The quality and clarity of financial advice in the UK is about to undergo a radical change. New rules published by the Financial Services Authority (FSA) will mean that all financial advisers have to work to higher standards, hopefully restoring some trust in a retail financial services sector that has become increasingly tainted in recent years.
As a consumer of financial services – including insurance, investment and pension products – you need to understand what these new rules will mean. The face of financial advice is about to change, hopefully for the better, but it will look very different.
The new FSA rules cover three main areas – status, charges and qualifications.
Several years ago, there was a clear polarisation in place with advisers being either independent or tied.
Independent advisers would act on behalf of their client and have access to the whole of the market. Tied advisers would represent a single product provider, selling only their products.
This system worked well until ‘depolarisation’ was introduced, resulting in a blurring of the lines and the introduction of ‘multi-tied’ advisers who sold products from a limited number of providers.
From the end of 2012, all advisers will fall into one of two camps. They will either be ‘independent’ or ‘restricted’.
Independent advisers will have to work to a much higher standard of independence than the one which currently applies, with a requirement to consider a wider range of investment options. Restricted advice will cover a number of different types of adviser, all with the common feature that their services will be limited in scope when compared to an independent financial adviser.
On charges, one of the most radical changes is the complete abolition of commission for the sale of financial products.
This means that, in the future, you will need to agree the cost of advice, implementation and review directly with your adviser before they provide their services. Adviser charges can still be paid out of products, but will be deducted directly from investments or pension contributions rather than a large upfront payment funded through product charges.
Another big change is the introduction of a higher minimum standard of professional qualifications.
The final rules on this remain subject to consultation, due for publication later this year. What looks likely to be the outcome is a requirement for all advisers, whether independent or restricted, to have a Diploma level financial planning qualification by the end of 2012. This is a big step up from the current position where the minimum qualification requirement for financial advisers is the equivalent of a GCSE or A Level.
These new rules should go a long way to improving the quality of the financial advice you receive. It will mean that all financial advisers have a very clear proposition, are not swayed by the influence of large commissions and will have demonstrated their competence by achieving professional qualifications.
Not every financial adviser is happy about these changes, with some claiming that experience alone is more important than tested knowledge through qualifications, for example.
Whilst the changes do not come into force until 1st January 2013, there is no need to wait that long to engage with an independent financial adviser working to these new higher standards. An increasing number of IFAs already operate on an agreed fee basis with their clients and hold the higher level professional qualifications, such as Chartered Financial Planner status.
