Research* conducted by Skandia, the investment company, has found that nearly 60% of independent financial advisers believe that the proposal by the Financial Services Authority (FSA) to ban legacy commission from 1 January 2013 will have a detrimental impact on their customers.These advisers believe as many as 40% of their customers could be disadvantaged which suggests that 1.8 million people could be disadvantaged.**
The financial services industry is undergoing phenomenal change, with ground breaking legislation in the form of the Retail Distribution Review (RDR) coming into force on 1 January 2013. From that date on, people who use a financial adviser will need to agree payment for their services upfront as commission will be abolished. This change is for new advice and new product sales, and has been known in the industry for sometime.
However, in a new twist, the FSA has recommended further changes, which ban financial advisers from receiving commission for advice on existing products (e.g. top-ups and switches), something which it previously said would be excluded from the impending regulatory changes. With the final rules still not known, many believe the FSA has left the industry with no time to make the required changes to all their products. This could mean some products will close to top ups, leaving customers no option but to open new products, which in some cases could mean the loss of valuable benefits. (See examples below***).
The Skandia research shows that, out of those advisers who believe their customers will be adversely impacted, 70% believe the greatest detriment will arise from customers having to pay separately for ongoing advice on existing products. Customers who don't want to pay the separate charge could potentially cease receiving valuable financial advice that they have benefited from in the past.
Peter Mann, CEO of Skandia UK, comments:
"The ‘great unwashed' was a rather disparaging term for the lower classes, my fear is that this latest move by the FSA could create the ‘great unadvised' which would be equally undesirable as returning to a class society. One of the main objectives of the RDR is to improve outcomes for consumers but if they prevail with this latest proposal against the advice of the industry the FSA may have taken a backwards step. People could lose access to valuable benefits or be forced to switch products because they close to new business. Even worse, they could lose a valuable relationship with their financial adviser if they are unable or unwilling to pay separately for advice. The challenge now for product providers is to do everything they can to help customers through what could be a difficult transition to the new rules."
***Some examples of customer detriment:
- The loss of protection benefits not available to customers elsewhere, either because the product is no longer available (e.g. pension products with associated life protection benefits) or the customer's age or state of health means that underwriters will be unprepared to offer them equivalent benefits at a competitive price.
- Customers with reviewable protection benefits associated with their investment will see their sums assured diminish as they will be unable to fund increased mortality charges for a sustained period of time without increasing their premiums.
- Customers will lose potential tax advantages that would otherwise be available to them if they were able to top-up their existing product rather than take out a new one.
- Customers are likely to suffer additional charges if they need to open up another product for their top-up.
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