Consumers will keep the right to choose how they pay for independent financial advice after the Financial Services Authority yesterday abandoned tough proposals that would have made independent advice the preserve of those who could afford upfront fees.
The way advisers are remunerated has been under investigation by the regulator for the past two years, after mis-selling scandals rocked consumer confidence in the quality of advice on offer.
Investigations by the FSA have found advisers can be biased towards recommending products offered by the company that pays them the most commission. In an effort to drum commission bias out of product recommendations, the FSA proposed in January that any adviser wanting to offer independent advice would have to force customers to agree a fee in advance, under a "defined payment system".
The FSA, however, yesterday published proposals that would allow advisers to offer customers a range of payment methods but force advisers to be much more explicit about their remuneration.
Consumers seeing an independent adviser will be given an outline of what services they are being offered and a choice of how they want to pay for them. This would be presented as a menu of payment options, either in a commission arrangement or a fee. Advisers would also have to show the average industry price for the same service, similar to a recommended retail price on household goods, and be expected to justify any deviance from it.
"This still achieves our original objectives of removing commission bias and making consumers more aware that they pay for advice. This menu system should allow for an upfront conversation about how much will be charged for what services, in a form that can be more easily compared with that of another adviser," said a spokeswoman for the FSA. The cost to the 26,000 independent financial advisers of operating under the defined payment system was widely expected to push many into becoming tied advisers, shrinking significantly the availability of impartial, independent advice.
Steven Cameron, of Aegon UK, which has lobbied hard alongside the Association of British Insurers to get the FSA to reconsider, said: "The FSA's previous proposals would have killed off a large chunk of independent financial advisers and that is something we would have all lived to regret. The problem is many consumers think advice is free, so the menu system will make things much clearer for consumers."
The FSA has listened to the industry and taken on a model put forward by the Association of Independent Financial Advisers (AIFA). Paul Smee, the director-general of AIFA, said: "This will mean the cost of advice is more explicit, showing customers what they are paying for. More than 90 per cent of IFAs already work on a similar basis, so a lot more advisers will stay independent."
The Consumers' Association yesterday welcomed the FSA's revised proposals, saying consumers would now be able to shop around at the beginning of their quest for financial advice. The FSA plans to introduce the menu system, not just for independent advisers, but across all sellers of financial products to make the charges of different channels visible to consumers.
The death knell for the FSA's proposals began this summer when Ron Sandler, commissioned by the Treasury to investigate the whole market for retail saving, voiced concerns that the defined-payment system would damage the availability of independent advice.
Yesterday's proposals are part of a much wider review by the FSA into how financial products are sold in the UK. The FSA hopes to have the rest of its proposals published before Christmas.