Carl Lamb calls upon fellow advisers to take a responsible approach to client charging
With the prospect of being forced out of the industry by the end of 2012, many advisers who have, for whatever reason, opted not to go down the Level 4 qualification route may feel justified in maximising their sales income in the interim by adopting high initial commission levels of 5% and above. By combining this with a strategy of churning client money – moving pensions and investments without sufficient justification from the client’s perspective just for the commission hit – unscrupulous advisers could award themselves a golden handshake as they bow out.
In a nutshell, the very real danger is that clients will be sold expensive products or advised to sell one product to buy another without good reason. Some years down the line, these clients may seek compensation for what may be identified as bad advice or misselling, and those of us who remain in the industry will have to pick up the tab through the FSCS.
Clearly this type of action will not be in the client’s best interest and, by extension, not in the interests of the industry as a whole. High commission levels have been the bugbear of those who want to see a more customer-focused industry – indeed, the FSA has spent both time and money promoting fairness and transparency.
However, the fact that commission is still being paid at 5-7% on some products may prove an irresistible temptation to those who will drop off the authorised list in January 2013 and the battle against unfairness will have to begin all over again.
All sectors of our industry need to work together to cap commissions payable for the next two years. Financial advisers must take a responsible attitude if they are leaving the industry. If they do not, then they should be forced to do so.
Product providers are at the centre of this issue. By offering products with prohibitive commission levels, they are compounding the problem. However, they are also uniquely positioned to provide the solution. Providers have the data and systems to monitor adviser activity and if a noticeable uplift in high commission transactions takes place, they are ideally placed to flag this up – and to pass the information on to the FSA.
This solution requires a number of critical things to happen immediately so that clients are protected in the two years leading up to December 2012.
Firstly – and key to the whole process – product providers must accept that they share the responsibility of ensuring fairness for the client.
Secondly, advisers, providers and the FSA must agree what is a fair charging framework – ideally limiting commission rates to, say, 3%.
Thirdly, the FSA must be given powers to act to ensure that punitive charging is acknowledged and, where appropriate, any client losses are recouped and the adviser brought to book.
Of course, not every adviser leaving the industry will be guilty of client abuse. The vast majority will continue to give good advice and levy fair and suitable charges.
Most will formulate an exit strategy to enable their clients to continue to receive a continuing high standard of service. We will undoubtedly see mergers and the sale of businesses that will allow clients to move seamlessly from one adviser or firm to another. With two years to go, now is the optimum time for firms to sell their business but as the RDR deadline approaches, purchase prices will almost certainly drop as client awareness grows and client numbers begin to fall away.
It is estimated that the number of advisers who will be leaving the industry by the end of 2012 will reach at least 10,000. It is entirely conceivable that a small percentage of these advisers will be tempted to take as big a slice of the pie as possible over the next two years. By putting controls into place that will bring those guilty of bad practice to the attention of the FSA, providers and advisers will be achieving two of the principal aims of the RDR – to raise the standards of professionalism within the Financial Services industry and to protect clients from abuse from irresponsible advisers.
Data quality is key
Granted leave to appeal the judgement