Criticisms of the retail financial distribution model by the Financial Services Authority and the Financial Ombudsman Service, particularly over the use of commissions, have provoked a flurry of angry responses from IFAs.
Walter Merricks, chief ombudsman at the Financial Ombudsman Service (FOS), called the distribution model “fundamentally flawed” and said it was at odds with basic legal and agency principles.
But many IFAs disagree with his comments and say they work exclusively for their clients, the majority of whom would not be willing to pay for fee-based advice.
Colin Langton, chairman of Langtons (IFA) Ltd, says:
“The courts have ruled that an IFA is an agent of both as he/she acts simultaneously for the provider and the client. After all we sign agency agreements with the provider and complete forms on their behalf. However, our commission is clearly paid by the client for our advice and legally we have to disclose all commissions which are typically costed into the product. I am not aware of any commission being ‘undisclosed’ as Merricks claims.
“Merricks and the FSA, who have never sold a ‘product’, like to compare IFAs to solicitors and accountants. But there is a massive difference as clients have to employ solicitors and accountants when buying a house or auditing their accounts. In the case of financial services, how many people would voluntarily opt to buy life cover or pensions and pay for that advice?
"The answer lies with stakeholder pensions which were a flop because the public are lethargic over financial services and IFAs didn’t bother to sell them stakeholder as there was nothing in it for them. In short, many financial products are ‘sold’ and not ‘bought’.”
Ken Boyd, a retired IFA, believes commission means both middle income earners and top earners are both able to receive advice. He states:
“To ask the middle income earner to pay fees means he would rather go without than pay what he perceives as being expensive. Consequently, thousands don’t save and unless they are employed they don’t have pensions. Before regulation the majority of the population had pensions and other savings. The regulator, charging in where angels fear to tread, have convinced the populace at large that financial service are a rotten lot so no pensions and savings are bought. It has given us nothing other than complexity.”
Simon Webster, managing director of Facts & Figures Financial Planners, adds:
“There I was thinking hard disclosure of commission at point of sale was mandated across the industry. It's in key features documents and illustrations and has been for years - what more do they want? To be an IFA one has to offer a fee alternative to every client - I have had two choose that option in two years despite the fact that with no clawback I prefer it.
“Everyone knows that when you buy a product, the business which sells it makes some money out of it. Consumers may claim after the event they thought the adviser was working for nothing because it suits their particular compensation claim, but does anyone really think anyone does a job or work for free?
“As for the law of agency, as an IFA I act exclusively as the agent of the client and I have never claimed to act as a representative of a life office. It all used to be totally clear: tied agents worked for life companies and IFAs worked for clients; then the FSA came along and introduced multi tie which totally distorted the law of agency.
“The regulators keep distorting a market which has worked pretty well overall for about 150 years. There is no denying there needed to be some changes, but the way they have gone about things is a joke. Then they blame their failures on industry they have systematically tried to destroy over the last 15 years. It beggars belief.”
Alan Lakey, partner at Highclere Financial Services, says regardless of whether advisers’ agency position is at odds with basic legal principles, the remit of the FOS is also at odds with basic legal principles and is in conflict with the requirements of Section 6 of the Human Rights Act. He states:
“I find it astounding the FSA and the FOS feel it appropriate to point the finger at the commission model with an obvious bias towards fee-based advice. While we all accept that in a perfect balanced society fee-based advice would be the preference, we must also accept a mass migration to fee-based advice will result in the disenfranchisation of a significant portion of the workplace.
“Perversely it is the very people, the archtypical 'man in the street', who cannot and will not pay fees for financial advice. High net worth individuals will and do. The result of such a change would be an even larger pensions gap, an even larger savings gap an even larger protection gap. It would also sway people towards the bancassurers who are tied agents with the result independent financial advice will be the sole preserve of the wealthy.
“Is this the sort of society we want? Us and them, rich and poor?”
Martin Nield, director of MCN Financial Services, adds:
“I feel that it is not up to the FSA to drive the industry in any direction at all. It is only there to produce the guidelines to which the industry should operate. The guidelines have to give the client the choice of how they are to pay for the advice they need. I personally feel if commission is outlawed, then the client choice will be compromised and it will lead them away from independent advice.
“In no other industry do the autocrats dictate how advice is provided and paid for. I am very concerned and worried the industry is being manipulated by people who are not fully informed and have their own agenda. We need an end to all this speculation by the FSA as to why profits are not being made by large IFA firms. They are not directors of the firms and do not know what they are talking about.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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