Comment: Smallwood's Shout

Chris Smallwood, CEO of 2plan Wealth Management, on recent positive news for ‘independent’ advisers post 2012.

At a time of great uncertainty both for the UK’s political future and the broader European economic future, it is perhaps a little reassuring to know that in some areas advisers can at last have a little more clarity to allow them to plan ahead.

The FSA has now clearly stated how it expects firms and advisers to behave and work with them in the run up to 2013 and, importantly, how it will take action on anyone who frustrates the process and what they and professional firms are endeavouring to achieve.

Firms will be expected to have charging structures that focus on the level of service they provide, and importantly, the outcome for the consumer. The FSA will shortly begin to conduct “thematic supervision” in the transition to test firms’ preparedness for the end of 2012 and identify those firms at greatest risk, for example those not taking any action or exploiting the situation.

And they will adopt a “transitional supervisory strategy” – particularly focusing on examining the commission levels offered by providers on investment bonds and how much advisers are charging, with ongoing monitoring for key risks e.g. maximising income by churning before commission is withdrawn.

Hiding the cost of advice in the product contributes to the commonly-held perception by the consumer that advice is free. The FSA wants firms to have charging structures that are product neutral, with firms focusing on the level of “service” they provide and the outcome for the consumer.

The main point here is that the objective is not to necessarily attempt to get the consumer to write out a cheque for financial advice but to educate the client that advice is not free. The agreement for the cost of financial advice must be between the adviser and the client, with no involvement from the product provider

The three main categories of advice which advisers will be able to describe themselves as post 2013 will be; ‘independent’, ‘restricted’ or ‘basic’. To be able to provide independent advice, firms will need to make recommendations based on a comprehensive and fair analysis of the relevant market, and to provide unbiased, unrestricted advice.

Nothing new there, I hear you say. However, the main change here in the future is that to be ‘independent’, the RDR Policy Statement published last month states: “we will need to broaden the research we do to include such things as all unregulated investment schemes and other investments that offer exposure to underlying financial assets, but in a packaged form e.g. ETFs”.

It is clear that, from the regulatory evidence and how the FSA monitors firms, these products are already being advised upon in the IFA market, be it some of these products are unregulated and not covered by the FSCS.

We have already seen huge issues around such products as those derived from Arch cru, Keydata and the like which have resulted in the financial fall-out being placed on the FSCS and hence firms such as 2plan; resulting in us (and every other firm) being given an invoice earlier this month – in our case for over £54,000 to be paid within 30 days.

So, whilst the more professional, regulatory-led firms currently receive no regulatory dividend for the safe, reduced risk environment they aim to achieve, this is something that we look forward to changing in the future.

If firms conclude that certain products, such as unregulated collective investment schemes for example, are not suitable for the consumer because there is no protection from the FSCS, then they will be able to decide to exclude such products from the advice they permit as a firm – and vitally, still be able to describe themselves as ‘independent’.

I for one believe this could be a very positive step forward.