How Much Is Financial Advice Costing You? - Consumers Will Have A Much Clearer Idea Of The True Cost Of Financial Advice Under New Proposals Launched By The UK's Financial Services Authority (FSA) Today

David Severn, Head of Retail Projects at the FSA, said: "We want to arm consumers with information that gives them a better understanding that the cost of advice can vary between firms and that different options exist for meeting the cost of advice. In this way consumers will be better equipped to shop around, compare costs across the market and get better deals.

"Many consumers remain reluctant to pay up-front fees for financial advice. If consumers want their adviser to take commission, that is their choice. We want consumers to be clear about the amount of commission being paid so they can have confidence that the financial advice they get is not being influenced by the level of commission."

Currently, advisers have to disclose to the consumer, in cash terms, the amount they receive as commission for selling a product. FSA research has shown that this is not as effective as it could be in educating consumers about what advice is costing. Today's proposals should help give consumers a better idea of their choices and of typical advice costs in the marketplace.

Under the FSA's proposals, advisers would give all consumers buying retail investment products, such as pensions, life assurance and unit trusts, a guide entitled "A guide to the cost of our services" at the start of any advice-giving situation with a firm.

This guide will include information explaining:

the services provided by the firm;
that different firms offer customers different options for meeting the cost of the firm's advice service (fees or commission) and that the firm may offer a choice;
where the firm offers a fee option to customers, what they would have to pay; and
where the firm takes commission for any product it recommends, the maximum commission it would take on a typical range of transactions and, importantly, how the commission it would take compares with the market average for such transactions.

This consultation is the last stage in the FSA's 'depolarisation' package which is designed to give consumers more choice and access to products. This guide will be provided to consumers alongside the 'Initial Disclosure Document'. Together these will make it clear to consumers which types of products the firm can advise on and from which firms products may be recommended. They will carry some of the most important 'key facts' about the firm and its services in a standard format set out by the FSA. These should help the consumer to decide whether to use a particular firm or adviser.

Also published today is feedback on CP166 'Reforming Polarisation: Removing the Barriers to Choice'.

Background

The closing date for comments Consultation paper 04/3 'Reforming Polarisation: A menu for being open with consumers'is 1 June 2004.
The FSA has developed a 'key facts' brand and logo to draw customers' attention to certain documents containing important information that they should read. Documents carrying the logo will present essential information in a concise, jargon-free way, enabling consumers to recognise the important factors they should think about before buying investment products and services.
At present, financial advisers are required to comply with the polarisation rules that came into effect in 1988. These restrictions control the way that some savings and investments can be sold and require advisers on packaged products to be either:
- independent (IFA) and advise across all products and companies on the market; or
- tied and represent just one company and sell only its products.
The depolarisation reforms are mainly concerned with the removal of these restrictions and increasing the range of products that advisers can sell. These proposals should result in increased choice for both consumers, in the products available to them, and firms, in the ways they can do business. Improved disclosure will have an important role in the new regime.
The guide, also known in the industry as the 'menu', is an integral part of the depolarisation package and the FSA does not propose to remove the polarisation restrictions until it has concluded the consultation process begun today. It proposes to make the rules for depolarisation and the menu at the same time and expects this to be in the second half of 2004. Then there will be a transitional period of six months, at the end of which all firms will need to be in compliance with the new rules.
The guide is split into 5 main sections containing information on:
- The FSA (that the FSA regulates the firm and requires them to give this document to consumers).
- Our Services - what the firm can do.
- Payment Options - fee, commission, or a combination of both shown by using tick boxes to indicate which options are available.
- How much might our services cost -
  - if the firm offers a fee option, it will set out its rates and charging basis (e.g. hourly rates, flat fees or other method).
  - if the firm offers a commission option it will have to include tables showing the maximum commission that it will take for sale of a product within specified product groups.
  - It will also include the average rate of commission charged for each product group by firms across the market as a whole, so that consumers can compare this with the firm's maximum.
- Further information - the FSA's website address and helpline number.
The existing system for the disclosure of the cost of advice, introduced in 1994, requires disclosure in cash terms of commission received by IFA firms and remunerations (which the FSA proposes to rename "commission equivalent") by non IFA firms. FSA research has shown that the existing disclosures are not as effective as they might be and that this new guide will meet its objectives of reducing the potential for commission bias, facilitating shopping around by consumers and exerting a pro-competitive force on commission levels.
A consumer awareness programme will consist of a wide-ranging education campaign coinciding with the making of the final depolarisation rules. The aim will be to encourage consumers to be alert to any information that is 'key facts' branded, explain the information within such documents and suggest how they should use it.
The FSA will also explain the changes directly to consumers by highlighting the key messages in updated versions of its existing consumer education material, such as its consumer web pages, information guides and leaflets.
FSA commissioned two specific pieces of research to inform the development work on the menu. Firstly, NOP Research Group was commissioned to produce a quantitative study on the appropriateness of developing the menu concept. IFF Research Ltd was then engaged to carry out a qualitative study in order to refine the document and to assess its performance against its objectives.
A summary of the NOP findings and the full report from IFF have been published as a separate document Consumer Research 24 'Polarisation: Menu testing research'.
Feedback on CP166 'Reforming Polarisation: Removing the Barriers to Choice' can be found in Annex 4of CP04/3.
An example of the 'guide' and 'Initial Disclosure Document' can be found here.
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.