From the Regulators

Proposals aimed at enhancing the quality of advice investors receive

By James Langton |

Proposals to reform regulation of the retail investment market, including a move to outlaw embedded commissions, were published Thursday by the UK’s Financial Services Authority.

The FSA has issued a consultation paper on its Retail Distribution Review, which sets out detailed proposals to implement reforms it first proposed last year. The FSA says that the changes, which will take effect at the end of 2012, “will improve outcomes for savers and investors by enhancing the quality of advice they receive, and prepare both consumers and the industry for the future.”

Under the proposals, the FSA would require firms to brand their services as either ‘independent advice’ or ‘restricted advice’, depending on whether they give advice on a full range of products, or only on proprietary products.

Additionally, in an effort to reduce remuneration bias, it will outlaw embedded commissions. Instead, all firms that give investment advice must set their own charges in agreement with their clients, and will have to meet new standards regarding how they determine and operate these charges.

“The proposals bring to an end the current, commission-based system of adviser remuneration,” the paper says. “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.”

Finally, the FSA plans to raise the minimum level of qualification for investment advisers, and to institute a code of ethics and enhanced standards for continuing professional development.

Jon Pain, FSA managing director of retail markets, said, “The RDR is about regaining consumer trust and confidence in the retail investment market, building a more sustainable sector and making it easier for people to find their way around and get the help they need – this is more important now than ever before.”

In response to the paper’s publication, Adam Phillips, acting chairman of the Financial Services Consumer Panel said, “The FSA has taken a big step today towards creating a financial advice system which the consumer can trust. The proposal to remove commission bias will help people to get independent investment advice that reflects their needs and is not influenced by the product provider.”

“We have encouraged the FSA throughout the process of the Retail Distribution Review to take radical steps which will give consumers greater confidence in financial advice and help them to engage with the industry. It is only by being open with consumers about the cost of advice and any financial relationship between the adviser and the product provider that the industry can hope to improve its credibility,” Phillips added. “The FSA’s plans to introduce clearer payment structures, more realistic descriptions of the different types of adviser and improvements in professional standards give the industry this opportunity.”

Comments on the consultation paper are due by October 30.

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