Written by Ben Hammond on Friday 1 July 2016
Just over ten years ago, when Altus was but six months old, a shake-up of investment regulations was just getting started. Pensions A-Day was the first to hit, with changes which included a menu of charging options as an alternative to traditional commission.
Next the FSA, as it was back then, announced they were launching the RDR to improve the way financial services products were delivered to retail consumers. There were a number of strands to the regulation but the focus was firmly on commission. One of the principal aims of the RDR was to allow consumers to have confidence that the advice they receive is in their best interests and that advisers were not simply recommending providers which pay the highest commission.
Whatever your views on the fallout from RDR, it’s hard to deny that it has eliminated commission bias and other countries are now treading the same path. From Germany and the Netherlands in Europe to countries as far afield as Australia and South Africa, many regulators are following in what is now the FCA’s footsteps by attempting to unwind financial advice paid for by commission.
Initially the scope of RDR was limited to products sold by a regulated advisor and many argued that even this relatively low level of interference would destroy the market; but then no one likes change, do they? With the recent completion of the regulations put in place by PS13/1, the ban on commission has now been extended to direct sales and even backdated to products taken out decades ago. There has also been recent press about the end of pension commission for corporate schemes, although in practice auto-enrolment should have killed off the need for this type of advice some time ago.
So here we stand in 2016 and, although it may have taken some time, commission appears to have finally been eradicated from large swathes of UK Financial Services.
But then, quite recently, came rumours of commission making a comeback via some comments from the regulator on FAMR. The rumours have subsequently been quashed but it made me think, how clear is the situation for the average consumer? I’ve worked in financial services for almost 15 years and so (mostly) understand which products pay commission and which don’t, but how clear is it to the man on the street?
None of the regulations introduced over the last 10 years bans unregulated advisors or brokers (or even the milkman as long as he can find an introducer) earning commission from selling all kinds of products such as life assurance, mortgages, loans or credit cards; and these types of commoditised products are the ones that the average consumer will be most familiar with in their everyday lives. Whatever happened to consistency?!
Perhaps unsurprisingly, up to a third of advisors would like to see the return of commission, with a third considering pensions as the product most suited to enabling this. The main reason given is to enable re-engagement with the mass market and so narrow the advice gap: advice has become unaffordable for a large proportion of consumers. But those who do want to see a return will need to take into account the strongest argument for banning commission: the inherent conflict of interest in selling these very products.
So 10 years into the future, will commission have made a comeback? Will there be further regulatory changes enforced? The outcome and current uncertainty surrounding last week’s result means it is likely to be some time before we know more.
This article first appeared in FT Adviser 01/07/2016