The Financial Services Authority (FSA) has decided it will develop a ‘menu’ approach to deal with concerns over the commission bias raised by consultation paper CP121.
The announcement was the first outcome of its consultation on the reform of polarisation. In CP121 the FSA proposed that in the future IFAs would operate a method of charging clients known as a ‘defined payment scheme’ (DPS), but following industry responses the FSA will now be developing a ‘menu’ approach.
The move means that plans to drop commission charges and replace them with an hourly fee rate, will instead be replaced by a ‘menu’ that allows clients to choose how they pay for advice.
David Severn, head of retail projects at the FSA, said: ‘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 the form and level of adviser remuneration ‘ and scope for negotiation ‘ is signalled to the customer up front.’
The Association of Independent Financial Advisers (AIFA) and IFA Promotion, which proposed the menu approach, welcomed the announcement.
Paul Smee, director general of AIFA, said: ‘We have said all along the defined payment scheme would be a disaster and would severely reduce the availability of independent financial advice. The menu sets the cost of advice within its value. Another advantage is that it can be used in different distribution channels.’
Adviser firms also praised the about turn, but there were suggestions it should have gone further.
Anna Bowes, savings and investments manager at Chase de Vere Investments, said too much emphasis was being placed on the price of advice.
Bowes said: ‘If consumers are to take advice they need to feel comfortable with both the company and the adviser. Price will only be a small part of this decision. The company’s approach to research, compliance and training will be important.’
However, there were still calls for the FSA to do more to remove the confusion for consumers between independent, multi-tied and tied advisers.
‘If a client is unaware whether they are receiving truly independent advice, or advice which is restricted to just a few product providers, how can they decide whether they are being charged the right amount?’ Bowes said.