The Treasury Select Committee says it will refer financing of the Association of IFAs to the Office of Fair Trading for potential conflict of interest, after the AIFA admitted up to 85 % of IFAs' compensation levy costs into the FSCS are cross-subsidised by product providers.
In a tough grilling of the AIFA by TSC members this morning, MPs pushed AIFA director general Paul Smee to the wire - along with Amanda Davidson of Charcol Holden Meehan and an AIFA director, as well as Roger Saunders, deputy chairman of the AIFA - on a variety of issues concerning long-term savings, including the cost and remuneration of advice, the liquidation of Berry Birch Noble, the assumed lack of ethics of the industry, as well as the complexity of product structure, precipice bonds and the potential for Sandler suite products.
Early in proceedings, however, chairman John McFall MP told AIFA director general Paul Smee the committee would refer the 85% funding of costs relating to the Financial Services Compensation Scheme to the OFT as the committee has concerns the IFA sector cannot truly say they operate independently from life office if it is providers who pay a large percentage of IFA compensation to the FSCS, and potentially cross subsidise at least 20% of FSA fees.
The AIFA has always made it public the members' FSCS fees are cross subsidised by the Independent Life Offices Group to limit the impact of rising regulatory costs.
Moreover, the AIFA also makes it clear the FSA allows cross subsidy of FSA fees through rebate as the AIFA's 2002/03 annual report reveals the AIFA secured a deal to cross subsidise a 20% rebate of regulatory fees to the end of 2003.
That said, McFall intimated the AIFA’s cross subsidy muddies the independence of IFAs from life offices and financial services companies because product design needs to be challenged and simplified for the benefit of the consumer whereas challenging it is made all the more difficult if IFAs are reliant on providers keeping the firms afloat through distribution support.
"When a company calls on the compensation scheme, the contracts sold are continually sold by the provider. We will be bringing this to the attention of the OFT," said McFall.
In another swipe at the IFA sector, the committee also condemned members of the AIFA committee for failing to criticise the "sharp practices" of Berry Birch Noble, a member of the AIFA which recently restructured its BBN liabilities into a now liquidated division of the firm.
Smee pointed out BBN was entitled to do so under company law, but Angel Eagle MP questioned the ethics of both the AIFA and the IFA industry, arguing his failure to condemn the BBN for their practices "casts doubt" on the trust consumer may hold in the IFA sector and in its trade body.
Addressing the question to Smee as a consumer, Eagle asked:
"What would you feel if a company did that to you, what would you this as a customer? Would you then go and buy another product from an industry that condones this kind of behaviour? You say you are not condoning, but you not condemning either," said Eagle.
"We are not happy and we should shout it from the rooftops. Why are you there [as director general of the AIFA] if you are not there to deal with issues such as this?" added Eagle.
Norman Lamb MP continued the onslaught by asking whether the AIFA ought to have a code of ethics which IFAs might follow in order to protect the majority of intermediaries from being sullied by the activities of firms such as Berry Birch Noble, who are not seen as entirely ethical in their actions.
"Doesn’t it do a grave disservice to other IFAs to undermine confidence in the whole industry," said Lamb.Despite trying to fight the corner of IFAs at the TSC hearing, Smee and the board of director was later criticised again by McFall for not questioning the IFA sector which presented precipice bonds to clients as a direct mail offering.
Quoting correspondence from an IFA who previously worked in the industry for 30 years, McFall ended the session by suggesting consumers want a variety of key changes to occur within the long-term savings market in order to improve service delivery, transparency of products and costs to the consumer.
"There are good IFAs out there. What we want here is a link with the customers involved. The first thing that should happen is the insurance companies should have a non-actuarial role for managers, embracing the best return and services.
"Second, document should be in English. Third, the insurance companies disclosure of commission to IFAs should not be on the last page which can be torn off and lost, there should be hard disclosure on the first page where it cannot be removed.
"There should be individual accountability of advisers and if people lose their life savings, some chief executives should imprisoned. We are not going to suggest we go that far. But people do need protection," added McFall.
IFAonline will bring you further details of this morning's Treasury Select Committee meeting with the AIFA later this afternoon.IFAonline
Third completed acquisition of 2018
March sales figures revealed
Three big drivers
No easy answers
Whatever the weather