Fears that commission reforms will lead to advice 'wasteland'

Plans to force flat fees and qualifications on independent financial advisers could end in many quitting the industry, leaving consumers stranded

Taking out a mortgage on your home, finding the right pension plan or sorting out a savings account for your children are all areas where you shouldn't take any risks, so seeking out an independent financial adviser (IFA) who can help you to sort through all the different deals is supposed to be the best play.

However, if your adviser is more concerned with securing themselves a bumper commission rather than finding you the best deal, you might find yourself mis-sold and, on top of that, you could be paying your IFA commission for the privilege.

Successive mis-selling scandals from personal pensions and endowments to the more recent high income bonds have all had one common denominator: the payment of commission.

Currently, if you buy a product from an IFA you have two options: you can either pay a fee for the advice, or the adviser can receive commission on the product you take out. This means that if an adviser has two more or less identical financial products but one gives them high commission, then they're far more likely to push that one, which can lead to the supposedly independent advice you receive, being biased.

But this is meant to change. From the start of 2013 the Financial Services Authority is implementing its Retail Distribution Review (RDR). From then on IFAs will be required to have qualifications that are equivalent to a certificate in higher education, for example, an NVQ at level four or above. And most importantly, the changes will also end commission; instead, customers will pay a set fee for the advice they receive.

Although it agrees with the changes, the powerful Treasury Select Committee recently sparked controversy by calling for a 12-month delay to RDR. The chairman of the committee, Andrew Tyrie MP, said that the changes risked "putting large numbers of experienced financial advisers out of business". The call was lambasted by consumer groups and rejected by the FSA almost as soon as it was made.

In particular, the fear among MPs and others is that some experienced advisers will simply refuse to retrain, deciding, more than likely, to retire.

No one is sure precisely how many advisers are set to leave the industry or have already departed. Back in 2007, the insurer Zurich estimated one in 10 could go, a figure also parroted by the FSA, but that now may be underplaying things.

The head of product sales at one of the UK's big five banks told The Independent on Sunday that they were working on the premise that as many as a quarter of all IFAs will cease to trade either prior to the RDR changes or soon after. Another major concern is that, with the banning of commissions, large numbers of IFAs are going to focus on those with the deepest pockets. They would morph from IFAs dealing largely with clients among the professions and everyday life into wealth managers with a few very wealthy clients.

In effect, what may well happen is that a wasteland of advice is created with fewer options for those on middle incomes and with more everyday ambitions such as what to do with their retirement savings pot. They would have to rely on bank and insurance sales staff for advice – a potential path to mis-selling.

Stephen Gay, the director general of the Association of Independent Financial Advisers (AIFA), believes that the RDR will result in advisers leaving the industry. He said, "There will be two tranches: people who leave – who won't be able to trade as they will not have the required qualifications – and those who, over a longer period of time, find it more difficult to work with transparent, non-commissioned-based charges."

The reduction in IFAs will no doubt have an effect on those needing advice on decent but affordable financial products, and the introduction of upfront consumer fees, may prove too difficult for some people to fund.

Mr Gay suggests that with or without the delay, the industry will experience a slight U curve in the number of people working in it, with a drop expected after the RDR officially comes into use in 2012. When asked how many financial advisers he expected would leave, he said, "The FSA's suggestion of about 11 per cent seems accurate, although it will be more difficult to tell over a sustained period of time."

This means that the RDR, whenever it is introduced, will potentially bring a significant lack of qualified, keen advisers who are able to provide a service that is fully equipped to deal with the demands of the financially strained middle classes.

"AIFA is supportive of the principles and objectives of the FSA, as it is important for the customer to understand clearly what they are getting and what they are paying for," said Mr Gay. "However, even the best of reforms can go wrong if they are badly implemented, and any delay would help those who are close to achieving their qualifications but can't quite manage it by the deadline."

But Adam Phillips, the chairman of the Financial Services Consumer Panel (FSCP), disagrees. "Over the past four years, independent financial advisers have already taken steps to meet the qualifications required by the RDR, with nearly half having already obtained the appropriate qualifications, and with at least 90 per cent having achieved the required standard by the 2012 deadline."

Any delay, Consumer Focus warns, could lead to some IFAs indulging in sharp practices by selling products prior to December 2012 which pay bumper trial commissions (in effect, payments that carry on for the term of a policy or pension plan which can be 10, 20 or even 30 years).

"We are concerned that some IFAs might be trying to build up trial commissions in the run-up to the implementation of the RDR. Delaying RDR could leave more consumers paying ongoing annual fees to their financial advisers," a Consumer Focus spokesperson said.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete tomorrow
Piers Morgan tells Scots they might not have to suffer living on the same island as him if they vote ‘No’ to Scottish Independence
peopleBroadcaster has a new role bringing 'the big stories that matter' to US
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
Life and Style
Moves to regulate e-cigarettes and similar products as medicines come amid increasing evidence of their effectiveness
healthHuge anti-smoking campaign kicks off on Wednesday
Life and Style
fashionEveryone, apparently
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
Arts and Entertainment
A new Banksy entitled 'Art Buff' has appeared in Folkestone, Kent
Arts and Entertainment
Shia LaBeouf is one of Brad Pitt's favourite actors in the world ever, apparently
filmsAn 'eccentric' choice, certainly
Life and Style
An Internet security expert has warned that voice recognition technology needs to be more secure
techExperts warn hackers could control our homes or spend our money simply by speaking
peopleBenjamin Netanyahu trolled by group promoting two-state solution
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Trust Accountant - Kent

    NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

    Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

    £18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

    Law Costs

    Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

    Day In a Page

    Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

    Isis an hour away from Baghdad -

    and with no sign of Iraq army being able to make a successful counter-attack
    Turner Prize 2014 is frustratingly timid

    Turner Prize 2014 is frustratingly timid

    The exhibition nods to rich and potentially brilliant ideas, but steps back
    Last chance to see: Half the world’s animals have disappeared over the last 40 years

    Last chance to see...

    The Earth’s animal wildlife population has halved in 40 years
    So here's why teenagers are always grumpy - and it's not what you think

    Truth behind teens' grumpiness

    Early school hours mess with their biological clocks
    Why can no one stop hackers putting celebrities' private photos online?

    Hacked photos: the third wave

    Why can no one stop hackers putting celebrities' private photos online?
    Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

    Homegrown ballerina is on the rise

    Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
    Education, eduction, education? Our growing fascination with what really goes on in school

    Education, education, education

    TV documentaries filmed in classrooms are now a genre in their own right
    It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

    It’s perfectly reasonable to negotiate with villains like Isis

    So why don’t we do it and save some lives?
    This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

    Is a sub-2-hour race now within sight?

    Dennis Kimetto breaks marathon record
    We shall not be moved, say Stratford's single parents fighting eviction

    Inside the E15 'occupation'

    We shall not be moved, say Stratford single parents
    Air strikes alone will fail to stop Isis

    Air strikes alone will fail to stop Isis

    Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
    Nadhim Zahawi: From a refugee on welfare to the heart of No 10

    Nadhim Zahawi: From a refugee on welfare to the heart of No 10

    The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
    Witches: A history of misogyny

    Witches: A history of misogyny

    The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
    Shona Rhimes interview: Meet the most powerful woman in US television

    Meet the most powerful woman in US television

    Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
    'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

    Endangered communities photographed 'like Kate Moss'

    Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style