
”We call on the AIFA to establish a code of ethics for its members, to monitor compliance with it and to establish a means of enforcement for members who do not comply.”IFAonline
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