End of commissions for UK financial planners

The UK Financial Services Authority (FSA) has moved to ban commission payments to financial advisers by the end of 2012.

The FSA has issued a consultation paper on its Retail Distribution Review (RDR) that provides detailed proposals for the implementation of wide-ranging reforms outlined by the authority in November last year.

The recommendations made in the review mirror those made by the Financial Planning Association in Australia earlier this year.

“The proposals bring to an end the current, commission-based system of adviser remuneration,” the FSA’s consultation paper said.

“We propose to ban product providers from offering amounts of commission to secure sales from adviser firms and, in turn, to ban adviser firms from recommending products that automatically pay commission.”

Under the FSA’s proposals, all firms that give investment advice must set their own charges in agreement with their clients prior to advice being given. In line with the recommendations made by the Financial Planning Association, clients can request that payments for advice come from their investments, “but these charges will no longer be determined by the product providers they are recommended”.

The FSA wants to ensure “recommendations made by advisers are not influenced by product providers”, and that independent advice is true to label. The authority also wants investors to be able to clearly identify and understand the services they are being offered.

The FSA admits that while the changes will be “challenging” for the industry, it also creates an opportunity for the retail investment market to “modernise practices, raise standards and improve the way they treat their customers”.

The FSA said its proposals impact on all regulated firms involved in producing or distributing retail investment products and services, which covers financial advisers as well as banks, building societies, insurers and wealth managers.

The proposals cover all ‘packaged products’, including annuities, as well as applying more widely to retail investment products, including unregulated collective investment schemes, and investments in trusts and structured products.

The FSA expects there may be short-term costs arising from the exit of the market by some financial advisers and increases in product prices. The changes will also create significant costs for the FSA.

Improving the education standards of financial advisers is also a key aim on the FSA’s agenda. The consultation paper recommends that all investment advisers be qualified to a higher level than they currently are, with the new level being equivalent to the first year of a university degree. The FSA also plans to introduce higher standards for continuing professional development and establish a Professional Standards Board to monitor education standards.