I've long been a critic of the commission system that is rife in the financial services industry. When you take out an insurance policy, pension plan or investment, the decision should be primarily based on finding the right account or policy for you, based on your needs, your attitude to risk, and your expectations.
But with the majority of financial companies paying fat commissions to advisers or brokers, the suspicion has always been that those products which pay the most commission will be the ones that are recommended to consumers.
You can trace the wholesale flogging of endowment policies in the Eighties and Nineties to the fact there was massive commission to be made from them. As millions learned to their horror, a huge number of endowment policies sold by commission-hungry salespeople proved to be totally unsuitable, leaving them unable to pay off their mortgage. In other words, commission is almost directly responsible for much of the mis-selling we've seen in financial services in the last few years.
So there's been some great news this week from the Financial Services Authority, the City watchdog. In a major shake-up of the advice industry, it is to outlaw commission-related payments. Its aim is to remove the bias that commission creates, forcing financial advisers to actually recommend the best products. The move means we should see an end to the confusion of people believing they are getting 'free' advice, when they are actually being charged hundreds of pounds through the commission the adviser is receiving from financial companies. However, the bad news is that the changes are only proposals at the moment and are not due to come into effect until 2012, three years away.
I also have a strong feeling that the FSA hasn't gone far enough in its proposed treatment of what advisers can be called. We need a system that allows consumers to understand in an instant what sort of person they are dealing with. They need to know that banks, for instance, are not friendly institutions dispensing wise advice, but profit-greedy financial shops eager to flog whatever loans or insurance policies they can.
Under the proposed new rules, the FSA says there will be a clear distinction between independent advisers and what the watchdog calls 'restricted' advisers. Independent advisers will be those who are free of any bias and who can recommend investments from across the entire range of the relevant market. All others will fall into the 'restricted' category, which is likely to include staff selling products in bank branches.
That still sounds too confusing to me. The FSA should simplify things even further by only allowing people offering advice to call themselves advisers. Everyone else should be labelled salespeople, as all they do is sell financial products. If people know they are being sold something, they are more likely to be wary of the seller's pitch, which is essential when making serious financial decisions.