In 2012 the well documented retail distribution review (RDR) banned financial product providers from paying commission to advisers who recommended their products. Not only did the move dramatically reduce bias of product recommendations in the sector, it was also heralded as the reason that the main objective of RDR was successfully achieved. This objective was to professionalise the world of financial advice and generate better outcomes for clients.
It therefore came as quite a shock to the sector, when last month, the FCA’s acting chief, Tracey McDemot, announced on BBC Radio 4’s Money Box programme, that she could not rule out a return to commission on some products as part of the regulator's financial advice market review (FAMR). The announcement comes just two months away from the Sunset Clause’s total ban of commission on all legacy products.
The drawbacks to the commission ban are that financial advice has become less accessible to the mass market, as financial advisers have had to focus on wealthier clients. This is because these clients are able to pay the upfront fees that must now be charged to cover the costs associated to regulated financial advice. Of course, the returns for consumers in this position are favourable, but there is still a question mark over how to make financial advice accessible to those who cannot afford the now necessary upfront fees. With this in mind would a return to commission on some level be such a bad thing?
Opinion across the profession on the topic is divided. Some state that a U-turn on product commission would be a step backwards for the sector, that it would play havoc with the revised business models now introduced to keep businesses profitable in a post- RDR world, and create the logistical headache of serving clients of varying wealth via two different business models. If not managed carefully, the differing client outcomes could perhaps fuel another mis-selling crisis.
This aside, research carried out by financial software adviser, Intelliflo, show that more advisers are in favour of a return to commission than not. Only 23% stated that it was a bad idea and 37% said that the success of such a move would depend upon which product the commission was related to and how it was implemented.
I would have to agree with the majority. A return to commission, if managed correctly, with very careful guidance and early intervention by the regulator for bad practice, would provide a welcome opportunity to service clients which, sadly, have been priced out of advice, due to the requirement of the upfront fees currently necessary to deliver financial advice.