Commenting on the news from the FSA, Paul Smee, director general of AIFA, said: "The news that the FSA is scrapping the defined payment system and is pursuing the menu as a viable alternative is very encouraging for IFAs and consumers alike. We have said all along that the DPS would be a disaster and would severely reduce the availability of independent financial advice. The menu is much more practical and builds on current best practice.”
The FSA announced today the first outcome of its consultation on the reform of polarisation. In its Consultation Paper 121, the regulator discussed potential ways to help consumers compare the cost of financial advice. The FSA’s objectives were:
• reducing the potential for commission bias;
• making consumers more aware of the cost of advice; and
• facilitating shopping around by consumers.
To address concerns over commission bias, CP121 proposed that independent financial advisers should in future operate a so-called “defined payment” method of charging their customers. However, in the light of consultation responses and following constructive suggestions from the industry, the FSA has decided that the objectives could be better met instead by developing a so-called ‘Menu’ approach.
The Menu is envisaged as a document provided to consumers in the early stages of the sales process. It would set out:
• an outline of the services the adviser is offering;
• for independent advice, the option of paying by fee and a fee scale;
• where offered, the option of paying by commission and, for a range of popular products, the commission that the adviser normally charges, set alongside average rates charged in the market.
The FSA will now work with the industry to develop the ideas fully and will consult next year on draft rules for the Menu. It is aiming to develop ways of applying the menu approach across all advice channels, not just the independent sector.
David Severn, head of retail projects at the FSA, said “We want to help consumers be more confident about the advice they are receiving, to know what they’re getting for their money and compare one adviser with another. Some constructive proposals came forward in the responses to CP121 and, of those, the Menu option offers the best route for us to achieve our objectives. Importantly, it will ensure that the form and level of adviser remuneration - and scope for negotiation - is signalled to the consumer up front.”
The FSA will make a further announcement on the outcome of its consultation on the reform of polarisation before the end of the year.
