FSA seeks ban on commission for financial advisers

Customers would pay fees up front under plans due to come into effect in 201

Financial advisers would no longer be able to cash in on commission from selling investments, pensions and insurance products under new rules proposed by the Financial Services Authority yesterday.

The change, one of several proposals to emerge from the City watchdog's Retail Financial Review, is designed to reform the way independent financial advice is provided and paid for. The FSA 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."

The planned move – to come into force in 2012 – is the latest attempt to bring to an end to the mis-selling scandals that have engulfed the financial services industry over the past two decades. Millions of consumers were wrongly advised to opt out of occupational pension schemes, or were sold poorly performing mortgage endowment policies, and there have been a variety of smaller cons ranging from the sale of risky precipice bonds to split-capital investment trusts.

The common thread throughout has been the involvement of financial advisers keen to earn commission from the products they sold.

If the FSA's proposals are adopted, investors will have to be told how much their financial advice is going to cost and given the choice of paying it as an up-front fee, or having the cost deducted from their investment.

The FSA also set out new rules that would require investment advisers to be qualified to a higher level, equivalent to the first year of a degree. At the same time, the regulator wants to make a clear distinction between independent financial advisers and what it terms "restricted" advisers. Independent advisers would be those who were free of any bias and who could recommend products from across the entire range of the relevant market. All others would fall into the "restricted" category, which is likely to include bank staff selling products in their branches.

The FSA's report was welcomed by Chris Cummings, the director-general of the Association of Independent Financial Advisers, who said: "There is now a real opportunity for IFAs to demonstrate the value of independent advice to consumers."

Dominic Lindley, the principal policy adviser at the consumer group Which?, said the proposals did not go far enough. "Raising professional standards and removing the bias created by commission will help to build consumer trust, but more must be done to ensure that prices are both transparent and reasonable," he said.

"Why doesn't the FSA want to call a sale a sale? Surely if someone is trying to sell a product to someone else, it should be described as 'sales'?

"We are not convinced that [the] current proposals set a clear enough definition between those offering independent, unbiased advice and those simply trying to sell."