The Financial Ombudsman Service (FOS) has become a second-tier regulator and needs to be scaled back, according to AIFA.
A no-loss, no-fee system should also be introduced, to protect advisers who are cleared of wrongdoing.
AIFA says the ombudsman needs to be a ‘small, cheaper operation' and should scale back its operations and role.
Chris Cummings, director general of AIFA, says: "Now is the time to review the work of the Ombudsman. It should be a mediator between disputing parties rather than the ‘judge and jury' of firms' activity.
"We are concerned that the Ombudsman has become a second tier regulator to FSA. This was not intended when it was introduced. FOS needs to be a smaller, cheaper operation, sharing resources with other parts of the regulatory structure."
By reducing costs, the FOS could introduce a system where advisers are not charged a case fee when they are cleared of giving improper advice.
Currently, firms are charged a flat fee for each complaint made against them, in addition to their annual levy, regardless of whether the ombudsman rules in the adviser's favour.
Case fees make up 79% of the FOS's current spending, and AIFA says it is unfair for innocent advisers to be contributing such a large percentage of its income.
"Given the Ombudsman refuses to increase the number of free cases from the current three per regulated firm, small firms can find themselves worried about the burden of case fees," Cummings says.
"IFAs should be protected from erroneous claims with the introduction of a no loss, no fee system."
AIFA also wants a long-stop to be introduced for adviser firms, giving them the same rights as other professions, and for the FOS to be bound by the rule of law.
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