New Financial Services Authority (FSA) managing director Martin Wheatley is making the headlines with his commitment to tackle the commissions and incentives that cause bad financial advice.
His crusade to tackle the dubious sales structures employed by banks and other tied financial advisers goes much further than existing plans to ban commissions on the sale of retail investment products.
From 31st December 2012, as a result of the Retail Distribution Review (RDR), independent financial advisers and tied salesmen at banks will be unable to receive a commission from a product provider when they sell an investment product.
Instead, they will need to agree an ‘adviser charge’ with the investor, before providing advice.
What Martin Wheatley is proposing would effectively ban the payment of commission on other types of financial products, including insurances and payment protection insurance (PPI) which has been at the centre of so much mis-selling by the banks.
Rather than tackle commissions directly, the FSA will be looking at the incentives paid to bank staff who are placed under a great deal of pressure to sell volumes of financial products each day to customers.
Ahead of announcing this initiative, the FSA carried out a review of 22 firms to understand their incentive schemes.
In most cases, they found incentives in place which were described as “bad”.
Examples of bad incentives included the bank offering a ‘super bonus’ of £10,000 to the first employee to reach a sales target and basic salaries moving up or down by £10,000 a year depending on sales volumes.
This is widespread and, if you seek financial advice from a bank, you are very likely to receive product sales from someone who is under massive levels of pressure to sell you whatever product is part of their sales incentive that day, week or month.
Commenting on the move today, moneysavingexpert.com founder Martin Lewis has argued that the cultural problems at banks go beyond sales incentive schemes. He described poorly qualified staff “dressed up as advisers” who lack the “moral compass” to realise they are engaged in mis-selling.
What we would like to see the FSA conclude is that financial advice should not take place in banks.
If the banks want to continue distributing financial products to their customers, it should not be described as anything other than “sales”. To label what they currently offer as “financial advice” or “financial planning” is very misleading and creates the false impression that banking customers are getting something impartial.
Only independent financial advisers should be allowed to describe their services as “financial advice” or “financial planning”, to ensure clarity with consumers.
This new FSA initiative, which will be at the heart of policy when the FSA becomes the Financial Conduct Authority (FCA), will of course stretch wider than simply the banks.
Those advisers who choose to offer ‘restricted advice’ from the end of this year will need to think carefully now about their plans for vertical integration to cross-subsidise the cost of delivering advice before channeling customers into their own in-house funds or products.
Photo credit: Flickr/wayneandwax
